Filed with the Securities and Exchange Commission on May 12, 1997.
Securities Act Registration No. 333-20543
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933,
AS AMENDED
PROTOSOURCE CORPORATION
-----------------------------------
(Exact Name of Small Business Issuer
As Specified In Its Charter)
California 7373 77-0190772
- ---------------------------- ----------------------- ---------------
(State or other jurisdiction (Primary Standard (IRS Employer
of incorporation or Industrial Identification
organization) Classification Code No.) Number)
2300 Tulare Street, Suite 210
Fresno, CA 93721
(209) 490-8600
----------------------------------------------------------
Address, including zip code, and telephone number, in-
cluding area code, of Registrant's principal executive offices)
Raymond J. Meyers, Chief Executive Officer
ProtoSource Corporation
2300 Tulare Street, Suite 210
Fresno, CA 93721
(209) 490-8600
------------------------------------------------
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copies of all communications to:
Gary A. Agron, Esq.
5445 DTC Parkway, Suite 520
Englewood, CO 80111
(303) 770-7254
(303) 770-7257 (Fax)
Approximate date of commencement of the Offering: As soon as practicable
after the effective date of the Offering.
<PAGE>
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If any of the securities registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box: [ X ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
check the following box: [ ]
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CALCULATION OF REGISTRATION FEE
=====================================================================================================================
Title of Each Class Amount to Proposed Amount of
of Securities Be Maximum Price Offering Registration
to be Registered Registered Per Security Price Fee
=====================================================================================================================
<S> <C>
Common Stock, no 426,667
par value Shares $4.65(1) $1,984,000 $ 602
Common Stock 293,333 $ .90(2) $ 264,000 $ 80
Purchase Warrants Warrants
Common Stock, no
par value, underlying
Common Stock 293,333
Purchase Warrants Shares $3.75 $1,100,000 $ 334
Totals............................................................... $3,348,000 $1,016
=====================================================================================================================
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(1) Represents the closing price per share of the Registrant's Common Stock on
the Electronic Bulletin Board of the NASD ("Bulletin Board") on January 24,
1997.
(2) Represents the highest estimated value of the common stock purchase
warrants based upon the closing price of the Registrant's Common Stock on
the Bulletin Board.
The Registrant hereby amends the Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
(EXHIBIT INDEX LOCATED ON PAGE ------- OF THIS FILING)
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PROTOSOURCE CORPORATION
Cross Reference Sheet
Item Caption Location or Caption in Prospectus
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<S> <C> <C>
1. Forepart of Registration Statement Outside Front Cover Page
and Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Inside Front and Outside Back Cover Pages
Cover Page of Prospectus
3. Summary Information and Risk Prospectus Summary; Risk Factors
Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Cover Page; Risk Factors
6. Dilution Not Applicable
7. Selling Security Holders Selling Stockholders
8. Plan of Distribution Selling Stockholders; Plan of Distribution
9. Legal Proceedings Not Applicable
10. Directors, Executive Officers, Management; Principal Stockholders
Promoters and Control Persons
11. Security Ownership of Certain Principal Stockholders
Beneficial Owners and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts and Not Applicable
Counsel
14. Disclosure of Commission Position Item 25 -- Undertakings
on Indemnification for Securities
15. Organization Within Last Five Prospectus Summary; Certain Transactions
Years
16. Description of Business Risk Factors; Business
17. Management's Discussion and Management's Discussion and Analysis of
Analysis or Plan of Operations Financial Condition and Results of
Operations
(ii)
<PAGE>
18. Description of Property Business--Properties
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market for Common Equity and Price Range of Common Stock;
Related Stockholder Matters Description of Securities
21. Executive Compensation Management--Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Not Applicable
Accountants on Accounting and
Financial Disclosure
</TABLE>
(iii)
<PAGE>
Subject to Completion Dated May 12, 1997
PROTOSOURCE CORPORATION
426,667 Shares of Common Stock
293,333 Common Stock Purchase Warrants
293,333 Shares of Common Stock
Underlying Common Stock Purchase Warrants
ProtoSource Corporation (the "Company") is registering hereby (i) 426,667
shares of its no par value Common Stock ("Common Stock"), (ii) 293,333 Common
Stock Purchase Warrants ("Warrants"), each Warrant exercisable to purchase one
share of Common Stock at $3.75 per share at any time until October 2001, and
(iii) 293,333 shares of Common Stock underlying the Warrants (collectively the
"Registered Securities"), all of which are being registered on behalf of certain
stockholders of the Company (the "Selling Stockholders"), some of whom are
officers, directors and principal stockholders of the Company. The Company's
four executive officers and directors own no shares of the Company's Common
Stock and are registering for sale hereby substantially all of their Warrants.
Accordingly, should those individuals elect to sell their Warrants, they will
have no financial stake in the Company whatsoever.
The Registered Securities will be offered and sold (the "Offering") from
time to time by the Selling Stockholders in public or private open market
transactions at prevailing market prices less customary selling commissions. The
Selling Stockholders may be deemed "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "1933 Act"). See "Selling Stockholders."
None of the proceeds from the sale of the Registered Securities will be received
by the Company, although the Company may receive cash proceeds from the exercise
of the Warrants. The Company will bear the expenses of the Offering, expected
not to exceed $125,000.
The Company's Common Stock trades on the Electronic Bulletin Board
("Bulletin Board") of the National Association of Securities Dealers, Inc.
("NASD") under the symbol "PSNW." On May 7, 1997, the closing price of the
Common Stock was $5.00 per share. See "Price Range of Common Stock."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION ("COMMISSION")
NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND SHOULD BE CONSIDERED ONLY BY PERSONS ABLE TO SUSTAIN
A TOTAL LOSS OF THEIR INVESTMENT. SEE "RISK FACTORS."
The date of this Prospectus is __________1997.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a Registration Statement on Form SB-2 (the
"Registration Statement") under the 1933 Act with respect to the securities
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement, certain items of which are omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and the securities offered by this Prospectus, reference
is made to such Registration Statement and the exhibits thereto. Statements
contained in this Prospectus as to the contents of any contract or other
documents are not necessarily complete and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement for a full statement of the provisions thereof; each such
statement contained herein is qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act") and, in accordance therewith,
files reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information may be inspected and copied at
public reference facilities of the Commission at 450 Fifth Street N.W.,
Washington, D.C. 20549; 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; 7 World Trade Center, New York, New York 10048; and 5757 Wilshire
Boulevard, Los Angeles, California 90036. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth Street
N.W., Washington, D.C. 20549 at prescribed rates.
The Company furnishes annual reports which include audited financial
statements to its stockholders. The Company may also furnish quarterly financial
statements to its stockholders and such other reports as may be authorized by
its Board of Directors.
2
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information contained in this
Prospectus and is qualified in its entirety by the detailed information and
financial statements that appear elsewhere herein. Unless otherwise indicated,
the share information included herein reflects a one share for ten shares
reverse stock split approved by the Company's stockholders on February 28, 1997
and a two shares for three shares reverse stock split approved by the Company's
stockholders on April 25, 1997 (collectively the "reverse stock splits"). Except
for the historical information contained herein, the matters set forth in this
Prospectus include forward-looking statements within the meaning of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are subject to risks and uncertainties that may
cause actual results to differ materially. These risks and uncertainties are
detailed throughout the Prospectus and will be further discussed from time to
time in the Company's periodic reports filed with the Commission. The
forward-looking statements included in the Prospectus speak only as of the date
hereof.
The Company
Operating through its ProtoSource Network ("PSNW") division, the Company
provides Internet access and related services to individuals, public agencies
and businesses in five small Central California cities. As of December 31, 1996,
the Company had 2,500 subscribers for whom it provided Internet access. The
Company intends to acquire other small Internet providers in markets with
populations of less than 500,000 that are located initially in various Central
California cities between Sacramento and Bakersfield. The Company believes that
certain of these local Internet providers currently doing business in the
Company's target markets will not be able to effectively manage the financial
and administrative burdens imposed by the continuing consumer demand for local
Internet services, unless these providers are integrated into larger, more
diversified Internet products and services companies. The Company has addressed
these financial and administrative burdens by (i) expanding its operations
throughout Central California, (ii) developing diversified services similar to
its larger competitors, such as hourly-based access services, special access
packages for business and high speed access, and (iii) investing in automated
billing and administrative systems. The Company believes these actions will
allow it to compete effectively with larger access firms entering the Company's
markets. The Company's long-term plan is to target a select number of such
target markets and increase revenues through acquisition in such markets. The
Company is not negotiating to acquire nor has it entered into any agreement to
acquire any such Internet related companies. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business -
Introduction."
The Company's strategy is to provide low cost direct Internet access to
subscribers in target markets by acquiring small Internet providers in these
markets or by establishing its own marketing operations in the target markets.
Thereafter, the Company will seek to generate additional revenues by (i)
increasing monthly Internet access fees, (ii) offering monthly community access
services, (iii) providing Internet consulting services, and (iv) generating
marketing service fees charged to businesses seeking a Web site on the Internet.
The Company was incorporated in the State of California as SHR Corporation
on July 1, 1988. In October 1994, the Company changed its name to "ProtoSource
Corporation." The Company's principal executive officers are located at 2300
Tulare Street, Suite 210, Fresno, California 93721, telephone (209) 486-8638.
3
<PAGE>
History
From July 1988 until August 1996, the Company's primary business was to
design, develop and market software programs (and related hardware) for the
agri-business industry including produce broker accounting programs, product
tracking programs, crop chemical usage reports, crop cost and billing systems
and fruit accounting programs. The programs were packaged under the Company's
"Classic" line of products and were divided by function, sophistication and the
size of the customer into "Classic" (appropriate for customers whose annual
sales are less than $10 million), "Classic Advantage" (appropriate for customers
whose annual sales are between $10 million and $100 million) and "Classic
Custom" (appropriate for customers whose annual sales exceed $100 million).
Prices ranged from $20,000 for a "Classic" program to $200,000 for a "Classic
Custom" program. The Company also sold customized computer system configurations
designed by it which integrated hardware and software. The Classic product line
together with the Company's design services and hardware and software sales is
collectively referred to as the "Classic Line."
In February 1995, the Company completed an initial public offering ("IPO")
of its securities, consisting of the sale of 46,000 Units to the public at
$82.50 per Unit. Each Unit consisted of one share of Common Stock and one common
stock purchase warrant (the "Public Warrants") to purchase an additional share
of Common Stock at $97.50 per share until February 1998. McClurg Capital
Corporation, the Representative of the Underwriters of the IPO (the "Prior
Representative") received warrants (the "Prior Representative's Unit Warrants")
to purchase 4,000 Units at $99.00 per Unit at any time until February 2000.
In December 1996, the Company sold the Classic Line to a Canadian company
for $300,000 in cash and an unsecured promissory note which the Company has not
valued on its financial statements. As a part of the transaction, the Company
received an exclusive worldwide license through December 2006 to market the
Classic Line based upon a royalty of 16% of gross sales. See "Certain
Transactions."
In January 1997, the Company sold the remaining assets of the Classic Line
to SSC Technologies, Inc. ("SSC") for $770,850 evidenced by a promissory note
bearing interest at 10% per annum payable in January 2007 and the assumption by
SSC of all of the liabilities of the Classic Line, aggregating approximately
$500,000. Under the terms of the asset sales agreement (the "Divestiture
Agreement"), the Company acquired 25% of the outstanding common stock of SSC for
$500,000 in cash (less $200,000 of liabilities which were paid by the Company
and deducted from the $500,000) and the remaining 75% of the outstanding common
stock was issued to other stockholders including Charles T. Howard, David L.
Green, Ding Yang and Steven L. Wilson who were previously officers and directors
of the Company (the "SSC Principals"). As a part of the Divestiture Agreement,
the SSC Principals also (i) cancelled 900,000 shares of Convertible Preferred
Stock held by them which were previously exercisable into shares of Common Stock
on a fifteen for one basis, (ii) agreed not to sell an aggregate of 30,300
shares of Common Stock owned by them until October 1999 except with the prior
written consent of Andrew, Alexander, Wise & Company, Incorporated ("AAWC"),
(iii) agreed to sublease office space from the Company at a monthly rental of
$12,000 through February 28, 1998, (iv) granted to Steven A. Kriegsman, a
director of the Company, an option to purchase up to 10,000 shares of Common
Stock held by the SSC principals at any time until October 2001, and (v)
personally guaranteed on a joint and several basis the $770,850 promissory note
and all other obligations of SSC to the Company. The Classic Line assets were
valued as a result of negotiations between the Company and the SSC Principals.
See "Certain Transactions."
In October 1996, the Company sold 400,000 shares of its Common Stock to a
group of investors for $3.75 per share or a total of $1,500,000 (the "Common
Stock Placement"). Included in the $1,500,000 was the conversion of $200,000 of
debt to equity which was originally represented by a bridge loan for which the
Company issued 26,667 shares of its Common Stock to the bridge lenders as
additional consideration for the $200,000 loan. The Company also issued a total
of 293,333 Warrants exercisable at $3.75 per share in connection with the bridge
loan and the private placement. The 426,667 shares, 293,333 Warrants and 293,333
shares underlying the Warrants are being registered hereby. See "Selling
Stockholders."
4
<PAGE>
The Offering
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<CAPTION>
<S> <C>
Securities offered........................................ 426,667 shares of Common Stock,
293,333 Warrants and 293,333 shares
of Common Stock underlying the Warrants
(the "Registered Securities") held by the
Selling Stockholders
Offering price............................................ Market prices of the Registered Securities
on the Bulletin Board
Common Stock outstanding(1)............................... 515,334 shares
Use of Proceeds........................................... None of the proceeds from the sale of the
Registered Securities will be received by
the Company. See "Use of Proceeds."
