Attached files
file | filename |
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EX-10.3 - COSINE COMMUNICATIONS INC | v165167_ex10-3.htm |
EX-32.1 - COSINE COMMUNICATIONS INC | v165167_ex32-1.htm |
EX-31.1 - COSINE COMMUNICATIONS INC | v165167_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(MARK
ONE)
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR
THE QUARTERLY PERIOD ENDED September 30, 2009
OR
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the transition period from ____________ to
____________.
|
Commission
File Number 000-30715
COSINE
COMMUNICATIONS, INC.
(Exact
name of Registrant as specified in its charter)
Delaware
|
94-3280301
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
Number)
|
61
East Main Street, Suite B, Los Gatos, CA
|
95030
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant's
telephone number including area code: (408) 399-6494
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 ¨
Indicate
by check mark whether the Registrant has submitted electronically and posted on
its Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the Registrant was
required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “small
reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ¨
|
Accelerated filer ¨
|
|
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
|
Small reporting company x
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes x No
¨
There
were 10,090,635 shares of the Registrant’s Common Stock, par value $.0001,
outstanding on November 5, 2009.
COSINE
COMMUNICATIONS, INC.
FORM
10-Q
Quarter
ended September 30, 2009
TABLE
OF CONTENTS
Page
|
|||
PART
I
|
|||
FINANCIAL
INFORMATION
|
|||
Item 1.
|
Condensed Financial
Statements (Unaudited):
|
||
Condensed Balance
Sheets as of September 30, 2009 (unaudited) and December 31,
2008
|
3
|
||
Condensed Statements
of Operations (unaudited) for the Three and Nine Month Periods Ended
September 30, 2009 and 2008
|
4
|
||
Condensed Statements
of Cash Flows (unaudited) for Nine Months Ended September 30,
2009 and 2008
|
5
|
||
Notes
to Condensed Financial Statements
|
6
|
||
Item 2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
13
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
16
|
|
Item 4.
|
Controls
and Procedures
|
16
|
|
PART
II
|
|||
OTHER
INFORMATION
|
|||
Item 1.
|
Legal
Proceedings
|
17
|
|
Item 1A.
|
Risk
Factors
|
18
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
18
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
18
|
|
Item 6.
|
Exhibits
|
18
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|
Signature
|
19
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||
Exhibit
Index
|
20
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||
Certifications
|
|
2
PART
I. FINANCIAL INFORMATION
ITEM
1. CONDENSED FINANCIAL STATEMENTS
COSINE
COMMUNICATIONS, INC.
CONDENSED
BALANCE SHEETS
(In
thousands, except for par value and share data)
September 30,
2009
|
December 31,
20081
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 22,679 | $ | 9,155 | ||||
Short-term
investments
|
— | 13,997 | ||||||
Accounts
receivable - other
|
— | 96 | ||||||
Prepaid
expenses and other current assets
|
39 | 31 | ||||||
Total
current assets
|
22,718 | 23,279 | ||||||
Long
-term deposit
|
3 | 3 | ||||||
Total
Assets
|
$ | 22,721 | $ | 23,282 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 173 | $ | 207 | ||||
Accrued liabilities
|
33 | 53 | ||||||
Total
current liabilities
|
206 | 260 | ||||||
Commitments
and contingencies (note 2)
|
||||||||
Stockholders'
equity:
|
||||||||
Preferred
stock, 3,000,000 authorized, none issued and outstanding
|
— | — | ||||||
Common
stock, $.0001 par value, 22,000,000 shares authorized;
10,090,635 shares issued and outstanding at September 30, 2009
and December 31, 2008
|
1 | 1 | ||||||
Additional
paid-in capital
|
539,086 | 539,060 | ||||||
Accumulated
other comprehensive income
|
— | 88 | ||||||
Accumulated
deficit
|
(516,572 | ) | (516,127 | ) | ||||
Total
stockholders' equity
|
22,515 | 23,022 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 22,721 | $ | 23,282 |
See
accompanying notes to condensed financial statements.
(1)The
information in this column was derived from the Company's audited financial
statements for the year ended December 31, 2008.
3
COSINE
COMMUNICATIONS, INC.
CONDENSED
STATEMENTS OF OPERATIONS
(In
thousands, except for per share data)
(Unaudited)
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenue:
|
||||||||||||||||
Product
|
$ | — | $ | — | $ | — | $ | — | ||||||||
Service
|
— | — | — | — | ||||||||||||
Total
revenue
|
— | — | — | — | ||||||||||||
Cost
of revenue
|
— | — | — | — | ||||||||||||
Gross
profit (loss)
|
— | — | — | — | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Research
and development
|
— | — | — | — | ||||||||||||
Sales
and marketing
|
— | — | — | — | ||||||||||||
General
and administrative1
|
170 | 169 | 583 | 492 | ||||||||||||
Total
operating expenses
|
170 | 169 | 583 | 492 | ||||||||||||
Loss
from operations
|
(170 | ) | (169 | ) | (583 | ) | (492 | ) | ||||||||
Interest
income and other
|
31 | 171 | 139 | 568 | ||||||||||||
(Loss)
Income before income tax provision
|
(139 | ) | 2 | (444 | ) | 76 | ||||||||||
Income
tax provision
|
— | — | 1 | — | ||||||||||||
Net
(loss) income
|
$ | (139 | ) | $ | 2 | $ | (445 | ) | $ | 76 | ||||||
Basic
net (loss) income per share
|
$ | (0.01 | ) | $ | 0.00 | $ | (0.04 | ) | $ | 0.01 | ||||||
Diluted
net (loss) income per share
|
$ | (0.01 | ) | $ | 0.00 | $ | (0.04 | ) | $ | 0.01 | ||||||
Shares
used in computing per share amounts:
|
||||||||||||||||
Basic
|
10,091 | 10,091 | 10,091 | 10,091 | ||||||||||||
Diluted
|
10,091 | 10,193 | 10,091 | 10,093 |
See
accompanying notes to condensed financial statements.
(1) General and administrative expenses
include non-cash charges related to equity issuances of $9 and $26, for the
three month and nine month periods ended September 30, 2009,
respectively. General and administrative expenses include non-cash
charges related to equity issuances of $9 and $25 for the three month and nine
month periods ended September 30, 2008,
respectively.
4
COSINE
COMMUNICATIONS, INC.
CONDENSED
STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
Nine Months Ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
Operating
activities:
|
||||||||
Net
(loss) income
|
$ | (445 | ) | $ | 76 | |||
Adjustments
to reconcile net (loss) income to net cash used in (provided by) operating
activities:
|
||||||||
Share-based
compensation
|
26 | 25 | ||||||
Change
in operating assets and liabilities:
|
||||||||
Accounts receivable
– other
|
96 | (7 | ) | |||||
Prepaid
expenses and other current assets
|
(8 | ) | (10 | ) | ||||
Accounts
payable
|
(34 | ) | 23 | |||||
Accrued
liabilities
|
(20 | ) | (87 | ) | ||||
Net
cash (used in) provided by operating activities
|
(385 | ) | 20 | |||||
|
||||||||
Investing
activities:
|
||||||||
Purchase
of short-term investments
|
— | (28,962 | ) | |||||
Proceeds
from sales and maturities of short-term investments
|
13,909 | 21,784 | ||||||
Net
cash provided by (used in) investing activities
|
13,909 | (7,158 | ) | |||||
Net
increase (decrease) in cash and cash equivalents
|
13,524 | (7,158 | ) | |||||
Cash
and cash equivalents at the beginning of the period
|
9,155 | 12,709 | ||||||
Cash
and cash equivalents at the end of the period
|
$ | 22,679 | $ | 5,551 |
See
accompanying notes to condensed financial statements.
5
COSINE
COMMUNICATIONS, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS
OF PRESENTATION
Description
of Business
CoSine
Communications, Inc. ("CoSine" or the "Company," which may be referred to as
"we," "us" or "our") was incorporated in California on April 14, 1997 and in
August 2000 was reincorporated in the State of Delaware. Our current business
strategy is to enhance stockholder value by pursuing opportunities to redeploy
our assets through an acquisition of one or more operating businesses with
existing or prospective taxable earnings that can be offset by use of our net
operating loss carry-forwards (“NOLs”). No assurance can be given that we will
find suitable candidates, and if we do, that we will be able to utilize our
existing NOLs.
We were a
provider of carrier network equipment products and services until the fourth
quarter of fiscal year 2004 during which time we discontinued our product lines,
took actions to lay off most of our employees, terminated contract manufacturing
arrangements, contractor and consulting arrangements and various facility
leases, and sold, scrapped or wrote-off our inventory, property and equipment.
In July 2005, our board of directors approved our strategy of redeploying our
existing resources to identify and acquire new business
operations. In 2006, we sold the remaining assets of our carrier
network products business with the sale of our patent portfolio and the rights
to the related intellectual property. During 2006, we also completed
the wrap-up of our carrier services business, providing customer support
services for our discontinued products through December 31, 2006, at which time
we terminated all customer support offerings. Effective July 1, 2007,
we engaged SP Corporate Services LLC to provide all of our executive, financial
and administrative support service, rent and personnel requirements and, as a
result, we no longer have any employees.
Redeployment
Strategy and Liquidity
In July
2005, after a comprehensive review of strategic alternatives, our board of
directors approved a strategy to redeploy our existing resources to identify and
acquire one or more new business operations with existing or prospective taxable
earnings that can be offset by use of our NOLs.
The
accompanying financial statements have been prepared in conformity with U.S.
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. However, at September 30, 2009, we have an
accumulated deficit of $517 million. Our current redeployment of
assets strategy and the termination of our employees, discontinuance of
production activities and cessation of our customer support offerings and
service capabilities raise substantial doubt about our ability to continue as a
going concern. The financial statements do not include any
adjustments to reflect the possible future effects relating to the
recoverability and classification of the recorded asset amounts or amounts and
classification of liabilities that might result from the outcome of this
uncertainty.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the accompanying
notes. Actual results could differ from these
estimates. Estimates are used in accounting for, but not limited to,
accrued liabilities and equity issuances. Estimates and assumptions
are reviewed periodically and the effects of revisions are reflected in the
financial statements in the period of determination.
The
unaudited condensed financial statements have been prepared by us pursuant to
instructions to Form 10-Q and Article 10 of Regulation S-X and include the
accounts of CoSine Communications, Inc. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with U. S. generally accepted accounting principles have been
condensed or omitted pursuant to the Securities Exchange Commission’s rules and
regulations. In the opinion of management, all adjustments
(consisting of normal recurring items) necessary for a fair presentation have
been included. The results of operations for the three and nine
months ended September 30, 2009 are not necessarily indicative of the results to
be expected for any subsequent quarter or for the entire year. The
condensed balance sheet at December 31, 2008 has been derived from the audited
financial statements as of that date. These unaudited condensed
financial statements should be read in conjunction with the audited financial
statements and the notes included in our Annual Report filed on Form 10-K/A for
the year ended December 31, 2008.
6
In
preparing the accompanying unaudited condensed financial statements, the Company
has reviewed, as determined necessary by the Company’s management, events that
have occurred after September 30, 2009, up until the issuance of the financial
statements, which occurred on November 6, 2009.
Stock
Compensation
Effective
January 1, 2006, we adopted the provisions of ASC 718, Compensation – Stock
Compensation (ASC 718). ASC 718 establishes accounting for
stock-based awards exchanged for employee services. Accordingly,
stock-based compensation cost is measured at grant date, based on the fair value
of the award, and is recognized as expense over the employee requisite service
period. All of our stock compensation is accounted for as an equity
instrument.
The
effect of recording stock-based compensation for the three and nine months ended
September 30, 2009 was $9,000 and $26,000, respectively, which consisted of
stock based compensation related to employee stock options. The effect of
recording stock-based compensation for the three and nine months ended September
30, 2008 was $9,000 and $25,000, respectively, which consisted of stock based
compensation related to employee stock options. As of September 30,
2009 we had an unrecorded deferred stock compensation balance related to stock
options of approximately $20,800 before estimated forfeitures. ASC
718 requires forfeitures to be estimated at the time of grant and revised if
necessary in subsequent periods if actual forfeitures differ from those
estimates. Based on our analysis of historical experience and review
of current option holders, we have assumed an annual forfeiture rate of 1.2% for
our options. Accordingly, as of September 30, 2009, we estimated that
the stock-based compensation for the awards not expected to vest was
approximately $63, and therefore, the unrecorded deferred stock-based
compensation balance related to stock options was adjusted to approximately
$20,700 after estimated forfeitures. This amount will be recognized
over an estimated weighted average amortization period of 3.75
years.
During
the nine months ended September 30, 2009, there were stock option grants for
20,000 shares, with an exercise price of $1.64 per share, the market price of
the stock at the date of the grant, and there were no options exercised,
cancelled or expired.