Bulletin Board symbols.................................... PSCO - Common Stock
PSCOW - Public Warrants
Transfer Agent............................................ Corporate Stock Transfer, Inc.
</TABLE>
- - -----------
(1) Excludes shares of Common Stock issuable upon exercise of (i) the 293,333
Warrants, (ii) the 46,000 Public Warrants, (iii) warrants held by the Prior
Representative to purchase up to 4,000 Units (each Unit consisting of one
share of Common Stock and one Public Warrant) exercisable at $99.00 per
Unit at any time until February 2000 (the "Prior Representative's Unit
Warrants"), and (iv) stock options to purchase up to 36,667 shares of
Common Stock at $3.75 per share until October 2001 granted to the Company's
Chief Executive Officer. See "Dilution", "Capitalization", "Management
Executive Compensation", "Certain Transactions", "Description of
Securities" and "Underwriting."
5
<PAGE>
<TABLE>
<CAPTION>
Summary Financial Information
The following financial information has been derived from the financial statements of the
Company appearing elsewhere in this Prospectus and should be read in conjunction with such
financial statements. See "Financial Statements."
Year Ended December 31,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Income Statement Data:
Revenues $ 697,581 100,901
Loss from continuing
operations (672,791) (974,578)
Net loss (1,409,800) (1,816,285)
Net loss per share from
continuing operations (3.69) (11.82)
Net loss per share (7.74) (22.04)
Weighted average number
of shares outstanding(1) 182,037 82,439
</TABLE>
December 31,
1996
-----------
Balance Sheet Data:
Working capital (deficit) $ 99,982
Total assets 3,561,855
Long-term debt 1,814,945
Total liabilities 2,318,725
Stockholders' equity 1,243,130
- - -----------
(1) For a description of net income per share and the number of shares used in
computing per share amounts, see Note 1 of Notes to Financial Statements.
6
<PAGE>
RISK FACTORS
In evaluating the Company's business, prospective investors should consider
carefully the following factors in addition to the other information presented
in this Prospectus.
Prospective purchasers of the Common Stock should carefully consider the
following risk factors and the other information contained in this Prospectus
before making an investment in the Common Stock. Information contained in this
Prospectus contains "forward-looking statements" which can be identified by the
use of forward-looking terminology such as "believes," "expects," "may,"
"should" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. See, e.g., "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business - Strategy." No assurance can be given that the future results covered
by the forward- looking statements will be achieved. The following matters
constitute cautionary statements identifying important factors with respect to
such forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results covered in
such forward-looking statements. Other factors could also cause actual results
to vary materially from the future results covered in such forward-looking
statements.
Limited History of Operations; Significant Operating Losses; Deficit in
Working Capital. The Company was incorporated in July 1988 but has only provided
Internet access services since July 1995. Prior to August 1996, the Company was
engaged primarily in the agricultural software development business and incurred
significant operating losses of $373,096, $1,816,285 and $1,409,800 for the
years ended December 31, 1994, 1995 and 1996 respectively. At December 31, 1996,
the Company had only limited working capital of $99,982 which could
significantly limit its operations. See "Financial Statements." There can be no
assurance that the Company will achieve profitability or positive cash flow from
operations. The Company expects to focus in the near term on building and
increasing its Internet subscriber base, which will require it to significantly
increase its expenses for personnel, marketing, network infrastructure and the
development of new services. As a result, the Company believes that it may incur
further losses in the near term. The Company intends to seek additional equity
capital if its cash flow continues to be insufficient to fund its desired
growth. There can be no assuance that the Company can obtain such additional
capital, and if it is unable to do so, it will be unable to expand its
operations. (See, also "Risk Factors - Need For Additional Financing.") The
Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets such as
the Internet. To address these risks, the Company must, among other things,
respond to competitive developments, continue to attract, retain and motivate
qualified persons, and continue to upgrade its technologies and commercialize
services incorporating such technologies. There can be no assurance that the
Company will be successful in addressing such risks.
Risks Associated With Acquisitions. Although the Company intends to
increase revenues in part through acquisition of other Internet access
providers, it has no experience in this regard and may acquire companies with
limited operating or negative operating history. Should the Company acquire
other companies that incur operating losses, the Company's operating results
will be further adversely affected. The Company is not negotiating to acquire
nor has it entered into any agreements to acquire any such Internet related
companies and there can be no assurance it will complete any such acquisitions
in the future.
7
<PAGE>
Fluctuations in Operating Results. As a result of the Company's limited
Internet services operating history, the Company has limited historical
financial data on which to base future operating expenses. Moreover, the Company
may experience fluctuations in operating results in the future caused by various
factors, some of which are outside of the Company's control, including general
economic conditions, specific economic conditions in the Internet services
industry, user demand for the Internet, the amounts of capital expenditures and
other costs related to the expansion of operations, the timing of customer
subscriptions, the introduction of new Internet services by the Company or its
competitors, the mix of such services sold and the mix of channels through which
those services are sold. As a strategic response to a changing competitive
environment, the Company may elect from time to time to make certain pricing,
service or marketing decisions or acquisitions that could have a material
adverse effect on the Company's business, results of operations and cash flow
from quarter to quarter. See "Business" and "Financial Statements."
Competition. The market for Internet services is new, intensely
competitive, rapidly evolving and subject to rapid technological change. The
Company expects competition to persist and intensify in the future. Almost all
of the Company's current and potential competitors have longer operating
histories, greater name recognition, larger customer bases and significantly
greater financial, technical and marketing resources than the Company. Such
competition could materially adversely affect the Company's business, operating
results or financial condition. Moreover, because many of the Company's
competitors possess financial resources significantly greater than those of the
Company, such competitors could initiate and support prolonged price competition
to gain market share. If significant price competition were to develop, the
Company likely would be forced to lower its prices, possibly for a protracted
period, which would have a material adverse effect on its financial condition
and results of operations and could threaten its economic viability. In
addition, the Company believes that the Internet service and on-line services
business is likely to encounter consolidation in the near future, which could
result in increased price and other competition in the industry and consequently
have an adverse impact on the Company's business, financial condition and
results of operations. See "Business Competition."
New and Uncertain Market; New Entrants. The market for local Internet
service providers is in its early stages. Since this market is new and because
current and future competitors are likely to introduce new products, it is
difficult to predict the forms of competition or the competitors that may
develop. There can be no assurance that the Company's local Internet provider
business can compete against new or developing competitors or that any local
provider can maintain its customer base against formidable national or other new
local competitors, or that Internet access will remain attractive to
subscribers. See "Business Marketing."
8
<PAGE>
Few Barriers to Entry. There are few significant barriers to entry in the
Internet access business. Accordingly, the Company expects substantial
competition in its markets from new local Internet service providers, as well as
existing local and national Internet providers. The Company's success will
depend on its ability to compete against these new and existing providers.
Importance of Entering New Markets and Identifying Acquisitions. The
Company's business plan calls for it to continue to enter new local markets in
order to grow. Entry into new local markets depends in part on acquiring small
access providers in secondary markets at favorable prices. Because there are a
limited number of small access providers in the Company's target markets, there
can be no assurance that the Company can acquire such companies on favorable
terms, or at all, or that it can obtain financing for such acquisitions. Should
the Company be unable to locate companies in suitable local markets for
acquisitions its growth would be adversely affected. See "Business - Strategy."
Technological Changes. The Internet is characterized by rapidly changing
technology, evolving industry standards, changes in customer needs and frequent
new service and product introductions. The Company's future success will depend,
in part, on its ability to effectively use new technologies, to continue to
enhance its current Internet access and other services, to develop new services
that meet changing customer needs, to advertise and market its services and to
influence and respond to emerging industry standards and other technological
changes on a timely and cost effective basis.
Government Regulation and Legal Uncertainties. The Company is not currently
subject to direct regulation by any government agency, other than regulations
applicable to businesses generally, and there are currently few laws or
regulations directly applicable to providing Internet access or other services
on the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that laws and regulations may be adopted with respect
to the Internet which may decrease the demand for Internet access, increase the
Company's cost of doing business or otherwise have an adverse effect on the
Company's operating results or financial condition.
Dependence on the Internet. The Company's business will depend in large
part upon a robust industry and infrastructure for providing Internet access and
carrying Internet traffic. Notwithstanding current interest and worldwide
subscriber growth, the Internet may not prove to be a viable marketplace because
of inadequate development of the necessary infrastructure or timely development
of complementary products, such as high speed modems. Because global commerce
and on-line exchange of information on the Internet, Web and other open area
networks are new and evolving, it is difficult to predict with any assurance
whether the Internet will prove to be economically viable in the long term. If
the necessary infrastructure or complementary products are not developed, or if
the Internet does not become an economically viable marketplace, the Company's
business, operating results and financial condition will be materially adversely
affected. See "Business - The Internet and the World Wide Web."
9
<PAGE>
Potential Liability for Information Disseminated On-Line. A pending action
against Prodigy alleging libel and negligence in connection with an electronic
message posted by a Prodigy subscriber through Prodigy's on-line access system
presents the potential, particularly if the plaintiff is successful, for
increased focus and attempts to impose liability upon Internet access and
service providers for information disseminated through their systems. The
Company does not carry any insurance against such liabilities.
Risk of System Failure; Limited Insurance. The success of the Company is
dependent upon its ability to offer high quality, uninterrupted access to the
Internet. Any system failure that causes interruptions in the Company's Internet
operations could have a material adverse effect on the Company. If the Company's
subscriber base expands, there will be increased stress placed upon the
Company's server hardware and traffic management systems. The Company's server
hardware is also vulnerable to damage from fire, earthquakes, power loss,
telecommunications failures and similar events. The Company carries property
damage and business interruption insurance with a basic policy limitation of
$500,000, subject to deductibles and exclusions. Such coverage, however, may not
be adequate to compensate the Company for all losses that may occur. Moreover,
significant or prolonged system failure could damage the reputation of the
Company and result in the loss of subscribers.
Need for Additional Financing. The Company may be required to seek debt or
equity financing in the future to fund expansion activities and acquisitions of
small access providers. There can be no assurance that additional financing will
be available to the Company on acceptable terms, or at all. Any future equity
financing may involve substantial dilution to the interests of the Company's
stockholders. See "Financial Statements."
Dependence Upon Management. The Company's success is dependent in part upon
the continued employment of Messrs Meyers and Chu, its Chief Executive Officer
and President, respectively. The Company does not have employment agreements
with either individual. The loss of the services of either individual would have
a material adverse effect upon the Company's operations. See "Management."
No Dividends. The Company does not intend to pay any cash dividends on its
Common Stock in the foreseeable future. Earnings, if any, will be used to
finance growth. See "Description of Securities - Dividends."
Possible Volatility of Securities Prices. The market price of the Common
Stock may be highly volatile, as has been the case with the securities of other
small capitalization companies. Factors such as the Company's operating results
or public announcements by the Company or its competitors may have a significant
effect on the market price of the Company's securities. In addition, market
prices for securities of many small capitalization companies have experienced
wide fluctuations in response to variations in quarterly operating results,
general economic indicators and other factors beyond the control of the Company.
The registration of the Registered Securities offered hereby coupled with
exercise of the Public Warrants could increase the volatility of the Common
Stock by increasing the number of shares of publicly traded Common Stock
outstanding.
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock in the open market or the availability of such shares for sale could
adversely affect the market price for the Common Stock. As of the date hereof,
there are 515,334 shares of the Company's Common Stock outstanding, of which
46,000 shares were registered for sale in the Company's IPO, 426,667 are being
10
<PAGE>
registered hereby and the remaining 42,667 shares may be sold under Rule 144
subject to the agreement of the holders of 30,300 shares not to sell such shares
until October 1999 without the prior written consent of AAWC. Additionally, an
aggregate of 293,333 Warrants and the 293,333 shares underlying the Warrants are
also being registered hereby and may be sold at any time. See "Description of
Securities - Common Stock Eligible for Future Sale" and "Underwriting."
Control by Management; Authorization and issuance of Preferred Stock;
Prevention of Changes in Control. The Company's officers and directors own
approximately 30.5% of the issued and outstanding shares of Common Stock
(assuming exercise by them of outstanding stock options and common stock
purchase warrants), and can as a practical matter continue to elect all of the
Company's directors and control the affairs of the Company. The Company's
Articles of Incorporation authorizes the issuance of up to 5,000,000 shares of
Preferred Stock with such rights and preferences as may be determined from time
to time by the Board of Directors. Accordingly, under the Articles of
Incorporation, the Board of Directors may, without shareholder approval, issue
Preferred Stock with dividend, liquidation, conversion, voting, redemption or
other rights which could adversely affect the voting power or other rights of
the holders of the Common Stock. The issuance of any shares of Preferred Stock
having rights superior to those of the Common Stock may result in a decrease in
the value or market price of the Common Stock and could be used by the Board of
Directors as a device to prevent a change in control of the Company. The Company
has no other anti-takeover provisions in its Articles of Incorporation or
Bylaws. Holders of the Preferred Stock may have the right to receive dividends,
certain preferences in liquidation, and conversion rights. See "Description of
Securities - Use of Preferred Stock As Anti-Takeover Device" and "Principal
Stockholders."
Elimination of Director Liability. The Company's Articles of Incorporation
contains a provision eliminating a director's liability to the Company or its
stockholders for monetary damages for a breach of fiduciary duty, except in
circumstances involving a financial benefit to a director, the intentional
infliction of harm of the Company or certain wrongful acts, such as the breach
of a director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of criminal law. The Company's Bylaws contain
provisions obligating the Company to indemnify its directors and officers to the
fullest extent permitted under California law. These provisions could serve to
insulate officers and directors of the Company against liability for actions
which damage the Company or its stockholders. See "Description of Securities -
Limitation on Liability."
Risks Associated With Penny Stocks such as the Company's; Lack of
Liquidity. The Commission has adopted rules that define "penny stock" and such
definition currently includes the Common Stock of the Company. Accordingly,
broker-dealers dealing in the Company's securities are subject to specific
disclosure rules for transactions involving penny stocks which require the
broker-dealer among other things to (i) determine the suitability of purchasers
of the securities and obtain the written consent of purchasers to purchase such
securities and (ii) disclose the best (inside) bid and offer prices for such
securities and the price at which the broker-dealer last purchased or sold the
securities. The additional burdens imposed upon broker- dealers discourage them
from effecting transactions in the Company's Common Stock, which reduces the
liquidity of the Company's Common Stock making it more difficult for
stockholders to sell the Common Stock should they desire to do so.
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CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1996, without giving effect to the exercise of (i) the 293,333
Warrants, (ii) the 46,000 Public Warrants, (iii) warrants held by the Prior
Representative to purchase up to 4,000 Units (each Unit consisting of one share
of Common Stock and one Public Warrant) exercisable at $99.00 per Unit at any
time until February 2000 (the "Prior Representative's Unit Warrants"), and (iv)
stock options to purchase 36,667 shares at $3.75 per share until October 2001
granted to the Company's Chief Executive Officer. See "Dilution", "Management -
Executive Compensation", "Certain Transactions", "Description of Securities" and
"Underwriting."
December 31, 1996
------------------
Short-term debt: $ 39,358
Long-term debt: 1,814,945
Stockholders' equity:
Preferred Stock, 5,000,000 no par value
shares authorized, 900,000 shares
issued and outstanding --
Common Stock, 10,000,000 no par value
shares authorized, 515,334 shares
issued and outstanding 4,839,485
Retained earnings (deficit) (3,596,355)
----------
Total stockholders' equity 1,243,130
----------
Total capitalization $ 3,097,433
===========
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PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the NASDAQ Small Cap Market under
the symbol "PSCO" from February 9, 1995 until July 10, 1996 when it was delisted
from NASDAQ and commenced trading on the Electronic Bulletin Board under the
symbol "PSNW."
The following table sets forth for the quarters indicated the range of high
and low closing prices of the Company's Common Stock as reported by NASDAQ and
the Electronic Bulletin Board but does not include retail markup, markdown or
commissions.
Price
----------------
By Quarter Ended: High Low
- - ------------------ ---- ---
June 30, 1997 (through May 7, 1997)..................... $ 5.50 $ 3.15
March 31, 1997.......................................... 4.65 3.15
December 31, 1996....................................... 11.25 3.15
September 30, 1996...................................... 15.00 8.40
June 30, 1996........................................... 26.25 8.40
March 31, 1996.......................................... 31.95 14.10
December 31, 1995....................................... 37.50 26.25
September 30, 1995...................................... 60.00 15.00
June 30, 1995........................................... 73.20 50.10
March 31, 1995.......................................... 75.00 63.75
As of May 7, 1997, the Company had approximately 355 record and beneficial
stockholders.
USE OF PROCEEDS
None of the proceeds of the Offering will be received by the Company. See
"Selling Stockholders." Any proceeds received upon exercise of the Warrants will
be used to expand the Company's marketing activities in order to increase its
Internet access customer base, to acquire small Internet access providers in the
Company's target markets, and for working capital. See "Business - Strategy."
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SELECTED FINANCIAL DATA
The selected financial data set forth below for the years ended December
31, 1996 and 1995 has been derived from the Company's financial statements which
have been audited by Angell & Deering. The selected financial data is qualified
by, and should be read in conjunction with, the financial statements and the
notes thereto included elsewhere herein. See "Financial Statements."
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Income Statement Data:
Revenues $ 697,581 100,901
Loss from continuing
operations (672,791) (974,578)
Net loss (1,409,800) (1,816,285)
Net loss per share from
continuing operations (3.69) (11.82)
Net loss per share (7.74) (22.04)
Weighted average number
of shares outstanding(1) 182,037 82,439
</TABLE>
December 31,
1996
-----------
Balance Sheet Data:
Working capital (deficit) $ 99,982
Total assets 3,561,855
Long-term debt 1,814,945
Total liabilities 2,318,725
Stockholders' equity 1,243,130
- - -----------
(1) For a description of net income per share and the number of shares used in
computing per share amounts, see Note 1 of Notes to Financial Statements.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Background
Operating through its ProtoSource Network ("PSNW") division, the Company
provides Internet access and related services to individuals, public agencies
and businesses in five small Central California cities. As of December 31, 1996,
the Company had 2,500 subscribers for whom it provided Internet access. The
Company intends to acquire other small Internet providers in markets with
populations of less than 500,000 that are located initially in various Central
California cities between Sacramento and Bakersfield. The Company believes that
certain of these local Internet providers currently doing business in the
Company's target markets will not be able to effectively manage the financial
and administrative burdens imposed by the continuing consumer demand for local
Internet services, unless these providers are integrated into larger, more
diversified Internet products and services companies. The Company has addressed
these financial and administrative burdens by (i) expanding its operations
throughout Central California, (ii) developing diversified services similar to
its larger competitors, such as hourly-based access services, special access
packages for business and high speed access, and (iii) investing in automated
billing and administrative systems. The Company believes these actions will
allow it to compete effectively with larger access firms entering the Company's
markets. The Company's long-term plan is to increase revenues through
acquisitions in such markets. The Company is not negotiating to acquire nor has
it entered into any agreement to acquire any such Internet related companies.
Results of Operations
Year Ended December 31, 1996 vs. Year Ended December 31, 1995
Net Sales. For fiscal 1996, Internet services revenues were $697,581 versus
$100,901 in fiscal 1995, which represents a 591% increase in revenue. The
increases are attributed to increases in the number of Internet users worldwide
and increased market penetration of PSNW in the Central California area. PSNW
only operated from August to December in 1995 versus a full year in 1996.
Management believes that PSNW revenues will continue to increase as the Company
increases the number of Points of Presence ("POPS") to provide Internet services
to more geographic areas. The number of POPS to be developed in any given
geographic area depends upon the Company's estimate of "demand" in such
geographic area. In turn, demand is based upon the population and rate of
population growth in the area, the number of existing access providers in the
area, the number of access subscribers and the growth rate of such access
subscribers.
Operating Expenses. Operating expenses were $1,121,773 in 1996 versus
$1,079,503 in 1995. he increased operating expense is the result of increased
depreciation expenses, additional personnel expenses and legal and accounting
expenses related to the Company's restructuring and the divestiture of the
Classic Line. Management believes that the operating expenses will remain at the
same level or decrease as a result of reduced personnel and facilities expenses
after the Classic Line sale. The decreases may be somewhat offset by the
increases in operating expenses as the PSNW grows.
Operating Loss. For fiscal 1996, the operating loss was $424,192 compared
to an operating loss of $978,602 in 1995 which represents a 56% decrease. The
decrease in the operating loss in 1996 is attributed to the significant
increases in Internet services revenues by $596,680. Management believes that
operating results will improve as revenues increase and operating expenses
decrease.
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Interest Expenses. Net interest expense for 1996 was $268,721 compared to
$109,301 in 1995. The increase in interest expense is primarily attributed to
additional interest expense related to capital leases on computer equipment and
interest expense related to the building which the Company acquired under a
20-year capital lease. The net interest expense is further increased by
decreases in interest income in 1996.
Financing Costs. Financing costs were $126,000 in 1996 which represented
the commission and expenses related to 400,000 shares of the Company's Common
Stock issued to the investors as additional compensation for the issuance of
40,000 shares of the Company's Common Stock for $1,500,000 (the "Common Stock
Placement"). The Common Stock issued was valued at $3.75 per share and resulted
in a financing expense of $100,000 to the Company.
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Liquidity and Capital Resources
Historically the Company required funds principally to finance increasing
levels of trade receivables which were caused by increasing sales volume and
business expansion. Those requirements have been met through internally
generated funds, bridge loans and short-term borrowings from a revolving bank
credit line. Funding for expansion of property and equipment has been provided
primarily by capital leases, operating leases and term loans.
The Company's IPO generated gross proceeds of $3,795,000 and net proceeds
of $3,415,500 to the Company in 1995. The Company's Common Stock Placement
generated gross proceeds of $1,500,000 and net proceeds of $1,275,199 through
the sale of 400,000 shares of Common Stock at $3.75 per share in October 1996.
The Company also received a capital contribution of $154,792 from officers
through forgiveness of previously accrued salaries.
For the year ended December 31, 1996, the Company purchased $38,421 of
property and equipment and acquired under capital lease $90,349 of property and
equipment. The Company's capitalized software development costs were $442,100.
The equipment acquired was primarily used to provide Internet services to PSNW's
customers.
For the year ended December 31, 1995, the Company acquired $404,000 of
property and equipment and capitalized software development costs of $593,000.
Included in these transactions were the purchase of computer and related
teaching equipment for the expansion of the Company's computer center facility
and acquisition of PSNW. The assets acquired by the Company are primarily for
Internet access, education and computer training purposes.
In September 1994, the Company acquired, under a 20-year capital lease, a
20,000 square foot office building. The Company occupies approximately half of
the space as its corporate offices and subleases the other half to unrelated
third parties. The capitalized costs for the land, building and improvements was
$1,760,000. The capital lease payments for the land, building and improvements
was $1,760,000. The capital lease payments for the building will increase annual
cash outflows by approximately $60,000 through 2014, net of sublease income.
At December 31, 1996, the Company had working capital of $99,982. The
limited working capital may restrict the ability of the Company to acquire
additional financing. The inability to obtain sufficient financing to support
the Company's planned growth would have a negative impact on its results of
operations.
The Company used net proceeds from the Common Stock Placement to repay
short-term debt and used additional proceeds to sell the Classic Line,
MarketStreet and computer training divisions. The Company also used proceeds to
acquire additional equipment for PSNW in order to expand its capacity. The
Company will use the remaining proceeds for marketing and working capital for
the operation of PSNW division.
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<PAGE>
In December 1996, the Company sold the Classic Line to a Canadian company
for $300,000 in cash and an unsecured promissory note which the Company has not
valued on its financial statements. As a part of the transaction, the Company
received an exclusive worldwide license through December 2006 to market the
Classic Line based upon a royalty of 16% of gross sales. The Company sold the
Classic Line in order to generate additional working capital initially to fund
further development of other Classic Line products and to develop the Company's
Internet access business. The Classic Line was valued as a result of
negotiations between the Company and its Canadian purchaser. The Company
accepted an unsecured promissory note as a part of its negotiations and elected
not to include the promissory note (which has a face value of $1,018,000) on its
balance sheet because of the possibility that the promissory note (which was
unsecured) would not be paid in full. The Company considered the cash portion of
the sale of the Classic Line as sufficient to compensate it for the Classic Line
assets, even if the promissory note was not paid, especially considering that
the Company retained the exclusive worldwide rights to market the Classic Line
products.
In January 1997, the Company sold the remaining assets of the Classic Line
to SSC Technologies, Inc. ("SSC") for $770,850 evidenced by a promissory note
bearing interest at 10% per annum payable in January 2007 and the assumption by
SSC of all of the liabilities of the Classic Line, aggregating approximately
$500,000. Under the terms of the asset sales agreement (the "Divestiture
Agreement"), the Company acquired 25% of the outstanding common stock of SSC for
$500,000 in cash (less $200,000 of liabilities which were paid by the Company
and deducted from the $500,000) and the remaining 75% of the outstanding common
stock was issued to other stockholders including Charles T. Howard, David L.
Green, Ding Yang and Steven L. Wilson who were previously officers and directors
of the Company (the "SSC Principals"). As a part of the Divestiture Agreement,
the SSC Principals also (i) cancelled 900,000 shares of Convertible Preferred
Stock held by them which were previously exercisable into shares of Common Stock
on a fifteen for one basis, (ii) agreed not to sell an aggregate of 30,300
shares of Common Stock owned by them until October 1999 except with the prior
written consent of Andrew, Alexander, Wise & Company, Incorporated ("AAWC"),
(iii) agreed to sublease office space from the Company at a monthly rental of
$12,000 through February 28, 1998, (iv) granted to Steven A. Kriegsman, a
director of the Company, an option to purchase up to 10,000 shares of Common
Stock held by the SSC principals at any time until October 2001, and (v)
personally guaranteed on a joint and several basis the $770,850 promissory note
and all other obligations of SSC to the Company. The Classic Line assets were
valued as a result of negotiations between the Company and the SSC principals.
18
<PAGE>
BUSINESS
Introduction
Operating through PSNW, the Company provides Internet access and related
services to individuals, public agencies and businesses in five small Central
California cities. As of December 31, 1996, the Company has 2,500 subscribers
for whom it provided Internet access. The Company intends to acquire other small
Internet providers in markets with populations of less than 500,000 that are
located initially in various Central California cities between Sacramento and
Bakersfield. The Company believes that certain of these local Internet providers
currently doing business in the Company's target markets will not be able to
effectively manage the financial and administrative burdens imposed by the
continuing consumer demand for local Internet services, unless these providers
are integrated into larger, more diversified Internet products and services
companies. The Company has addressed these financial and administrative burdens
by (i) expanding its operations throughout Central California, (ii) developing
diversified services similar to its larger competitors, such as hourly-based
access services, special access packages for business and high speed access, and
(iii) investing in automated billing and administrative systems. The Company
believes these actions will allow it to compete effectively with larger access
firms entering the Company's markets. The Company's long-term plan is to target
a select number of such target markets and increase revenues through acquisition
in such markets. The Company is not negotiating to acquire nor has it entered
into any agreement to acquire any such Internet related companies.