Stock
activity under the Stock Option Plans was as follows (in thousands, except per
share data):
Shares
Available for
Grant
|
Shares
|
Weighted-
Average
Price Per
Share
|
||||||||||
Balance
as of December 31, 2008
|
2,817 | 161 | $ | 7.28 | ||||||||
Granted
|
20 | 20 | 1.64 | |||||||||
Exercised
|
— | — | — | |||||||||
Canceled
|
— | — | — | |||||||||
Balance
as of September 30, 2009
|
2,797 | 181 | $ | 6.66 |
The
following table summarizes information concerning options outstanding and
exercisable at September 30, 2009 (in thousands, except per share
data):
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||||
Weighted-
|
||||||||||||||||||||
Average
|
Weighted-
|
Weighted-
|
||||||||||||||||||
Number
|
Remaining
|
Average
|
Number
|
Average
|
||||||||||||||||
Range of
|
Of
|
Contractual
|
Exercise
|
Of
|
Exercise
|
|||||||||||||||
Exercise Prices
|
Shares
|
Life (Years)
|
Price
|
Shares
|
Price
|
|||||||||||||||
$1.64
- $1.64
|
20 | 9.8 | $ | 1.64 | - | $ | - | |||||||||||||
$2.15
- $2.60
|
118 | 6.0 | 2.55 | 108 | 2.57 | |||||||||||||||
$2.61
- $3.50
|
14 | 8.2 | 3.01 | - | - | |||||||||||||||
$3.51
- $5.20
|
4 | 3.6 | 5.20 | 4 | 5.20 | |||||||||||||||
$5.21
- $6.96
|
12 | 4.0 | 6.96 | 12 | 6.96 | |||||||||||||||
$6.97
- $8.80
|
4 | 2.6 | 8.80 | 4 | 8.80 | |||||||||||||||
$8.81
- $22.30
|
4 | 1.7 | 22.30 | 4 | 22.30 | |||||||||||||||
$22.31
- $120.00
|
5 | .9 | 120.00 | 5 | 120.00 | |||||||||||||||
$2.15
- $120.00
|
181 | 6.0 | $ | 6.66 | 137 | $ | 8.07 |
7
Guarantees
We may enter into certain
types of contracts that require that we indemnify parties against certain third
party claims that may arise. These contracts primarily relate to:
(i) certain agreements with our officers, directors and employees, under
which we may be required to indemnify such persons for liabilities arising out
of their relationship with us, (ii) contracts under which we may be
required to indemnify customers against loss or damage to property or persons as
a result of willful or negligent conduct by our employees or sub-contractors,
(iii) contracts under which we may be required to indemnify customers against
third party claims that our product infringes a patent, copyright or other
intellectual property right and (iv) procurement or license agreements under
which we may be required to indemnify licensors or vendors for certain claims
that may be brought against them arising from our acts or omissions with respect
to the supplied products or technology.
Generally,
a maximum obligation is not explicitly stated. Because the obligated
amounts associated with this type of agreement are not explicitly stated, the
overall maximum amount of the obligation cannot be reasonably
estimated. Historically, we have not been obligated to make payments
for these obligations, and no liabilities have therefore been recorded for these
obligations the Company’s balance sheet as of September 30, 2009.
Income
Taxes
We
adopted the provisions of ASC 740, Income Taxes (ASC 740), on January 1,
2007. This Interpretation clarifies the accounting for income taxes by
prescribing the minimum recognition threshold a tax position is required to meet
before being recognized in our financial statements. The Interpretation
also provides guidance for the measurement and classification of tax positions,
interest and penalties, and requires additional disclosure on an annual
basis. The cumulative effect of the change was not
material. Following implementation, the ongoing recognition of
changes in measurement of uncertain tax positions will be reflected as a
component of income tax expense. Interest and penalties incurred
associated with unresolved income tax positions will continue to be included in
other income (expense).
2.
COMMITMENTS AND CONTINGENCIES
On
November 15, 2001, we along with certain of our officers and directors were
named as defendants in a class action shareholder complaint filed in the United
States District Court for the Southern District of New York, now captioned In re
CoSine Communications, Inc. Initial Public Offering Securities Litigation, Case
No. 01 CV 10105. The complaint generally alleges that various investment bank
underwriters engaged in improper and undisclosed activities related to the
allocation of shares in our initial public offering. The complaint brings claims
for the violation of several provisions of the federal securities laws against
those underwriters, and also against us and each of the directors and officers
who signed the registration statement relating to the initial public offering.
The plaintiffs seek unspecified monetary damages and other relief. Similar
lawsuits concerning more than 300 other companies' initial public offerings were
filed during 2001, and this lawsuit is being coordinated with those actions in
the Southern District of New York before Judge Shira A. Scheindlin.
On or
about July 1, 2002 an omnibus motion to dismiss was filed in the coordinated
litigation on behalf of the issuer defendants, of which we and our named officer
and directors are a part, on common pleading issues. In October 2002, pursuant
to stipulation by the parties, the Court entered an order dismissing our named
officers and directors from the action without prejudice. On February 19, 2003,
the Court dismissed the Section 10(b) and Rule 10b-5 claims against us but did
not dismiss the Section 11 claims against us.
In June
2004, a stipulation of settlement and release of claims against the issuer
defendants, including us, was submitted to the Court for
approval. Although the Court preliminarily approved that settlement
in August 2005, it was terminated in June 2007 based upon a stipulation among
the parties to the settlement, after it became unlikely that the settlement
would receive final Court approval. Plaintiffs filed amended master
allegations and amended complaints and moved for class certification in the six
focus cases. Defendants moved to dismiss the amended complaints and
opposed class certification. In March 2008, the Court denied the
defendants’ motion to dismiss the amended complaints.
The
parties have reached a global settlement of the litigation. On April 2,
2009, plaintiffs filed a motion for preliminary approval of the
settlement. On June 9, 2009, the Court granted preliminary approval
of the settlement, and on October 5, 2009, the Court entered an Opinion and
Order granting final approval of the settlement. Under the
settlement, the insurers will pay the full amount of settlement share allocated
to the Company, and the Company will bear no financial liability. The Company,
as well as the officer and director defendants who were previously dismissed
from the action pursuant to tolling agreements, will receive complete dismissals
from the case.
8
On
October 9, 2007, a purported CoSine shareholder filed a complaint for violation
of Section 16(b) of the Securities Exchange Act of 1934, which prohibits
short-swing trading, against the Company's IPO underwriters. The complaint,
Vanessa Simmonds v. The Goldman Sachs Group, et al., Case No. C07-1629, filed in
the District Court for the Western District of Washington, seeks the recovery of
short-swing profits. The Company is named as a nominal defendant. No recovery is
sought from the Company. The plaintiff, Vanessa Simmonds, has filed similar
lawsuits in the District Court for the Western District of Washington alleging
short-swing trading in the stock of 54 other companies. On July 25, 2008, a
majority of the named issuer companies, including CoSine, jointly filed a motion
to dismiss plaintiff's claims. On March 12, 2009, the Court issued an
order granting the motion to dismiss and a judgment in the favor of the moving
issuers. On April 10, 2009, Ms. Simmonds appealed the order and
judgment dismissing her claims to the United States Court of Appeal for the
Ninth Circuit. The appeal is pending.