The Company's strategy is to provide low cost direct Internet access to
subscribers in target markets by acquiring small Internet providers in these
markets or by establishing its own marketing operations in the target markets.
Thereafter, the Company will seek to generate additional revenues by (i)
increasing monthly Internet access fees, (ii) offering monthly community access
services, (iii) providing Internet consulting services, and (iv) generating
marketing service fees charged to businesses seeking a Web site on the Internet.
The Internet and the World Wide Web
The Internet is a worldwide network that links thousands of public and
private computer networks. The Internet began in 1969 as a project of the
Advanced Research Projects Agency ("ARPA") of the U.S. Department of Defense to
connect different types of computers across geographically disparate areas. The
ARPA network was designed to allow any computer on the network to communicate
with any other computer on the network through an open communications protocol
known as TCP/IP.
Initially, use of the Internet was limited to governmental, educational and
commercial organizations with a working knowledge of the UNIX operating system
and commands, and the primary use made of the Internet was the communication of
information via electronic mail. However, there has been a rapid growth in the
use and popularity of the Internet in the past several years. According to
industry sources, users in more than 130 countries throughout the world are
connected to the Internet including 24 million users in North America, 17.6
million of whom use the Web.
The dramatic growth in the number of Internet users is attributable to a
number of developments and factors. The first was the introduction in 1992 of
the World Wide Web ("Web"), a client/server system of hyperlinked multimedia
19
<PAGE>
databases which began to unlock the potential of the Internet as a mass medium.
The Web, developed by the European Laboratory for Research Physics ("CERN") in
Switzerland, advanced the potential of the Internet in several significant ways.
First, it enabled full multimedia presentation (including text, graphics, video
and audio) over the Internet. Second, through the Web's system of standardized
information protocols and a communications format called HyperText Transfer
Protocol ("HTTP"), users were allowed access to information ("navigate") on the
Web without entering complex alphanumeric commands. Third, using HyperText
Markup Language ("HTML"), document authors were able to link text or images in
one document to other documents anywhere else on the Web. When the user selected
or, if using a mouse, clicked on the hypertext in one document (often displayed
on the screen as highlighted words or images), the linked document was
automatically accessed and displayed.
The Web is based on a client/server system in which certain computers
("servers"), store information in files and respond to requests issued by remote
user computers to view or download files, thus allowing multiple, geographically
dispersed users to view and use the information stored on a single server. The
user must use software, known as a browser, that can read HTML documents and
follow their hypertext links to retrieve and display linked documents from
servers such as the Company.
An early limitation to growth of the Web was that the browser software
initially provided by CERN was text-based and contained limited retrieval and
display capabilities. In January 1993, the National Center for Supercomputing
Applications ("NCSA") at the University of Illinois at Urbana-Champaign
significantly advanced the use of Web technology with the introduction of NCSA
Mosaic for X Window on the UNIX platform, the first graphical user interface
browser for the Web. The NCSA Mosaic graphical user interface allows users to
access the diverse information archives, data protocols and data formats of the
Internet using point-and-click, mouse-driven commands. NCSA Mosaic, which is
offered to users on a free- with-copyright basis (making it available for use
without charge and without the right to distribute), served as a catalyst for
increased use of the Web. When NCSA released a version of NCSA Mosaic for
Windows in September 1993, the Web became accessible to personal computer users
for the first time.
The increased popularity of the Internet is also attributable to the
proliferation of information and services available on the Internet, as well as
the expanded use of home personal computers, which increasingly contain modems
as a standard feature. Among the types of publications and information available
to Internet users are newspapers, magazines, weather updates, government
documents and industry newsletters, as well as a variety of commercial products
and services such as the Internet Waterway.
In order to support the continued growth and popularity of the Internet,
certain infrastructure elements must expand to handle the resulting increases in
Internet demand and traffic. These elements include widespread, inexpensive
Internet access, either through Internet access providers such as the Company or
on-line services, and widely available high-speed communications channels to
accommodate the increasing number and size of files available for downloading.
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As business organizations have begun to realize the potential of the
Internet as an inexpensive and effective means of offering products and services
directly to customers and potential customers, businesses are increasingly
advertising and selling such products and services on the Web. For example,
business organizations are now using the Web to provide product information and
support to existing customers, to advertise products and services and to offer
products and services for sale by means of on-line catalogs. It is this market,
as well as Internet access, that the Company seeks to address. Industry sources
have estimated, based on registered Internet addresses, that the number of
commercial organizations as a percentage of total Internet users has increased
from approximately 30% at the beginning of 1993 to approximately 60% at the end
of 1994.
Computer users wishing to access the vast array of information and services
available on the Web use a browser that can read HTML documents, follow
hypertext links and interface with the diverse information archives and data
formats of the Web. The basic needs of most individual computer users casually
browsing the Web can be fulfilled by a number of different browsers available
today, including certain browsers that are available for no charge.
Strategy
The Company's strategy is to provide low cost direct Internet access to
subscribers by acquiring small Internet providers in target markets or by
establishing its own marketing operations in such markets. Thereafter, the
Company will seek to generate additional revenues by (i) increasing the
profitability of monthly Internet access fees while maintaining a price
structure below that of its competitors, (ii) offering monthly community access
services, (iii) providing Internet consulting services, and (iv) generating
marketing service fees charged to businesses seeking a Web site on the Internet.
The Company believes that it can increase the profitability of its monthly
access fees by developing economies of scale as a result of increasing total
access subscribers and earning additional revenues from such subscribers by
providing additional access services.
Increasing Monthly Internet Access Fees. The Web is the driving force
behind the growth in Internet subscribers who use the Web to access information
as well as commerce and communication. The Company intends to continue to
provide low-priced direct Internet access through the Company's
telecommunication network infrastructure which is comprised of two high speed
dedicated data lines that connect directly to the backbone of the Internet. The
Company plans to add additional high-speed dedicated data lines, enhance
system-wide access software, and expand the number of points of presence (POPs)
in local markets in order to attract and support additional subscribers. By
increasing the number of POPs, the Company will offer Internet access through
local phone calls to more geographic areas which in turn may promote growth in
its subscriber base.
The Company also provides Integrated Services Digital Network (ISDN) and
high-speed Internet access using dedicated data lines to business customers. The
Company believes that the demand for high-speed Internet access and the ability
to integrate Internet access into a corporate-wide computer network is becoming
increasingly more important.
21
<PAGE>
Offering Monthly Community Access Services. Local public agencies, (such as
city agencies, police departments and libraries), are seeking to provide
information resources directly to their citizens through Community Web sites.
Believing that its subscribers will be willing to pay a recurring fee for such
community information access, the Company intends to offer such access in 1998.
Providing Internet Consulting Services. The Company provides Internet
solutions to assist businesses and their employees, including consulting
services for network setup, Internet application implementation, Intranet design
and Web site implementation.
Generating Marketing Service Fees. The Company will continue to design and
develop Web sites for its clients with sophisticated graphics to attract user
attention. The Company also provides all necessary hardware and software and
stores its clients' Web pages on its dedicated servers, which are monitored and
maintained 24 hours a day, 365 days a year.
Acquisition Strategies
The Company will seek to acquire local Internet access providers in its
Central California target markets. The criteria for such acquisition candidates
calls for attracting companies that (i) are located in markets under 500,000
population; (ii) have been in business a minimum of one year; (iii) have at
least 300 subscribers; (iv) have current owners and staff with strong technical
backgrounds, (v) enjoy strong community contacts, and (vi) offer projected
annual growth rates in excess of 200%. The Company may also seek to acquire
other small companies that provide consulting and related Internet services. The
Company is not negotiating to acquire nor has it entered into any agreement to
acquire any such Internet related companies.
Marketing
The Company primarily markets to customers who are new to the Internet, and
who seek to access information using point-and-click graphical interface.
Marketing is conducted through a small sales force which contacts prospective
customers responding to advertisements in computer, professional and business
publications. The Company also seeks customers by participating in industry
trade shows and educational seminars and through referrals from existing
customers. In addition, the Company seeks strategic alliances with local
computer retailers who offer Internet access fee discounts to their customers
and through joint advertising efforts with television and radio stations. The
Company may also distribute Internet services through retail channels.
Direct mailings, telemarketing programs, co-marketing agreements and joint
promotional efforts among organizations and individual users are strategies that
the Company may employ in the future. Finally, the Company seeks to retain
business customers and individual users through what it perceives to be
responsive customer support and services programs.
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Competition
The Internet services business is highly competitive and there are few
significant barriers to entry. Currently, the Company competes with a number of
national and local California Internet service providers. In addition, a number
of multinational corporations, including giant communications carriers such as
AT&T, Cable and Wireless, MCI, Sprint and the regional Bell operating companies,
are offering, or have announced plans to offer, Internet access or on-line
services. The Company also faces significant competition from the on-line
service firms such as America Online (AOL), CompuServe, Delphi, Genie, Microsoft
and Prodigy. The Company believes that new competitors which may include
computer software and services, telephone, media, publishing, cable television
and other companies, are likely to enter the on-line services market.
The ability of some of the Company's competitors to bundle Internet access
software with other popular products and services could give those competitors
an advantage over the Company. For example, NETCOM, MCI and PSI offer retail
software packages and AOL and Prodigy bundle their software with new PCs.
Many of the Company's competitors possess financial resources significantly
greater than those of the Company and, accordingly, could initiate and support
prolonged price competition to gain market share. If significant price
competition were to develop, the Company might be forced to lower its prices,
possibly for a protracted period, which would have a material adverse effect on
its financial condition and results of operations and could threaten its
economic viability. In addition, the Company believes that the Internet service
and on-line services business are likely to consolidate in the future, which
could result in increased price and other competition in the industry and
consequently adversely impact the Company. A number of on-line services have
recently lowered their monthly service fees, which may cause the Company to
lower its monthly fees in order to compete.
The Company believes that the primary competitive factors among Internet
access providers are price, customer support, technical expertise, local
presence in a market, ease of use, variety of value-added services and
reliability. The Company believes it is able to compete favorably in these
areas. The Company's success in its markets will depend heavily upon its ability
to provide high quality Internet connectivity and value-added Internet services
targeted in select target markets. Other factors that will affect the Company's
success in these markets include the Company's continued ability to attract
additional experienced marketing, sales and management talent, and the expansion
of support, training and field service capabilities.
Employees
As of February 28, 1997, the Company employed 15 full-time individuals. The
Company believes it maintains good relations with its employees. None of the
Company's employees are represented by a labor union or covered by a collective
bargaining agreement.
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Properties
In September 1994, the Company acquired, under a 20-year non-cancelable
capital lease, an office building, including land and improvements at 2580 West
Shaw, Fresno, California 93711. The lease requires initial annual minimum lease
payments lease payments of $188,000, increasing every five years to a maximum
annual payment of $338,000 in 2009. Under the lease, the Company has an option
at any time to purchase the building and land for $1,800,000 through April 30,
1997. Such amount increases to $1,900,000 through April 30, 1998. After April
30, 1998, the option amount increases annually by the percentage increase in the
Consumers Price Index, as further described in the lease. Upon exercise of the
purchase option, the principal portion of the lease payments made by the Company
will be applied toward the down payment for the purchase price based upon an
amortized 20-year note with interest accrued at 9% per annum. The Company has
leased a portion of the building to the SSC Principals based upon monthly
payments to the Company of $12,000 through February 28, 1998. The Company also
receives lease payments from another tenant in the amount of $78,000 per year.
The Company leases 4,000 square feet of space for its corporate offices and
PSNW facilities at 2300 Tulare Street, Suite 210, Fresno, California 93721. The
lease is for five years, ending May 2002 and requires minimum annual payments of
$40,250 increasing every year to a maximum of $55,375 in 2002.
24
<PAGE>
MANAGEMENT
Officers and Directors
The name, age and position of each of the Company's executive officers and
directors are set forth below:
<TABLE>
<CAPTION>
Officer/Director
Name Age Position Since
---- --- -------- ----------------
<S> <C> <C> <C>
Raymond J. Meyers 40 Chief Executive Officer 1996
and Director
Andrew Chu 25 President, Chief Financial Officer 1995
and Director
Steven A. Kriegsman 55 Director 1997
Howard P. Silverman 56 Director 1997
</TABLE>
Directors hold office for a period of one year from their election at the
annual meeting of stockholders or until their successors are duly elected and
qualified. Officers of the Company are elected by, and serve at the discretion
of, the Board of Directors.
In January 1997 in connection with the sale of the Company's Classic Line,
the SSC Principals resigned as officers and directors and the above four
individuals were appointed executive officers and directors of the Company. See
"Certain Transactions."
Background
The following is a summary of the business experience, for at least the
last five years, of each executive officer and director of the Company:
Raymond J. Meyers became the Company's Chief Executive Officer in December
1996. From 1985 to 1996, he was employed by Transamerica Corporation holding a
variety of positions, most recently (from 1991 to 1996) as Director of Business
Services for Transamerica Telecommunications. Mr. Meyers graduated from Rutgers
University in 1979 with a Bachelor of Arts degree in Economics.
Andrew Chu became the Company's Chief Financial Officer in April 1995 and
its President and a director in January 1997. From 1992 to 1994, he was employed
at IDS Financial Services as a Financial Planner. He was the managing partner of
The Pacific Group, a consulting firm engaged in equity financing for small firms
from January 1994 to April 1995. Mr. Chu holds a B.S. degree with emphasis in
Finance from California State University of Fresno.
25
<PAGE>
Steven A. Kriegsman has been President of the Kriegsman Group, a
privately-held Los Angeles, California based investment banking firm since 1989.
He graduated from New York University in 1964 with a Bachelor of Science degree.
Howard P. Silverman has been an independent business consultant with
emphasis on the financing of public and private companies for more than five
years. He earned a Bachelor of Science degree from City College of New York and
an O.D. degree from the Illinois College of Optometry. He is a director of
Incomnet, Inc., a publicly-held reseller of long distance services.
Executive Compensation
None of the Company's executive officers or directors currently receive
compensation in excess of $100,000 per year except Mr. Meyers who receives a
salary of $130,000 per year. In connection with his employment, Mr. Meyers was
also granted options to purchase 36,667 shares of Common Stock vesting over a
three year period at $3.75 per share at any time until October 2001. No
executive officers or directors as a group received compensation in excess of
$100,000 for the calendar years ended December 31, 1996, 1995 or 1994.
Compensation for all officers and directors as a group for the calendar year
ended December 31, 1996 aggregated $64,000.
The following table discloses certain compensation paid to the Company's
executive officers for the calendar years ended December 31, 1996, 1995 and
1994.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
------------------- -----------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name
and
Prin- Other All
cipal Annual Restricted Other
Posi- Compen- Stock Options/ LTIP Compen-
tion Year Salary($) Bonus($) sation($) Award(s)($) SARS(#) Payouts($) sation($)
- - ----- ---- --------- -------- --------- ----------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James C. 1996 $61,925 $ 0 0 0 0 0 0
Robinson 1995 61,425 5,941 0 0 0 0 0
Chief Execu- 1994 57,226 25,000 0 0 0 0 0
tive Officer
</TABLE>
1995 Stock Option Plan
In November 1994, the Company adopted a stock option plan (the "Plan")
which provides for the grant of options intended to qualify as "incentive stock
options" and "nonqualified stock options" within the meaning of Section 422 of
the United States Internal Revenue Code of 1986 (the "Code"). Incentive stock
options are issuable only to eligible officers, directors, key employees and
consultants of the Company.
26
<PAGE>
The Plan is administered by the Board of Directors. At December 31, 1996,
the Company had reserved 150,000 shares of Common Stock for issuance under the
Plan. Under the Plan, the Board of Directors determines which individuals shall
receive options, the time period during which the options may be partially or
fully exercised, the number of shares of Common Stock that may be purchased
under each option and the option price.
The per share exercise price of the Common Stock may not be less than the
fair market value of the Common Stock on the date the option is granted. No
person who owns, directly or indirectly, at the time of the granting of an
incentive stock option, more than 10% of the total combined voting power of all
classes of stock of the Company is eligible to receive incentive stock options
under the Plan unless the option price is at least 110% of the fair market value
of the Common Stock subject to the option on the date of grant.
No options may be transferred by an optionee other than by will or the laws
of descent and distribution, and during the lifetime of an optionee, the option
may only be exercisable by the optionee. Options may be exercised only if the
option holder remains continuously associated with the Company from the date of
grant to the date of exercise. Options under the Plan must be granted within
five years from the effective date of the Plan and the exercise date of an
option cannot be later than ten years from the date of grant. Any options that
expire unexercised or that terminate upon an optionee's ceasing to be employed
by the Company become available once again for issuance. Shares issued upon
exercise of an option will rank equally with other shares then outstanding.
As of the date of this Prospectus, no options have been granted under the
Plan.
27
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning the holdings of
Common Stock (without giving effect to any shares issuable upon exercise of the
Public Warrants or the Prior Representative's Unit Warrants) by each person who,
as of the date of this Prospectus, holds of record or is known by the Company to
hold beneficially or of record, more than 5% of the Company's Common Stock, by
each director, and by all directors and executive officers as a group. All
shares are owned beneficially and of record and all share amounts include stock
options and common stock purchase warrants exercisable within 60 days from the
date hereof. The address of all persons is in care of the Company at 2300 Tulare
Street, Suite 210, Fresno, California 93721.
Amount of Percent of
Name Ownership Class
- - ----- --------- -----
Raymond J. Meyers(1) 13,333 2.5%
Andrew Chu(2) 38,999 7.0%
Steven A. Kriegsman(3) 117,667 18.6%
Howard P. Silverman(4) 56,667 9.9%
Andrew, Alexander, Wise &
Company, Incorporated(5) 90,000 14.9%
Gloria Ippolito 40,000 7.8%
Anaka Parkash 46,667 9.1%
Isaac Paschaldis 60,000 11.6%
John Benedetto 46,667 9.1%
Matthew Mulhern 26,667 5.2%
All officers and directors as
a group (4 persons)(1)(2)(3)(4) 226,666 30.5%
- - ------------
(1) Represents stock options to purchase 13,333 shares at $3.75 per share at
any time until October 2001. Mr. Meyers holds an additional 23,334 stock
options which vest in 1998 and 1999.
(2) Represents common stock purchase warrants to purchase 38,999 shares at
$3.75 per share at any time until October 2001 including 35,666 Warrants
which are being registered hereby.
(3) Represents common stock purchase warrants to purchase 117,667 shares at
$3.75 per share at any time until October 2001 including 111,000 Warrants
which are being registered hereby. All common stock purchase warrants are
held by the Kriegsman Group of which Mr. Kriegsman is the President and a
principal stockholder.
(4) Represents common stock purchase warrants to purchase 56,667 shares at
$3.75 per share at any time until October 2001, all of which are being
registered hereby.
(5) Represents common stock purchase warrants to purchase 90,000 shares at
$3.75 per share at any time until October 2001, all of which are being
registered hereby.
28
<PAGE>
SELLING STOCKHOLDERS
By this Prospectus, the Company is registering (at its expense) the
Registered Securities consisting of 426,667 shares of Common Stock, 293,333
Warrants and 293,333 shares of Common Stock underlying the Warrants. Each
Warrant is exercisable to purchase one share of Common Stock at $3.75 per share
at any time until October 2001. The Registered Securities may be sold from time
to time in public or private open market transactions at prevailing market
prices less customary selling commissions by the Selling Stockholders whose
names are listed in the table below. The Selling Stockholders may use the
Prospectus to offer the Registered Securities for sale in transactions in which
the Selling Stockholders may be deemed to be "underwriters" within the meaning
of the 1933 Act. The Selling Stockholders acquired the Registered Securities in
private transactions with the Company between September 1996 and October 1996.
See "Certain Transactions." Certain information concerning the Selling
Stockholders and the Registered Securities is set forth below.
<TABLE>
<CAPTION>
Number of
Number of Warrants or
Warrants Shares
Number of Number of or Shares to be
Shares Warrants Offered Owned After
Name Owned Owned For Sale Offering
---- --------- --------- -------- -----------
<S> <C> <C> <C> <C>
Andrew Chu(1)(2) -- 35,666 35,666 3,333
Steve A. Kriegsman(1)(2) -- 111,000 111,000 6,667
Howard P. Silverman(1)(2) -- 56,667 56,667 -0-
Andrew, Alexander, Wise &
Company, Incorporated(2) -- 90,000 90,000 -0-
John Benedetto(2) 46,667 -- 46,667 -0-
Brian A. Brewer 6,667 -- 6,667 -0-
James Ippolito 23,333 -- 23,333 -0-
Raymond King 6,667 -- 6,667 -0-
Jack Ko and Wendy Ko 13,333 -- 13,333 -0-
Anaka Parkash(2) 46,667 -- 46,667 -0-
Isaac Paschaldis(2) 60,000 -- 60,000 -0-
Larry Pensa 23,333 -- 23,333 -0-
Francis Sajeski and Barbara Sajeski 6,667 -- 6,667 -0-
Jerry Silberman 6,667 -- 6,667 -0-
Rao-Qi Zhang 6,667 -- 6,667 -0-
George P. Argerakis 13,333 -- 13,333 -0-
Robert Cavallaro 6,667 -- 6,667 -0-
Ding Chu Fuh Chen 6,667 -- 6,667 -0-
Murray Frank 6,667 -- 6,667 -0-
Donald Gross 13,333 -- 13,333 -0-
Gloria Ippolito(2) 40,000 -- 40,000 -0-
Chris Meskouris 6,667 -- 6,667 -0-
James Meskouris 6,667 -- 6,667 -0-
Matthew Mulhern and Mary Mulhern(2) 26,667 -- 26,667 -0-
Michael Pizitz 20,000 -- 20,000 -0-
Bernard Schwartz and Barbara Schwartz 6,667 -- 6,667 -0-
29
<PAGE>
George Strifas and Mathew Ianello 6,666 -- 6,666 -0-
Kuei-Chi Tsai 6,666 -- 6,666 -0-
Saul Unter 6,666 -- 6,666 -0-
Osweld Valenti, Jack Valenti
and Barbara Davis 6,666 -- 6,666 -0-
</TABLE>
- - -----------
(1) Officer or director of the Company. Messrs. Chu and Kriegsman own 3,333 and
6,667 common stock purchase warrants, respectively, which are not being
registered hereby.
(2) Principal stockholder of the Company.
30
<PAGE>
CERTAIN TRANSACTIONS
Management of the Company believes that the transactions described below
were no more or less fair than the terms of transactions which the Company might
otherwise have entered into with third party nonaffiliated entities. Any related
party transactions have been and will continue to be approved by a majority of
the disinterested members of the Company's Board of Directors. All Common Stock,
Preferred Stock and Warrant amounts reflect the reverse stock splits.
In November 1994, the Company issued 857,140 shares of its Convertible
Preferred Stock to five of the Company's then officers and directors, each share
of which was convertible for no additional consideration into one share of
Common Stock for each fifteen shares of Preferred Stock under certain
circumstances. The Convertible Preferred Stock was cancelled and returned to the
Company by the five holders in connection with the Divestiture Agreement
described below.
In February 1995, the Company loaned $35,000 to Charles T. Howard, the
Company's then President. Interest on the loan is payable monthly at the rate of
9% per annum and the promissory note evidencing the indebtedness is due in April
1997. The promissory note is secured by 3,333 shares of the Company's Common
Stock owned by Mr. Howard and was transferred to SSC as a part of the
Divestiture Agreement described below.
In October 1996, the Company issued 146,666 Warrants to the Kriegsman Group
("KG") for consulting services. Steven A. Kriegsman who subsequently became a
director of the Company is the President and controlling stockholder of KG. KG
subsequently assigned 35,666 of such Warrants to Andy Chu, the Company's
President and a director. The Warrants and underlying shares are being
registered hereby. KG also assigned 3,333 of the 10,000 stock options it
received from the SSC Principals to Mr. Chu. KG assigned the 35,666 Warrants and
3,333 stock options to Mr. Chu to provide him with an equity stake in the
Company. KG believes the Company's success and therefore the economic success of
its investment in the Company depends in part upon the participation of Mr. Chu
as the Company's President. See "Selling Stockholders."
In October 1996, the Company issued 146,667 Warrants to AAWC as additional
compensation for AAWC assisting the Company in the private placement of 400,000
shares of the Company's Common Stock to a group of investors for $3.75 per
share. AAWC subsequently assigned 56,667 Warrants to Howard P. Silverman,
currently a director of the Company for his assistance to AAWC in connection
with the private placement. At the time the Warrants were assigned, Mr.
Silverman was not a director of the company. The Warrants and underlying shares
are being registered hereby. See "Selling Stockholders." The Company also paid
to AAWC a cash commission of 10% of the gross proceeds raised ($150,000) and a
nonaccountable expense allowance of 3% of such gross proceeds ($45,000). In
September 1996, AAWC and KG entered into an agreement not to sell the 146,667
Warrants and underlying shares owned by each party for a period of three years
without the consent of the other party.
In January 1997, the Company sold the remaining assets of the Classic Line
to SSC Technologies, Inc. ("SSC") for $770,850 evidenced by a promissory note
bearing interest at 10% per annum payable in January 2007 and the assumption by
SSC of all of the liabilities of the Classic Line, aggregating approximately
$500,000. Under the terms of the asset sales agreement (the "Divestiture
Agreement"), the Company acquired 25% of the outstanding common stock of SSC for
$500,000 in cash (less $200,000 of liabilities which were paid by the Company
and deducted from the $500,000) and the remaining 75% of the outstanding common
stock was issued to other stockholders including Charles T. Howard, David L.
Green, Ding Yang and Steven L. Wilson who were previously officers and directors
of the Company (the "SSC Principals"). As a part of the Divestiture Agreement,
the SSC Principals also (i) cancelled 900,000 shares of Convertible Preferred
Stock held by them which were previously exercisable into shares of Common Stock
on a fifteen for one basis, (ii) agreed not to sell an aggregate of 30,300
shares of Common Stock owned by them until October 1999 except with the prior
written consent of Andrew, Alexander, Wise & Company, Incorporated ("AAWC"),
(iii) agreed to sublease office space from the Company at a monthly rental of
$12,000 through February 28, 1998, (iv) granted to Steven A. Kriegsman, a
director of the Company, an option to purchase up to 10,000 shares of Common
Stock held by the SSC principals at any time until October 2001, and (v)
personally guaranteed on a joint and several basis the $770,850 promissory note
and all other obligations of SSC to the Company. The Classic Line assets were
valued as a result of negotiations between the Company and the SSC Principals.