Even if
the above claims are not successful, the litigation could result in substantial
costs and divert management's attention and resources, which could adversely
affect our business, results of operations and financial position.
In the
ordinary course of business, we are involved in disputes and legal proceedings
involving contractual obligations, employment relationships, and other
matters. Except as described above, we do not believe there are any
pending or threatened disputes or legal proceedings that will have a material
impact on our financial position or results of operations.
Our
unconditional purchase obligations relate to executive, financial and
administrative support services, rent and personnel provided by SP Corporate
Services LLC under an agreement which became effective as of July 1, 2007 and
was renewed as of July 1, 2009 (the "Services Agreement"). Under the
Services Agreement, we pay SP Corporate Services LLP a monthly fee of $17,000 in
exchange for SP Corporate Services LLC’s services, rent and personnel. The
Services Agreement has a term of one year and automatically renews for
successive one year periods unless otherwise terminated by either
party.
3.
BALANCE SHEET DETAILS
Cash
Cash and Cash
Equivalents and Investments
The
Company considers all investment instruments purchased with an original maturity
of three months or less to be cash equivalents. Investment securities with
original or remaining maturities of more than three months but less than one
year are considered short-term investments. Investment securities
held with the intent to reinvest or hold for longer than a year, or with
remaining maturities of one year or more, are considered long-term investments.
The Company’s cash equivalents at September 30, 2009 and December 31, 2008
consisted of money market funds with original maturities of three months or
less, and are therefore classified as cash and cash equivalents in the
accompanying balance sheets. At September 30, 2009, we had
deposits with a financial institution that may exceed the amount of insurance
provided on such deposits.
The
Company accounts for its short-term investments in accordance with Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 320,
Investments – Debt and Equity
Securities. The Company’s short –term investments in securities are
classified as available-for-sale and are reported at fair value, with unrealized
gains and losses, net of tax, recorded in other comprehensive income (loss).
Realized gains or losses and declines in value judged to be other than
temporary, if any, on available- for-sale securities are reported in other
income, net. The Company reviews the securities for impairments considering
current factors including the economic environment, market conditions and the
operational performance and other specific factors relating to the business
underlying the securities. The Company records impairment charges equal to the
amount that the carrying value of its available-for-sale securities exceeds the
estimated fair market value of the securities as of the evaluation date. The
fair value for publicly held securities is determined based on quoted market
prices as of the evaluation date. In computing realized gains and losses on
available-for-sale securities, the Company determines cost based on amounts
paid, including direct costs such as commissions, to acquire the security using
the specific identification method.
See Fair Value Measurement for
further information on fair value.
9
Fair
Value Measurement
On
January 1, 2008, we adopted ASC 820, Fair Value Measurements and Disclosures
(ASC 820), which defines fair value, establishes a framework for using fair
value to measure assets and liabilities, and expands disclosures about fair
value measurements. The Statement applies whenever other statements require or
permit assets or liabilities to be measured at fair value. ASC 820 is effective
for fiscal years beginning after November 15, 2007, except for nonfinancial
assets and liabilities that are recognized or disclosed at fair value in the
financial statements on a nonrecurring basis, for which application has been
deferred for one year.
The
following table summarizes our financial assets measured at fair value on a
recurring basis in accordance with ASC 820 as of September 30, 2009 (in
thousands):
Quoted Prices in
|
||||||||||||||||
Unrealized
|
Active Markets for
|
|||||||||||||||
Cost
|
Gain/(loss)
|
Fair Value
|
Identical Assets (level 1)
|
|||||||||||||
Assets:
|
||||||||||||||||
Cash
Equivalents:
|
||||||||||||||||
Commercial
paper
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Money
market funds
|
22,617 | - | 22,617 | 22,617 | ||||||||||||
Available-for-sale
investment - short term
|
||||||||||||||||
Corporate
obligations
|
- | - | - | - | ||||||||||||
U.S.
government agency notes
|
- | - | - | - | ||||||||||||
$ | 22,617 | $ | - | $ | 22,617 | $ | 22,617 | |||||||||
Liabilites:
|
$ | - | $ | - | $ | - | $ | - |
Our
financial assets are valued using market prices on active markets (level
1). Level 1 instrument valuations are obtained from real-time quotes
for transactions in active exchange markets involving identical
assets. At September 30, 2009 we did not have any assets with
instrument valuations which are not obtained from readily-available pricing
sources for comparable instruments (level 2) or assets without observable market
values that would require a high level of judgment to determine fair value
(level 3).
The
carrying amounts of certain of the Company’s financial assets and liabilities
including cash, accounts receivable-other, accounts payable and accrued expenses
approximate its fair value due to their short term maturities.
4. NET
(LOSS) INCOME PER COMMON SHARE
Basic net
(loss) income per share is calculated based on the weighted average number of
common shares outstanding during the periods presented. Diluted net
loss per share gives effect to the dilutive effect of common stock equivalents
consisting of stock options and warrants (calculated using the treasury stock
method) and convertible preferred stock.
The
following table presents the calculation of basic and diluted net (loss) income
per share for each year (in thousands, except per share data):
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
(loss) income
|
$ | (139 | ) | $ | 2 | $ | (445 | ) | $ | 76 | ||||||
Basic
and diluted:
|
||||||||||||||||
Weighted-average
shares of common stock outstanding
|
10,091 | 10,091 | 10,091 | 10,091 | ||||||||||||
Add:
effect of dilutive securities – stock options
|
0 | 2 | 0 | 2 | ||||||||||||
Weighted-average
shares used in diluted net income per share
|
10,091 | 10,093 | 10,091 | 10,093 | ||||||||||||
Basic
and diluted net (loss) income per share
|
$ | (0.01 | ) | $ | 0.00 | $ | (0.04 | ) | $ | 0.01 |
10
Basic net
(loss) income per common share is calculated based on the weighted-average
number of common shares outstanding during the periods
presented. Dilutive net income per share includes the effects of
outstanding dilutive options.
5.