31
<PAGE>
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 10,000,000 shares of common stock, no
par value (the "Common Stock"), of which 515,334 shares are currently
outstanding. Upon issuance, the shares of Common Stock are not subject to
further assessment or call. The holders of Common Stock are entitled to one vote
for each share held of record on each matter submitted to a vote of
stockholders. Cumulative voting for election of directors is permitted. Subject
to the prior rights of any series of Preferred Stock which may be issued by the
Company in the future, holders of Common Stock are entitled to receive ratably
such dividends that may be declared by the Board of Directors out of funds
legally available therefor, and, in the event of the liquidation, dissolution or
winding up of the Company, are entitled to share ratably in all assets remaining
after payment of liabilities. Holders of Common Stock have no preemptive rights
and have no rights to convert their Common Stock into any other securities. The
outstanding Common Stock is, and the Common Stock to be outstanding upon
completion of the Offering will be, validly issued, fully paid and
nonassessable.
Public Warrants
In connection with the Prior Offering, the Company issued 46,000 Public
Warrants. Each Public Warrant represents the right to purchase one share of
Common Stock at an exercise price of $97.50 per share at any time until February
9, 1998. The exercise price and the number of shares issuable upon exercise of
the Public Warrants are subject to adjustment in certain events including the
issuance of Common Stock as a dividend on shares of Common Stock, subdivisions
or combinations of the Common Stock or similar events. The Public Warrants do
not contain provisions protecting against dilution resulting from the sale of
additional shares of Common Stock for less than the exercise price of the Public
Warrants or the current market price of the Company's securities.
Public Warrants may be redeemed in whole or in part, at the option of the
Company upon 30 days' notice, at a redemption price equal to $.01 per Public
Warrant if the closing price of the Company's Common Stock is at least $112.50
per share for 30 consecutive trading days.
Holders of Public Warrants may exercise their Public Warrants for the
purchase of shares of Common Stock only if a current prospectus relating to such
shares is then in effect and only if such shares are qualified for sale, or
deemed to be exempt from qualification under applicable state securities laws.
The Company is required to use its best efforts to maintain a current prospectus
relating to such shares of Common Stock at all times when the market price of
the Common Stock exceeds the exercise price of the Public Warrants until the
expiration date of the Public Warrants, although there can be no assurance that
the Company will be able to do so.
32
<PAGE>
The shares of Common Stock issuable on exercise of the Public Warrants will
be, when issued in accordance with the Public Warrants, fully paid and
non-assessable. The holders of the Public Warrants have no rights as
stockholders until they exercise their Public Warrants.
For the life of the Public Warrants, the holders thereof are given the
opportunity to profit from a rise in the market for the Company's Common Stock,
with a resulting dilution in the interest of all other stockholders. So long as
the Public Warrants are outstanding, the terms on which the Company could obtain
additional capital may be adversely affected. The holders of the Public Warrants
might be expected to exercise them at a time when the Company would, in all
likelihood, be able to obtain any needed capital by a new offering of securities
on terms more favorable than those provided by the Public Warrants.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock, no
par value (the "Preferred Stock"), none of which is currently outstanding. In
December 1994, the Company issued 900,000 shares of Preferred Stock to five of
the Company's then executive officers. All such shares were subsequently
cancelled with the agreement of the holders. The Preferred Stock may, without
action by the stockholders of the Company, be issued by the Board of Directors
from time to time in one or more series for such consideration and with such
relative rights, privileges and preferences as the Board may determine.
Accordingly, the Board has the power to fix the dividend rate and to establish
the provisions, if any, relating to voting rights, redemption rates, sinking
fund provisions, liquidation preferences and conversion rights for any series of
Preferred Stock issued in the future.
The Warrants
The Company has issued an aggregate of 293,333 Warrants, which, along with
the underlying 293,333 shares of Common Stock, are being registered hereby. See
"Selling Stockholders." Each Warrant entitles the holder to purchase one share
of Common Stock for $3.75 per share at any time until October 2001.
Use of Preferred Stock As Anti-Takeover Device
It is not possible to state the actual effect of any other authorization of
Preferred Stock upon the rights of holders of Common Stock until the Board
determines the specific rights of the holders of any other series of Preferred
Stock. The Board's authority to issue Preferred Stock also provides a convenient
vehicle in connection with possible acquisitions and other corporate purposes,
but could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock. Accordingly, the future
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders and therefore, may be used as an "anti-takeover" device adversely
affecting the holders of the Common Stock and depressing the value of the Common
Stock. The Company has no current plans to issue any other Preferred Stock.
33
<PAGE>
See "Risk Factors - Control by Management; Authorization and Issuance of
Preferred Stock; Prevention of Changes in Control."
Common Stock Eligible For Future Sale
There are currently 515,334 shares of Common Stock outstanding of which
46,000 shares were registered in the Company's IPO, 426,667 shares are being
registered hereby and the remaining 42,667 shares may be sold pursuant to Rule
144 at any time subject to the agreement of the holders of 30,300 shares not to
sell such shares until October 1999 without the written consent of AAWC. Any
future sales may adversely affect prevailing market prices for the Common Stock
and could impair the Company's ability to raise capital through the sale of its
equity securities. The Company has also granted certain demand and piggyback
registration rights with respect to the Prior Representative's Unit Warrants and
the Common Stock underlying the Prior Representative's Unit Warrants.
Transfer Agent and Warrant Agent
Corporate Stock Transfer, Inc., 370 Seventeenth Street, Suite 2350, Denver,
Colorado 80202, is the Company's transfer agent and warrant agent.
Dividends
The Company has not paid cash dividends on its Common Stock and does not
intend to pay any cash dividends on its Common Stock in the foreseeable future.
Earnings, if any, will be retained to finance growth. The Company has no
financing or other agreements which prohibit payment of dividends.
Limitation on Liability
The Company's Articles of Incorporation provides that liability of
directors to the Company for monetary damages is eliminated to the full extent
provided by Colorado law. Under Colorado law, a director is not personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director except for liability arising from (i) any breach of
the director's duty of loyalty to the Company or its shareholders; (ii) acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law; (iii) authorizing the unlawful payment of a dividend or other
distribution on the Company's capital stock or the unlawful purchases of its
capital stock, or (iv) any transaction from which the director derived any
improper personal benefit.
The effect of this provision in the Articles of Incorporation is to
eliminate the rights of the Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover monetary damages from a
director for breach of the fiduciary duty of care as a director (including
breaches resulting from negligent or grossly negligent behavior) except in the
situations described above. This provision does not limit or eliminate the
rights of the
34
<PAGE>
Company or any stockholder to seek non-monetary relief such as an injunction or
rescission in the event of a breach of a director's duty of care or any
liability for violation of the federal securities laws.
PLAN OF DISTRIBUTION
By this Prospectus, the company is registering (at its expense) the
Registered Securities consisting of 426,667 shares of Common Stock, 293,333
Warrants and 293,333 shares of Common Stock underlying the Warrants. Each
Warrant is exercisable to purchase one share of Common Stock at $3.75 per share
at any time until October 2001. The Registered Securities may be sold from time
to time in public or private open market transactions at prevailing market
prices less customary selling commissions by the Selling Stockholders whose
names are listed in the table below. The Selling Stockholders may use the
Prospectus to offer the Registered Securities for sale in transactions in which
the Selling Stockholders may be deemed to be "underwriters" within the meaning
of the 1933 Act. The Selling Stockholders acquired the Registered Securities in
private transactions with the Company between September and October 1996. See
"Selling Stockholders" and "Certain Transactions."
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon
for the Company by the Law Office of Gary A. Agron, Englewood, Colorado.
EXPERTS
The financial statements of the Company for the years ended December 31,
1995 and 1996, appearing in this Prospeftus and Registration Statement, have
been audited by Angell & Deering, independent auditors, as set forth in their
report thereon appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
35
<PAGE>
PROTOSOURCE CORPORATION
(Formerly SHR Corporation
dba Software Solutions Company)
INDEX TO FINANCIAL STATEMENTS
Financial Statements Page
- - - -------------------- ----
Independent Auditors' Report F-2
Balance Sheet as of December 31, 1996 F-3
Statements of Operations for the Years Ended
December 31, 1996 and 1995 F-5
Statements Of Changes in Shareholders' Equity
for the Years Ended December 31, 1996 and 1995 F-6
Statements Of Cash Flows for the Years Ended
December 31, 1996 and 1995 F-7
Notes To Financial Statements F-9
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
ProtoSource Corporation
We have audited the accompanying balance sheet of ProtoSource Corporation as of
December 31, 1996 and the related statements of operations, changes in
shareholders' equity and cash flows for the years ended December 31, 1996 and
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ProtoSource Corporation as of
December 31, 1996 and the results of its operations and its cash flows for the
years ended December 31, 1996 and 1995 in conformity with generally accepted
accounting principles.
/S/ ANGELL & DEERING
-----------------------------
Angell & Deering
Certified Public Accountants
Denver, Colorado
February 28, 1997, except for
Note 12 as to which the date
is April 25, 1997
F-2
<PAGE>
PROTOSOURCE CORPORATION
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
------
Current Assets:
Cash and cash equivalents $ 482,357
Accounts receivable:
Trade 29,156
Employees and other 21,397
Inventories 8,980
Prepaid expenses and other 14,587
Current portion of note receivable 47,285
----------
Total Current Assets 603,762
----------
Property and Equipment, at cost:
Land 411,176
Building and improvements 1,381,816
Equipment 680,377
Furniture 104,375
Vehicles 10,090
----------
2,587,834
Less accumulated depreciation and amortization 486,441
----------
Net Property and Equipment 2,101,393
----------
Other Assets:
Goodwill, net of accumulated amortization
of $2,006 19,239
Deferred tax assets 71,550
Note receivable, net of current portion above 723,565
Deposits and other assets 42,346
----------
Total Other Assets 856,700
----------
Total Assets $3,561,855
==========
The accompanying notes are an integral
part of these financial statements.
F-3
<PAGE>
PROTOSOURCE CORPORATION
BALANCE SHEET
DECEMBER 31, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 195,694
Accrued liabilities 267,228
Customer deposits 1,500
Current portion of long-term debt 39,358
-----------
Total Current Liabilities 503,780
-----------
Long-Term Debt, net of current portion above:
Bank 2,220
Obligations under capital leases 1,852,083
Less current portion above (39,358)
-----------
Total Long-Term Debt 1,814,945
-----------
Commitments and contingencies --
Shareholders' Equity:
Preferred stock, no par value; 5,000,000
shares authorized, none issued and
outstanding --
Common stock, no par value; 10,000,000
shares authorized, 515,334 shares issued
and outstanding 4,839,485
Accumulated deficit (3,596,355)
-----------
Total Shareholders' Equity 1,243,130
-----------
Total Liabilities and Shareholders'
Equity $ 3,561,855
===========
The accompanying notes are an integral
part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 and 1995
1996 1995
---- ----
<S> <C> <C>
Net Revenues:
Internet service fees $ 697,581 $ 100,901
----------- -----------
Total Revenues 697,581 100,901
----------- -----------
Operating expenses 1,121,773 1,079,503
----------- -----------
Operating Loss (424,192) (978,602)
----------- -----------
Other Income (Expense):
Interest income 3,507 50,891
Interest expense (272,228) (160,192)
Financing costs (126,000) --
Rent income 146,122 124,356
Other, net -- (10,231)
----------- -----------
Total Other Income (Expense) (248,599) 4,824
----------- -----------
Loss From Continuing Operations
Before Provision For Income Taxes (672,791) (973,778)
Provision for income taxes -- 800
----------- -----------
Loss From Continuing Operations (672,791) (974,578)
----------- ------------
Discontinued Operations:
Loss from discontinued
operations (Note 2) (532,663) (841,707)
Loss on disposal (Note 2) (204,346) --
----------- -----------
Loss From Discontinued
Operations (737,009) (841,707)
----------- -----------
Net Loss $(1,409,800) $(1,816,285)
=========== ===========
Net Loss Per Share of Common Stock:
Loss from continuing operations $ (3.69) $ (11.82)
Discontinued operations (4.05) (10.22)
----------- -----------
Net Loss $ (7.74) $ (22.04)
=========== ===========
Weighted Average Number of
Common Shares Outstanding 182,037 82,439
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 and 1995
Series A
Preferred Stock Common Stock
--------------- ------------ Accumulated
Shares Amount Shares Amount Deficit
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 900,000 $ -- 42,667 $ 303,595 $ (370,270)
Issuance of common stock and warrants
in public offering (net of offering
costs of $808,476) -- -- 46,000 2,986,524 --
Contribution of shares to the Company
by officers and directors for issuance
in connection with an acquisition -- -- -- 19,375 --
Net loss -- -- -- -- (1,816,285)
-------- ---- ------- ---------- -----------
Balance at December 31, 1995 900,000 -- 88,667 3,309,494 (2,186,555)
Contribution of capital by officers
through forgiveness of previously
accrued salaries -- -- -- 154,792 --
Issuance of common stock in
connection with bridge loans -- -- 26,667 100,000 --
Issuance of common stock in private
offering (net of offering costs of
$224,801) -- -- 400,000 1,275,199 --
Cancellation of Preferred Stock in
connection with divestiture of assets (900,000) -- -- -- --
Net loss -- -- -- -- (1,409,800)
-------- ---- ------- ---------- -----------
Balance at December 31, 1996 -- $ -- 515,334 $4,839,485 $(3,596,355)
======== ==== ======= ========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 and 1995
1996 1995
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $(1,409,800) $(1,816,285)
Adjustments to reconcile net
loss to net cash used by
operating activities:
Depreciation and amortization 367,049 584,810
Provision for bad debts -- 508,187
Assets and liabilities disposed of
in divestiture and note receivable
received 17,176 --
Gain on disposal of equipment (4,607) --
Issuance of common stock for
costs of financing 100,000 --
Changes in operating assets
and liabilities:
Accounts receivable 163,556 (499,436)
Inventories 7,079 (4,625)
Deposits and other assets 15,441 (18,814)
Accounts payable 32,536 (150,623)
Accrued liabilities 344,284 (10,618)
Customer deposits (4,000) (12,213)
Unearned customer support revenue (34,542) (5,286)
----------- -----------
Net Cash (Used) By Operating
Activities (405,828) (1,424,903)
----------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment (38,421) (403,591)
Proceeds from disposal of equipment 10,536 --
Software development costs capitalized (442,100) (592,754)
Receivable from shareholders -- (35,000)
----------- ------------
Net Cash (Used) By Investing
Activities (469,985) (1,031,345)
----------- -----------
Cash Flows From Financing Activities:
Payments on notes payable (55,675) (625,998)
Proceeds from borrowing 200,000 20,000
Issuance of common stock 1,300,000 3,795,000
Offering costs incurred (224,801) (619,990)
----------- -----------
Net Cash Provided By Financing
Activities 1,219,524 2,569,012
----------- -----------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 and 1995
1996 1995
---- ----
<S> <C> <C>
Net Increase in Cash and
Cash Equivalents $343,711 $112,764
Cash and Cash Equivalents at
Beginning of Year 138,646 25,882
-------- --------
Cash and Cash Equivalents at
End of Year $482,357 $138,646
======== ========
Supplemental Disclosure of
Cash Flow Information:
Cash paid during the year for:
Interest $272,228 $174,251
Income taxes -- 800
Supplemental Disclosure of Noncash
Investing and Financing Activities:
Acquisition of equipment
under capital leases $ 90,349 $118,701
Common stock contributed by
stockholders for issuance in
acquisition by the Company -- 19,375
Conversion of account payable to a
note payable 32,000 --
Capital contribution by officers
through forgiveness of previously
accrued salaries 154,792 --
Conversion of note payable into
common stock 200,000 --
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-8
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
- - ------------------------------------------
Description of Business
-----------------------
ProtoSource Corporation, formerly SHR Corporation, doing business as
Software Solutions Company (the "Company"), was incorporated on July 1,
1988, under the laws of the state of California. The Company is an Internet
services provider.