COMPREHENSIVE (LOSS) INCOME
The
components of comprehensive income are shown below, in thousands:
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
(loss) income
|
$ | (139 | ) | $ | 2 | $ | (445 | ) | $ | 76 | ||||||
Other
comprehensive (loss) income:
|
||||||||||||||||
Unrealized
gains (loss) on investments
|
- | (87 | ) | - | (99 | ) | ||||||||||
Currency
translation adjustment
|
- | - | - | - | ||||||||||||
Total
other comprehensive (loss) income
|
- | (87 | ) | - | (99 | ) | ||||||||||
Comprehensive
(loss) income
|
$ | (139 | ) | $ | (85 | ) | $ | (445 | ) | $ | (23 | ) |
6. RECENT
ACCOUNTING PRONOUNCEMENTS
In June 2009, the Financial Accounting
Standards Board (the “FASB”) issued the “FASB Accounting Standards Codification”
(the “Codification”) as the single source of authoritative U.S. generally
accepted accounting principles (“U.S. GAAP”) recognized by the FASB. The
Codification does not change current U.S. GAAP, but is intended to simplify user
access to all authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. All existing
accounting standard documents will be superseded and all other accounting
literature not included in the Codification will be considered
non-authoritative. While the adoption of the Codification as of September
30, 2009 changes how we reference accounting standards, the adoption did not
have an impact on our consolidated financial position, results of operations, or
cash flows.
In March
2008, we adopted amendments to the accounting standard addressing derivatives
and hedging. The amendments change the disclosure requirements for
derivative instruments and hedging activities, requiring enhanced disclosures
about how and why an entity uses derivative instruments, how instruments are
accounted for under U.S. GAAP, and how derivatives and hedging activities affect
an entity’s financial position, financial performance and cash flows. The
adoption of these amendments required additional disclosure only, and therefore
did not have an impact on our consolidated financial position, results of
operations, or cash flows.
In
October 2008, we adopted amendments to the accounting standard addressing
estimating fair value. The amendments provide additional authoritative
guidance to assist both issuers and users of financial statements in determining
whether a market is active or inactive, and whether a transaction is
distressed. The adoption of these amendments did not have a material
impact on our consolidated financial position, results of operations or cash
flows.
In June
2009, we adopted amendments to the accounting standard addressing fair value of
financial instruments in interim reporting periods. The amendments provide
guidance on the disclosure requirements about fair value of financial
instruments in interim reporting periods. Such disclosures were previously
required only in annual financial statements. The adoption of these
amendments did not have a material impact on our consolidated financial
position, results of operations or cash flows. See Note 3.
In June
2009, we adopted amendments to the accounting standard addressing subsequent
events. The amendments provide guidance on the definition of what
qualifies as a subsequent event—those events or transactions that occur
following the balance sheet date, but before the financial statements are
issued, or are available to be issued—and requires companies to disclose the
date through which subsequent events were evaluated and the basis for
determining that date. This disclosure should alert all users of financial
statements that a company has not evaluated subsequent events after that date in
the set of financial statements being presented. The amendments required
additional disclosures only, and therefore did not have a material impact on our
financial position, results of operations, or cash flows.
11
In April
2009, the FASB issued authoritative guidance in connection with accounting for
assets acquired and liabilities assumed in a business combination that arise
from contingencies. The guidance addresses application issues regarding the
initial recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination. Due to the fact that the literature is applicable to acquisitions
completed after January 1, 2009 and the Company did not have any business
combinations with assets and liabilities arising from contingencies in the first
nine months of 2009, the adoption of the authoritative guidance did not impact
the Company’s consolidated financial statements and its effects on future
periods will depend on the nature and extent of business combinations that we
complete, if any, in or after fiscal 2009.
7. TRANSACTIONS
WITH RELATED PERSONS
In
efforts to reduce our operating expenses, on June 15, 2007, the board of
directors approved an agreement (the “Services Agreement”) with SP Corporate
Services, LLC (“SP”) pursuant to which SP provides us, on a non-exclusive basis,
a full range of executive, financial and administrative support services, rent
and personnel, including the services of a Chief Executive Officer, Chief
Financial Officer, Secretary, Principal Executive Officer and Principal
Accounting Officer, maintenance of our corporate office and records, periodic
reviews of transactions in our stock to assist in preservation of our NOLs, and
related executive, financial, accounting and administrative support services.
The Service Agreement became effective as of July 1, 2007 and was renewed as of
July 1, 2009. Under the Services Agreement, we pay SP a monthly fee
of $17,000 in exchange for SP's services. SP is responsible for compensating and
providing all applicable employment benefits to any SP personnel in connection
with providing services under the Services Agreement. We reimburse SP for
reasonable and necessary business expenses of ours incurred by SP, and we are
responsible for payment of fees related to audit, tax, legal, stock transfer,
insurance broker, investment advisor and banking services provided to us by
third party advisors. The Services Agreement has a term of one year and
automatically renews for successive one year periods unless otherwise terminated
by either party. The Services Agreement is also terminable by us upon the death
of Terry R. Gibson or his resignation as our Chief Executive Officer, Chief
Financial Officer or Secretary of the Company. Under the Services Agreement, SP
and its personnel are entitled to the same limitations on liability and
indemnity rights available under our charter documents to any other person
performing such services for us. During the nine months ended September 30,
2009, we incurred $153,000 for services performed by SP under the Services
Agreement.
SP is
affiliated with Steel Partners Holdings L.P., our largest stockholder, by virtue
of SP’s President, Warren Lichtenstein, serving as the managing member of Steel
Partners II GP LLC, the general partner of Steel Partners Holdings
L.P. SP is also a wholly owned subsidiary of Steel Partners, Ltd.,
also controlled by Mr. Lichtenstein. Mr. Gibson is the Managing
Director of SP Corporate Services, LLC.
Pursuant
to the Services Agreement, Terry R. Gibson terminated his employment with us,
effective as of June 30, 2007, but continues to serve as our Chief Executive
Officer, Chief Financial Officer, Secretary, Principal Executive Officer and
Principal Accounting Officer as an employee of SP. SP is responsible
for compensating Mr. Gibson, including providing him with all applicable
employment benefits to which he may be entitled, for his serving as our Chief
Executive Officer, Chief Financial Officer, Secretary, Principal Executive
Officer and Principal Accounting Officer and for any other services he may
provide to us under the Services Agreement.
8. OTHER
EVENTS
As of
August 6, 2009, we amended our share purchase rights plan, dated as of September
1, 2005 and first amended as of August 31, 2007, which provided for a dividend
distribution of one preferred share purchase right for each outstanding share of
our common stock, paid on September 12, 2005 to our stockholders of record at
the close of business on that date. The amendment extends the expiration date of
the rights from September 1, 2009 until September 1, 2011, unless earlier
redeemed, exchanged, or amended by the board of directors. The amendment was not
made in response to any pending takeover bid for CoSine. The primary
purpose of the plan is to preserve our NOLs for tax
purposes.
12
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTSOF OPERATIONS
In
addition to historical information, this Quarterly Report on Form 10-Q
contains forward-looking statements that involve risks and uncertainties that
could cause our actual results to differ materially. When used in this report,
the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,”
“estimates” and similar expressions are generally intended to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements, which reflect our opinions only as of the date of
this Quarterly Report. We undertake no obligation to publicly release any
revisions to the forward-looking statements after the date of this document. You
should carefully review the risk factors described in other documents we file
from time to time with the U.S. Securities and Exchange Commission,
including our Annual Report on Form 10-K/A for our fiscal year ended
December 31, 2008 and our other Quarterly Reports on Form 10-Q filed
by us in our fiscal year 2009.
OVERVIEW
Our
strategy is to enhance stockholder value by pursuing opportunities to redeploy
our assets through an acquisition of one or more operating businesses with
existing or prospective taxable earnings that can be offset by use of our net
operating loss carry-forwards (“NOLs”). No assurance can be given that we will
find suitable candidates, and if we do, that we will be able to utilize our
existing NOLs.
We were a
provider of carrier network equipment products and services until the fourth
quarter of fiscal year 2004 during which time we discontinued our product lines,
took actions to lay off most of our employees, terminated contract manufacturing
arrangements, contractor and consulting arrangements and various facility
leases, and sold, scrapped or wrote-off our inventory, property and equipment.
In July 2005, our board of directors approved our strategy of redeploying our
existing resources to identify and acquire new business
operations. In 2006, we sold the remaining assets of our carrier
network products business with the sale of our patent portfolio and the rights
to the related intellectual property. During 2006, we also completed
the wrap-up of our carrier services business, providing customer support
services for our discontinued products through December 31, 2006, at which time
we terminated all customer support offerings. Effective July 1, 2007,
we engaged SP Corporate Services LLC to provide all of our executive, financial
and administrative support service, rent and personnel requirements and, as a
result, no longer have any employees.
DUE TO
THE ADOPTION OF OUR REDEPLOYMENT STRATEGY, THE INFORMATION APPEARING BELOW,
WHICH RELATES TO PRIOR PERIODS, MAY NOT BE INDICATIVE OF THE RESULTS THAT MAY BE
EXPECTED FOR ANY SUBSEQUENT PERIODS. THE NINE MONTHS ENDED SEPTEMBER 30, 2009
PRIMARILY REFLECT, AND FUTURE PERIODS PRIOR TO A REDEPLOYMENT OF OUR ASSETS ARE
EXPECTED TO PRIMARILY REFLECT, GENERAL AND ADMINISTRATIVE EXPENSES AND
TRANSACTION EXPENSES ASSOCIATED WITH THE CONTINUING ADMINISTRATION OF THE
COMPANY AND ITS EFFORTS TO REDEPLOY ITS ASSETS.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
General
Our
discussion and analysis of our financial condition and results of operations are
based on our financial statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. The preparation of
these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, and disclosures of
contingent assets and liabilities. On an ongoing basis, we evaluate
our estimates, including those related to equity
issuances. Additionally, the audit committee of our board of
directors reviews these critical accounting estimates at least
annually. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances. These estimates form the basis for certain judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates.
13
The
following accounting policies are significantly affected by the judgments and
estimates we use in the preparation of our financial statements.
Impact
of Equity Issuances on Operating Results
Equity
issuances have historically had a material impact on our operating
results. The equity issuances that have historically affected
operating results to date include warrants granted to customers and suppliers,
stock options granted to employees and consultants, stock issued in lieu of cash
compensation to suppliers and re-priced stock options.
Our
cost of revenue, operating expenses and interest expense were affected in prior
years by charges related to warrants and options issued for
services. Furthermore, some of our employee stock option transactions
had resulted in deferred compensation, which was presented as a reduction of
stockholders’ equity on our balance sheet and was amortized over the vesting
period of the applicable options using the graded vesting method.
Some
of the stock options granted to our employees had resulted in deferred
compensation as a result of stock options having an exercise price below their
estimated fair value. Deferred compensation is presented as a
reduction to stockholders’ equity on the balance sheet and is then amortized
using an accelerated method over the vesting period of the applicable
options. When an employee terminates, an expense credit is recorded
for any amortization that has been previously recorded as an expense in excess
of vesting.
RESULTS
OF OPERATIONS
Revenue
Effective
December 31, 2006, we ceased all customer service operations. Accordingly, there
were no revenues recognized for the three and nine months ended September 30,
2009 and 2008, respectively.
Non-Cash
Charges Related to Equity Issuances
During
the nine months ended September 30, 2009 and 2008, we recorded $26,000 and
$25,000, respectively, of non-cash charges related to equity
issuances. Such costs were $9,000 and $9,000 for the three
month period ended September 30, 2009 and 2008
respectively. The charges relate to the adoption of ASC
718.
Cost
of Revenue
There was
no cost of revenue for the three and nine months ended September 30, 2009 and
2008 as we closed our customer service business effective December 31,
2006.
Research
and Development Expenses
There
were no research and development expenses for the three and nine months ended
September 30, 2009 and 2008 as we discontinued all research and development in
connection with our announcement in September 2004 that we were terminating all
employees and discontinuing our products. We do not expect to incur
research and development costs unless and until we acquire new operating
businesses.
Sales
and Marketing Expenses
There
were no sales and marketing expenses for the three and nine months ended
September 30, 2009 and 2008, respectively. With our announcement in
September 2004 that we were terminating all employees and were discontinuing our
products, we have ceased essentially all ongoing sales and marketing efforts. We
do not expect to incur sales and marketing costs unless and until we acquire new
operating businesses.
General
and Administrative Expenses
General
and administrative expenses were $583,000 and $492,000 for the nine months ended
September 30, 2009 and 2008, respectively. Such costs were $170,000
and $169,000 for the three months ended September 30, 2009 and 2008
respectively. The increases from September 30, 2008 to 2009 are due
to primarily to increased legal costs. With our announcement in September 2004
that we were terminating all employees and discontinuing our products, our
general and administrative efforts have been focused on activities related to
identifying and acquiring profitable business operations. General and
administrative costs for the nine months ended September 30, 2009 and 2008
consisted of costs of our contractors, legal and accounting services, insurance
and office expenses. General and administrative expenses should
remain at approximately the levels reported in the three months ended September
30, 2009 for the quarter ending December 31, 2009.