Reclassifications
-----------------
The former software development, MarketStreet and computer training center
divisions are presented as discontinued operations in accordance with
Accounting Principles Board (APB) Opinion No. 30 (Note 2). The 1995
operations and per share information have been reclassified to present the
operations of the three divisions as discontinued operations also.
Stock Split
-----------
On February 28, 1997, the Company's shareholders adopted a resolution
approving a one for ten reverse stock split of the issued and outstanding
common shares, effective April 2, 1997. All share information and per share
data have been retroactively restated for all periods presented to reflect
the reverse stock split. (Note 12).
Revenue Recognition
-------------------
Product sales represent sales of application software to end users.
Equipment sales represent sales of computer and peripheral equipment
bundled with the Company's software. Professional service fees represent
revenue from custom programming, post contract customer support (PCS)
agreements and training and installation related services. Fees associated
with insignificant vendor obligations related to installation of systems
are deferred and recognized upon completion of performance. Other income
represents primarily sales of promotional brochures, marketing materials
and sales of miscellaneous equipment and supplies.
Revenue from product sales is recognized upon delivery to the customer,
provided that no significant vendor or PCS obligations remain, and
collection of the related receivable is deemed probable. Revenue from PCS
agreements is recognized on a straight-line basis over the period of the
PCS agreement.
Revenue from the Internet operations is recognized over the period the
services are provided. Deferred revenue consists primarily of monthly
subscription fees billed in advance.
Cash and Cash Equivalents
-------------------------
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less to be
cash equivalents.
Inventories
-----------
Inventories, consisting of computer equipment and supplies held for resale,
are stated at the lower of cost (determined on the first in, first out
method) or market.
F-9
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued)
- -- ------------------------------------------------------
Property and Equipment
----------------------
Depreciation and amortization of equipment, furniture and vehicles are
computed using the straight-line method over estimated useful lives of
three to seven years. Assets held under capital lease obligations,
exclusive of land, are amortized using the straight-line method over the
shorter of the useful lives of the assets or the term of the lease.
Depreciation of property and equipment charged to operations was $233,201
and $171,695 for the years ended December 31, 1996 and 1995, respectively.
Goodwill
--------
Goodwill is being amortized using the straight-line method over an
estimated useful life of 15 years.
Investment
----------
The Company has a 25% ownership interest in SSC Technologies, Inc. ("SSC").
The Company received the equity interest in connection with the divestiture
of three operating divisions of the Company (Note 2). The cost of its
investment is $--, and since the Company does not have the ability to
exercise influence over operating and financial policies of SSC, the
Company is accounting for its investment in SSC utilizing the cost method
of accounting. Under the cost method, net accumulated earnings of an
investee subsequent to the date of investment are recognized by the
investor only to the extent distributed by the investee as dividends.
Dividends received in excess of earnings subsequent to the date of
investment are considered a return of investment and are recorded as
reductions of cost of the investment.
Software Development Costs
--------------------------
Software development costs are capitalized with respect to those products
for which technological feasibility (as defined in Statement of Financial
Accounting Standards No. 86) has been established. Capitalized amounts are
reported at the lower of unamortized cost or net realizable value. These
costs are amortized into cost of goods sold on a product-by-product basis.
The annual amortization expense is the greater of the amount computed using
the ratio of current revenue to the total anticipated revenue for the
product or the straight-line method over the estimated life of the product
starting when the product is available for general release to customers.
Generally, the Company amortizes these costs over three years. Software
development costs capitalized relate primarily to product enhancements.
Amortization expense for capitalized software was $132,254 and $412,258 for
the years ended December 31, 1996 and 1995, respectively.
Deferred Offering Costs
-----------------------
In connection with the Company's public offering (Note 6), costs incurred
to complete the offering have been deferred and were offset against the
proceeds of the offering.
F-10
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued)
- -- ------------------------------------------------------
Stock-Based Compensation
------------------------
During the year ended December 31, 1996, the Company adopted Statement of
Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation". The Company will continue to measure compensation expense
for its stock-based employee compensation plans using the intrinsic value
method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees". See Note 8 for pro forma disclosures of net income and earnings
per share as if the fair value- based method prescribed by SFAS 123 had
been applied in measuring compensation expense.
Income Taxes
------------
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," in 1992. Under the statement, deferred
income taxes are provided for temporary differences between the financial
reporting and tax bases of assets and liabilities using enacted tax laws
and rates for the years when the differences are expected to reverse.
Net Income (Loss) Per Share of Common Stock
-------------------------------------------
Net income (loss) per share of common stock is based upon the weighted
average number of shares of common stock and common stock equivalents
outstanding during the year. Common stock equivalents represent the
dilutive effect of the assumed exercise of certain outstanding stock
options and warrants.
Estimates
---------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amount of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
2. Discontinued Operations
- -- -----------------------
In 1996, the Company retained the Kriegsman Group ("Kriegsman"), a
financial consulting firm, to assist it with a financial restructuring of
its operations. In connection with the financial restructuring the Company
divested the software development, MarketStreet (advertising division) and
the computer training center divisions. The divisions were to be spun-off
to a new Company owned by the former management of the Company effective
August 31, 1996. The closing for the divestiture occurred on December 31,
1996. All of the assets of the three divisions and the related liabilities
and facilities leases were assumed by the former management and a note
payable was issued by the former management to the Company in the amount of
$770,850 (Note 9). Also included in the assets of the divested divisions
F-11
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
2. Discontinued Operations (Continued)
- -- -----------------------------------
was $500,000 in cash less approximately $200,000 in liabilities which were
paid by the Company which resulted in approximately $300,000 in cash paid
to the divested divisions. The management of the divested divisions also
assumed all litigation and claims related to the divisions which includes
one law suit in the amount of approximately $70,000. The Kriegsman Group
also nominated new members for the Board of Directors upon completion of
the divestiture of the three divisions which were approved in January 1997.
The Company received a 25% ownership interest in the common stock of the
new company formed to acquire the divested divisions and the divested
divisions will lease the principal office from the Company for a period of
eighteen months at the current market rate.
Kriegsman was to use its best efforts to provide a minimum of $1,500,000 of
financing for the Company through bridge loans or equity financing. In
August 1996, a bridge loan of $200,000 was obtained by the Company for
which the Company issued 26,667 shares of common stock to the bridge
lenders as additional consideration for the $200,000 loan. In October and
November 1996 the Company sold 400,000 shares of its common stock at $3.75
per share through an Underwriter, which included the conversion of the
$200,000 bridge loan into common stock. The Company paid the Underwriter a
10% sales commission and a 3% nonaccountable expense allowance on the
bridge loan and sale of common stock. The Company also entered into a two
year financial consulting agreement with the Underwriter which provides for
a monthly consulting fee of $5,000 for the two year period.
As a part of the financing transaction, the Company granted both the
Underwriter and Kriegsman warrants to purchase common stock. The Company
granted 146,667 warrants to each which are exercisable at $3.75 per share
for a four year period through October 31, 2001. The Company also agreed to
use its best efforts to file a Registration Statement within 90 days of the
closing of the Private Placement to register the shares issued in the
Private Placement and the shares underlying the warrants issued to the
Underwriter and Kriegsman.
Revenues applicable to the Company's discontinued operations were $540,112
and $1,734,605 for the years ended December 31, 1996 and 1995,
respectively.
3. Long-Term Debt
- -- --------------
Long-term debt consists of the following:
Bank
----
10.5% installment note due in 1997 with
monthly principal and interest payments of
$328, collateralized by an automobile. $ 2,220
F-12
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
3. Long-Term Debt (Continued)
- -- --------------------------
Obligations Under Capital Leases
--------------------------------
5.7% to 25.1% installment notes due in 1997
to 2001, collateralized by equipment. 193,146
13% capital lease for building and land with
a 20 year lease term, with monthly principal
and interest payments of $15,634 for the
first five years, $19,021 for the next five
years, $23,142 for the next five years and
$28,156 for the next five years with an
escalating purchase option (Note 7). 1,658,937
-----------
Total Long-Term Debt 1,854,303
Less current portion of long-term debt (39,358)
-----------
Long-Term Debt $1,814,945
==========
Installments due on debt principal, including the capital leases, at
December 31, 1996 are as follows:
Year Ending
December 31,
------------
1997 $ 39,358
1998 26,058
1999 16,325
2000 42,101
2001 10,591
Later years 1,719,870
----------
Total $1,854,303
==========
4. Income Taxes
- -- ------------
The components of the provision for income taxes are as follows:
1996 1995
---- ----
Current:
Federal $ -- $ --
State -- 800
-------- --------
Total -- 800
-------- --------
Deferred:
Federal -- --
State -- --
-------- --------
Total -- --
-------- --------
Total Provision For Income Taxes $ -- $ 800
======== ========
The provision for income taxes reconciles to the amount computed by
applying the federal statutory rate to income before the provision for
income taxes as follows:
F-13
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
4. Income Taxes (Continued)
- -- ------------------------
1996 1995
---- ----
Federal statutory rate (25)% (25)%
State franchise taxes,
net of federal benefits (4) (4)
Valuation allowance 29 29
------ ------
Total -- % -- %
====== =======
Significant components of deferred income taxes as of December 31, 1996 are
as follows:
Net operating loss carryforward $1,051,240
Vacation accrual 2,070
----------
Total deferred tax asset 1,053,310
----------
Accelerated depreciation (43,540)
State income taxes (1,520)
----------
Total deferred tax liability (45,060)
Less valuation allowance (936,700)
----------
Net Deferred Tax Asset $ 71,550
==========
The Company has assessed its past earnings history and trends, sales
backlog, budgeted sales, and expiration dates of carryforwards and has
determined that it is more likely than not that $71,550 of deferred tax
assets will be realized. The remaining valuation allowance of $936,700 is
maintained on deferred tax assets which the Company has not determined to
be more likely than not realizable at this time. The net change in the
valuation allowance for deferred tax assets was an increase of $406,760.
The Company will continue to review this valuation on a quarterly basis and
make adjustments as appropriate.
At December 31, 1996, the Company had federal and California net operating
loss carryforwards of approximately $3,900,000 and $1,900,000,
respectively. Such carryforwards expire in the years 2007 through 2011 and
1997 through 2001 for federal and California purposes, respectively.
5. Acquisitions
- -- ------------
In July 1995, the Company purchased, from an unrelated individual certain
assets of ValleyNet Communications, an Internet services provider. The
purchase price was $50,000 in cash and 334 shares of the Company's common
stock. The common stock was issued by the Company's shareholders in
accordance with their agreement to use certain of their shares owned
individually in connection with future acquisitions of the Company (Note
9). The assets acquired consists of computer hardware and software, and
goodwill of $21,245 was recorded in connection with the acquisition. The
goodwill is being amortized over a fifteen year useful life.
F-14
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
6. Shareholders' Equity
- -- --------------------
Incentive Stock Option Plan
---------------------------
In November 1994, the Company's Board of Directors authorized and the
shareholders approved, a stock option plan which provides for the grant of
incentive and nonqualified options to eligible officers and key employees
of the Company to purchase up to 150,000 shares of the Company's common
stock. The purchase price of such shares shall be at least equal to the
fair market value at the date of grant. Such options vest at the discretion
of the Board of Directors, generally over a four-year period. The stock
option plan expires in 2004. As of December 31, 1996, no options have been
granted under the Plan.