14
Interest
and Other Income (Expense)
For the
nine months ended September 30, 2009 and 2008, interest and other income was
$139,000 and $568,000, respectively. For the three months ended
September 30, 2009 and 2008, interest and other income was $31,000 and $171,000
respectively. The decreases during the three and nine month periods
ended September 30, 2008 to September 30, 2009 are due to lower interest rates
during 2009 as compared to 2008.
Income
Tax Provision
Provisions
for income taxes were nil for the three and nine months ended September 30, 2009
and 2008, respectively.
LIQUIDITY
AND CAPITAL RESOURCES
We
have adopted a strategy of seeking to enhance stockholder value by pursuing
opportunities to redeploy our assets through an acquisition of one or more
operating business with existing or prospective taxable earnings that can be
offset by use of our net operating loss carry-forwards ("NOLs"). We
believe that we possess sufficient liquidity and capital resources to fund our
operations and working capital requirements for at least the next 12 months.
However, our redeployment of assets strategy raises substantial doubt as to our
ability to continue as a going concern.
We
will continue to prepare our financial statements on the assumption that we will
continue as a going concern, which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. As such,
the financial statements do not include any adjustments to reflect possible
future effects of the recoverability and classification of assets or the amounts
and classification of liabilities that may result from any decisions made with
respect to an assessment of our strategic alternatives. If at some
point we were to decide to pursue alternative plans, we may be required to
present the financial statements on a different basis. As an example,
if we were to decide to pursue a liquidation and return of capital, it would be
appropriate to prepare and present financial statements on the liquidation basis
of accounting, whereby assets are valued at their estimated net realizable
values and liabilities are stated at their estimated settlement
amounts.
Cash,
Cash Equivalents and Short-Term Investments
Cash,
cash equivalents and short-term investments were $22.7 million and $23.2 million
at September 30, 2009 and December 31, 2008, respectively.
Operating
Activities
We used
$385,000 in cash from operations for the nine months ended September 30, 2009 as
compared to generating $20,000 in cash from operations for the nine months ended
September 30, 2008. The increase in cash usage in 2009 is due
primarily to the net loss incurred for the nine months ended September 30, 2009
as compared to the net income for the nine months ended September 30,
2008.
Investing
Activities
We
generated $13.9 million in cash in the nine months ended September 30, 2009 as
compared to utilizing cash of $7.2 million during the nine months ended
September 30, 2008 due to a decrease in purchases of short term investments for
the nine months period ended September 30, 2009. There were no
capital expenditures in the nine months ended September 30, 2009 or 2008,
respectively.
Financing
Activities
There
were no significant financing activities in the nine months ended September 30,
2009, or 2008 respectively.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future material affect.
15
OUTLOOK
Our
board of directors, on completion of a comprehensive review of strategic
alternatives, approved a plan to redeploy our existing resources to identify and
acquire one or more new business operations. Our redeployment
strategy will involve the acquisition of one or more operating businesses with
existing or prospective taxable earnings that can be offset by use of our
NOLs. No assurance can be given that we will find suitable
candidates, and if we do, that we will be able to utilize our existing
NOLs.
At
September 30, 2009, we had $22.7 million in cash and cash equivalents. We
believe we possess sufficient liquidity and capital resources to fund our
operations and working capital requirements for at least the next 12
months.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
Rate Sensitivity
We do not
currently use derivative financial instruments for speculative trading or
hedging purposes. In addition, we maintain our cash equivalents in
government and agency securities, debt instruments of financial institutions and
corporations and money market funds. Our exposure to market risks
from changes in interest rates relates primarily to corporate debt
securities. We place our investments with high credit quality issuers
and, by policy, limit the amount of the credit exposure to any one
issuer.
Our
general policy is to limit the risk of principal loss and ensure the safety of
invested funds by limiting market and credit risk. All highly-liquid
investments with a maturity of less than three months at the date of purchase
are considered to be cash equivalents, and all investments with maturities of
three months or greater are classified as available-for-sale and considered to
be short-term investments.
A
sensitivity analysis was performed on our investment portfolio as of September
30, 2009 based on a modeling technique that measures hypothetical fair market
value changes that would result from a parallel shift in the yield curve of plus
100 basis points. Based on this analysis, a hypothetical 100 basis
point increase in interest rates would result in a $2,000 decrease in the fair
value of our investments in debt securities as of September 30,
2009.
Exchange
Rate Sensitivity
Currently,
all of our income and most of our expenses are denominated in U.S.
dollars.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation of
Disclosure Controls and Procedures. The
Securities and Exchange Commission defines the term "disclosure controls and
procedures" to mean a company's controls and other procedures that are designed
to ensure that information required to be disclosed in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized, and reported, within the time periods specified in the Commission's
rules and forms. Our Chief Executive Officer and Chief Financial Officer has
concluded, based on the evaluation of the effectiveness of the disclosure
controls and procedures by our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, as of the end of the period
covered by this report, that our disclosure controls and procedures were
effective for this purpose.
Changes in Internal Controls.
With respect to the most recently completed fiscal quarter, there have been no
changes to our internal controls over financial reporting which have materially
affected, or are reasonably likely to materially affect our internal controls
over financial reporting.
Limitations on Effectiveness of
Controls and Procedures. Our management, including our Chief
Executive Officer and Chief Financial Officer, does not expect that our
disclosure controls and procedures or our internal controls will prevent all
errors and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include,
but are not limited to, the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate because
of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
16
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
On
November 15, 2001, we along with certain of our officers and directors were
named as defendants in a class action shareholder complaint filed in the United
States District Court for the Southern District of New York, now captioned In re
CoSine Communications, Inc. Initial Public Offering Securities Litigation, Case
No. 01 CV 10105. The complaint generally alleges that various investment bank
underwriters engaged in improper and undisclosed activities related to the
allocation of shares in our initial public offering. The complaint brings claims
for the violation of several provisions of the federal securities laws against
those underwriters, and also against us and each of the directors and officers
who signed the registration statement relating to the initial public offering.
The plaintiffs seek unspecified monetary damages and other relief. Similar
lawsuits concerning more than 300 other companies' initial public offerings were
filed during 2001, and this lawsuit is being coordinated with those actions in
the Southern District of New York before Judge Shira A. Scheindlin.
On or
about July 1, 2002 an omnibus motion to dismiss was filed in the coordinated
litigation on behalf of the issuer defendants, of which we and our named officer
and directors are a part, on common pleading issues. In October 2002, pursuant
to stipulation by the parties, the Court entered an order dismissing our named
officers and directors from the action without prejudice. On February 19, 2003,
the Court dismissed the Section 10(b) and Rule 10b-5 claims against us but did
not dismiss the Section 11 claims against us.
In June
2004, a stipulation of settlement and release of claims against the issuer
defendants, including us, was submitted to the Court for
approval. Although the Court preliminarily approved that settlement
in August 2005, it was terminated in June 2007 based upon a stipulation among
the parties to the settlement, after it became unlikely that the settlement
would receive final Court approval. Plaintiffs filed amended master
allegations and amended complaints and moved for class certification in the six
focus cases. Defendants moved to dismiss the amended complaints and
opposed class certification. In March 2008, the Court denied the
defendants’ motion to dismiss the amended complaints.
The
parties have reached a global settlement of the litigation. On April 2,
2009, plaintiffs filed a motion for preliminary approval of the
settlement. On June 9, 2009, the Court granted preliminary approval
of the settlement, and on October 5, 2009, the Court entered an Opinion and
Order granting final approval of the settlement. Under the
settlement, the insurers will pay the full amount of settlement share allocated
to the Company, and the Company will bear no financial liability. The Company,
as well as the officer and director defendants who were previously dismissed
from the action pursuant to tolling agreements, will receive complete dismissals
from the case.
On
October 9, 2007, a purported CoSine shareholder filed a complaint for violation
of Section 16(b) of the Securities Exchange Act of 1934, which prohibits
short-swing trading, against the Company's IPO underwriters. The complaint,
Vanessa Simmonds v. The Goldman Sachs Group, et al., Case No. C07-1629, filed in
the District Court for the Western District of Washington, seeks the recovery of
short-swing profits. The Company is named as a nominal defendant. No recovery is
sought from the Company. The plaintiff, Vanessa Simmonds, has filed similar
lawsuits in the District Court for the Western District of Washington alleging
short-swing trading in the stock of 54 other companies. On July 25, 2008, a
majority of the named issuer companies, including CoSine, jointly filed a motion
to dismiss plaintiff's claims. On March 12, 2009, the Court
issued an order granting the motion to dismiss and a judgment in the favor of
the moving issuers. On April 10, 2009, Ms. Simmonds appealed the
order and judgment dismissing her claims to the United States Court of Appeal
for the Ninth Circuit. The appeal is pending.
Even if
the above claims are not successful, the litigation could result in substantial
costs and divert management's attention and resources, which could adversely
affect our business, results of operations and financial position.
In the
ordinary course of business, we are involved in disputes and legal proceedings
involving contractual obligations, employment relationships, and other
matters. Except as described above, we do not believe there are any
pending or threatened disputes or legal proceedings that will have a material
impact on our financial position or results of operations.
17
ITEM
1A. RISK FACTORS
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A. “Risk Factors” in
our Annual Report on Form 10-K/A for our fiscal year ended
December 31, 2008. The risks discussed in our Annual Report on
Form 10-K/A could materially affect our business, financial condition and
future results. The risks described in our Annual Report on Form 10-K/A are
not the only risks facing us. Additional risks and uncertainties not currently
known to us or that we currently deem to be immaterial also may materially and
adversely affect our business, financial condition or operating
results.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On
September 25, 2000, in connection with our initial public offering, a
Registration Statement on Form S-1 (File No. 333-35938) was declared effective
by the Securities and Exchange Commission, pursuant to which 1,150,000 shares of
our common stock were offered and sold for our account at a price of $230 per
share, generating gross offering proceeds of $264.5 million. The
managing underwriters were Goldman, Sachs & Co., Chase Securities Inc.,
Robertson Stephens, Inc. and JP Morgan Securities Inc. Our initial public
offering closed on September 29, 2000. The net proceeds of the
initial public offering were approximately $242.5 million after deducting
approximately $18.5 million of underwriting discounts and approximately $3.5
million of other offering expenses.
We did
not pay directly or indirectly any of the underwriting discounts or other
related expenses of the initial public offering to any of our directors or
officers, any person owning 10% or more of any class of our equity securities,
or any of our affiliates.
We have
used approximately $220 million of the funds from the initial public offering to
fund our operations. We expect to use the remaining net proceeds for
general corporate purposes, to fund our operations, working capital and capital
expenditures. Pending further use of the net proceeds, we have
invested them in short-term, interest-bearing, investment-grade
securities.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July
27, 2009, we held our 2009 Annual Meeting of Stockholders at which one proposal
was considered. We recommended that the stockholders vote for the
proposal. The results of the matter considered and voted upon are as
follow:
Proposal
1:
|
To
elect a Board of Directors to hold office until our 2010 Annual Meeting of
Stockholders.
|
Of the
aggregate 9,729,056 shares represented in person or by proxy at the 2009 Annual
Meeting of Stockholders, the shares were voted as follows:
Nominee
|
Votes For
|
Withheld
|
||
Donald
Green
|
8,798,221
|
930,835
|
||
Charles
J. Abbe
|
9,658,021
|
71,035
|
||
Jack
L. Howard
|
8,774,886
|
954,170
|
||
Terry
R. Gibson
|
|
8,796,291
|
|
932,765
|
ITEM
6. EXHIBITS
Exhibit
Index on page 20.
18
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.
COSINE COMMUNICATIONS, INC.
|
||
Dated: November 6, 2009
|
By:
|
/s/ Terry R. Gibson
|
Terry R. Gibson
|
||
Director, Chief Executive Officer and Chief Financial Officer
|
||
(Principal Accounting Officer)
|
19
EXHIBIT
INDEX
Exhibit Number
|
Description
|
|
10.1
|
Services
Agreement by and between CoSine Communications, Inc. and SP Corporate
Services, LLC, effective as of July 1, 2007 (incorporated by reference to
Exhibit 10.1 to Form 8-K filed June 19, 2007).
|
|
10.2
|
First
Amendment to Rights Agreement by and between CoSine Communications, Inc.
and Mellon Investor Services LLC, effective as of August 31, 2007
(incorporated by reference to Exhibit 10.1 to Form 8-K filed on
September 4, 2007).
|
|
10.3
|
Second
Amendment to Rights Agreement by and between CoSine Communications, Inc.
and Mellon Investor Services LLC, effective as of August 6,
2009.
|
|
31.1
|
Certification
of Terry R. Gibson, Chief Executive Officer and Chief Financial Officer of
CoSine Communications, Inc., pursuant to 15 U.S.C. Section 7241, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
32.1
|
Certification
of Terry R. Gibson, Chief Executive Officer and Chief Financial Officer of
CoSine Communications, Inc., pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
20