Preferred Stock
---------------
In December 1994, the Company issued to six individuals, including the
Company's five executive officers, for no consideration, a total of 900,000
shares of Series A Convertible Preferred Stock, no par value. Such shares
are automatically convertible, in varying amounts per year, into shares of
common stock on a fifteen for one basis through 2003 if certain revenue and
net income milestones are met as follows:
(i) an aggregate of 9,375 shares of Series A Preferred Stock will
convert to common stock if the Company reports gross annual revenues
of at least $9,600,000 and annual after tax earnings of at least
$1,550,000 for the calendar year ended December 31, 1996, an
additional 9,375 shares per year will convert to common stock from
1997 to 2002, and 121,875 shares in 2003 if the company reports gross
annual revenues of at least $9,600,000, and annual after tax earnings
of at least $1,550,000 for calendar years 1997 through 2003.
(ii) an aggregate of 9,375 shares of Series A Preferred Stock will
convert to common stock if the Company reports gross annual revenues
of at least $15,500,000 and annual after tax earnings of at least
$3,000,000 for the calendar year ending December 31, 1997, an
additional 9,375 shares per year will convert to common stock from
1998 to 2002, and 131,250 shares in 2003 if the Company reports gross
annual revenues of at least $15,500,000, and annual after tax earnings
of at least $3,000,000 for calendar years 1998 through 2003.
(iii) An aggregate of 15,000 shares of Series A Preferred Stock will
convert to common stock if the Company reports gross annual revenues
of at least $23,800,000 and annual after tax earnings of at least
$5,100,000 for the calendar year ending December 31, 1998, an
additional 5,000 shares per year will convert to common stock from
1999 to 2002, and 225,000 shares in 2003 if the Company reports gross
annual revenues of at least $23,800,000, and annual after tax earnings
of at least $5,100,000 for calendar years 1999 through 2003.
F-15
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
6. Shareholders' Equity (Continued)
- -- --------------------------------
Preferred Stock (Continued)
---------------------------
The fair market value of the common stock issued upon conversion will be
charged to operations at that time. Any preferred shares not converted
during such period will be canceled. If, prior to January 1, 1999 (i) the
Company consolidates with or merges into another corporation or entity (and
the Company is not the survivor) or if the Company sells or leases
substantially all of its assets and the Company's common stock has
appreciated an average of 10% per annum for each 12 month period following
the date of the Company's Prospectus (February 9, 1995) or (ii) any person,
entity or affiliated group or entities acquires 40% or more of the
Company's common stock in any 12 month period, then all preferred stock
will be automatically converted into common stock. While outstanding, the
preferred stock does not carry voting rights or dividend rights and has a
liquidation preference of $.01 per share.
In connection with the divestiture of three operating divisions (Note 2)
all of the outstanding shares of Series A Preferred Stock were cancelled on
December 31, 1996.
Common Stock and Warrants
-------------------------
The closing for the Company's IPO occurred on February 17, 1995. The
Company sold 46,000 units at $82.50 per unit and paid the Underwriter a 10%
commission and a 3% nonaccountable expense allowance which resulted in net
proceeds to the Company of $2,986,524. Each unit consists of one share of
the Company's common stock and one warrant to purchase an additional share
of common stock at $97.50 per share until February 9, 1998. The warrants
may be redeemed by the Company at any time, upon 30 days written notice to
the holders at a price of $.01 per warrant if the closing price of the
common stock is $112.50 or more for 30 consecutive days. The Company also
entered into a one year financial consulting contract with the Underwriter
for $36,000 which was paid in full in advance. In connection with the
offering, the Company issued the Underwriter, for $100, a warrant to
purchase 10% of the number of Units sold in the offering. The Warrant is
exercisable for a period of four years beginning February 9, 1996. The
Underwriter's Warrant is exercisable at a price of $99.00 per Unit. The
Units subject to the Underwriter's Warrant are identical to the Units sold
to the public.
7. Commitments and Contingencies
- -- -----------------------------
In September 1994, the Company acquired, under a 20 year noncancellable
capital lease, an office building, including land and improvements. The
Company occupies approximately half of the space as its corporate office
facility and has sublet the remaining space to unrelated parties. The lease
requires initial annual minimum lease payments of $187,608, increasing
every five years to a maximum annual payment of $337,872 in 2009. Under the
lease, the Company has an
F-16
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
7. Commitments and Contingencies (Continued)
- -- -----------------------------------------
option at any time through April 30, 1996, to purchase the building and
land for $1,700,000. Such amount increases to $1,800,000 through April 30,
1997 and $1,900,000 through April 30, 1998. After April 30, 1998, the
option amount increases annually by the percentage increase in the Consumer
Price Index, as further described in the lease. Upon exercise of the
purchase option, all lease payments made by the Company will be applied
toward the down payment for the purchase price based upon an amortized 20
year note with interest accrued at 9% per annum.
The Company also leases certain computer equipment and furniture and
fixtures under noncancellable capital leases. The Company leases other
facilities, certain vehicles and computer equipment under noncancellable
operating leases. The Company entered into a sublease for its office
building described above in connection with the divestiture of three
operating divisions. The sublease rentals to be received in the future are
approximately $168,000 and have been deducted from the future minimum lease
payments in the table below.
The following is a schedule of future minimum lease payments at December
31, 1996 under the Company's capital leases (together with the present
value of minimum lease payments) and operating leases that have initial or
remaining noncancellable lease terms in excess of one year:
<TABLE>
<CAPTION>
Year Ending Capital Operating
December 31, Leases Leases Total
------------ ------ ------ -----
<S> <C> <C> <C>
1997 $ 132,142 $ 57,074 $ 189,216
1998 235,146 53,242 288,388
1999 245,162 53,841 299,003
2000 266,169 54,918 321,087
2001 230,523 56,016 286,539
Later years 3,705,573 23,340 3,728,913
----------- -------- ----------
Total Minimum Lease
Payments 4,814,715 $298,431 $5,113,146
======== ==========
Less amount representing
interest (2,962,632)
-----------
Present Value of Net
Minimum Lease Payments $ 1,852,083
===========
</TABLE>
Rent expense amounted to approximately $120,100 and $133,600 for the years
ended December 31, 1996 and 1995, respectively.
Leased equipment under capital leases as of December 31, 1996 is as
follows:
Building $1,348,824
Land 411,176
Equipment 276,441
Less accumulated amortization (252,939)
----------
F-17
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
7. Commitments and Contingencies (Continued)
- -- -----------------------------------------
Net Property and Equipment Under
Capital Leases $1,783,502
==========
8. Stock Based Compensation Plans
- -- ------------------------------
The Company adopted Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123) during the year ended December 31,
1996. In accordance with the provision of SFAS 123, the Company applies APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans other than for
options granted to non-employees. If the Company had elected to recognized
compensation expense based upon the fair value at the grant date for awards
under these plans consistent with the methodology prescribed by SFAS 123,
the Company's net income and earning per share would be reduced to the
following pro forma amounts:
1996 1995
---- ----
Net Loss:
As reported $(1,409,800) $(1,816,285)
Pro forma (1,412,843) (1,816,285)
Net Loss Per Share of Common
Stock:
As reported $ (7.74) $ (22.04)
Pro forma $ (7.76) $ (22.04)
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense
over the vesting period and additional options may be granted in future
years. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following assumptions
for the year ended December 31, 1996:
1996
----
Risk free interest rate 5.97%
Expected life 3.5 years
Expected volatility 129.3%
Expected dividend yield 0%
The Company did not grant any stock options in 1995.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which 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 subjective
F-18
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
8. Stock Based Compensation Plans (Continued)
- -- ------------------------------------------
input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock based
compensation plans.
9. Related Party Transactions
- -- --------------------------
The Company has entered into transactions with its officers and directors,
as follows.
The Company had a note receivable from its former President of $35,000 at
December 31, 1995. Interest is payable monthly at 9% per annum and the note
is due in April 1997. The note is secured by 3,333 shares of the Company's
common stock which are owned by the Company's former President. The note
receivable and accrued interest were sold in Connection with the
divestiture of three operating divisions (Note 2).
On November 1, 1994, all of the Company's shareholders agreed in writing
with each other and with the Company to contribute pro rata from their
shareholdings up to a total of 13,334 shares of common stock to be used by
the Company (at any time until December 31, 1999) for acquisitions of other
companies or lines of business. The Company in its sole discretion may call
for such contributions at any time and from time to time for these
purposes. The Company will not issue any additional equity securities for
purposes of acquisition of other companies or product lines until all
13,334 shares have been contributed. The shareholders did not receive any
compensation or other form of remuneration for their agreement to
contribute the shares and will have no interest in any of the companies or
product lines which may be acquired. The shareholders agreed to provide the
13,334 shares at the request of the Underwriter of the Company's IPO, in
order to reduce any dilution to existing shareholders if the Company
elected to use common stock for acquisition purposes. In 1995, the
Company's shareholders contributed 334 shares in connection with the
acquisition of ValleyNet Communications (Note 5).
The Company incurred expenses in connection with desktop publishing
services provided by a Corporation controlled by the wife of the Company's
former Chief Executive Officer of $7,800 for the year ended December 31,
1995.
In connection with the divestiture of three divisions (Note 2) the Company
received a note receivable of $770,850 from SSC which is controlled by the
former management of the Company. The note bears interest at 10% per annum
and is payable in monthly principal and interest installments of $10,187
through 2006. The note is collateralized by substantially all assets of SSC
and is guaranteed by the former management of the Company.
F-19
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
9. Related Party Transactions (Continued)
- -- --------------------------------------
The Company issued 36,667 warrants to its Chief Executive Officer in
connection with his employment agreement in November 1996. The warrants
vest as to 13,333 warrants in December 1997, 13,334 in December 1998 and
10,000 in December 1999. The warrants are exercisable at $3.75 per share at
anytime through December 2001.
10. Concentration of Credit Risk and Major Customers
- --- -------------------------------------------------
The Company provides credit, in the normal course of business, to a large
number of companies in the Internet services industry. The Company's
accounts receivable are due from customers located primarily in central
California. The Company performs periodic credit evaluations of its
customers' financial condition and generally requires no collateral. The
Company maintains reserves for potential credit losses, and such losses
have not exceeded management's expectations.
11. Sale of Software
- --- ----------------
In December 1995, the Company entered into an agreement to sell its
"Classic" Software to a Canadian Limited Partnership (the "Partnership")
for a promissory note in the amount of $8,080,000. The Partnership acquired
all of the Company's interest in the Classic Software defined as follows;
all existing and future updates, upgrades additions, improvements and
enhancements and any new versions of the software. The Partnership is
selling limited partnership units in Canada and the promissory note will be
replaced by cash and promissory notes as the units are sold. If all units
are sold, the Company would receive $1,333,200 cash at closing (less
expenses), $1,333,200 cash on March 21, 1996 (less expenses) and notes
receivable from the limited partners of $5,413,600. The notes bear interest
at 8.5% per annum and are due December 27, 2005 with interest payable
annually. The Partnership closed on December 28, 1995 selling units
representing 18.81% of the purchase price of the software and the Company
received $188,000, net of expenses, and received the second payment of
$188,000 in March 1996. A second partnership was formed in 1996 in Canada
to sell units to acquire the remaining 81.19% of the Software. The Company
received approximately $150,000, net of expenses, on December 31, 1996 for
the sale of software to the second partnership. The $150,000 was paid to
the Company that acquired the software development division pursuant to the
terms of the Divestiture Agreement. The Company also entered into a
Distribution Agreement with the Partnership, whereby the Company was
appointed as the exclusive distributor of the Classic Software throughout
the world for a term of twenty years. Under the terms of the Distribution
Agreement the Company will purchase copies of the Classic Software for
resale to third parties. Until December 31, 2000, the Company shall pay the
following prices for each copy of the Software purchased from the
Partnership:
F-20
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
11. Sale of Software (Continued)
- --- ----------------------------
(a) until the Company has purchased $475,000 of copies in each year,
100% of the price the Company invoices to its customers for each copy
of the Software; plus
<TABLE>
<CAPTION>
Percentage of Sales
-----------------------------------
Until Below Over
December 31, Sales Benchmark Benchmark Benchmark
------------ --------------- --------- ---------
<S> <C> <C> <C>
1997 $ 8,850,000 5% .1%
1998 10,275,000 4 .1
1999 15,150,000 3 .1
2000 34,000,000 5 .1
Later Years -0- 6 6
</TABLE>
Prior to the repayment of the Promissory Notes, payments to the Partnership
for Software will be applied by the Partnership as follows:
i) first, the Partnership shall pay to the Company on behalf of
each Limited Partner, an amount equal to the interest then
payable in respect of the Promissory Note issued by such Limited
Partner;
ii) second, the balance remaining allocable to each Limited
Partner will be paid (A) 55% to the Limited Partner and (B) 45%
to the Company for repayment of the principal amount then
outstanding on the Limited Partner's Promissory Note.
The Partnership has also entered into an Option Agreement with the Company
whereby the Company may purchase the Software from the Partnership upon
certain triggering events. Upon the occurrence of such triggering events
the Company, at its sole option, may purchase the software from the
Partnership for a purchase price based upon the following.
The purchase price payable by the Company for the Software shall be equal
to the fair market value of the Software on the Exercise Date as determined
by a qualified arm's length appraiser agreed to by the parties, provided
that, if as a result of a Triggering Event, securities are issued by the
Company, or to the Company or its shareholders, the purchase price shall be
satisfied by the transfer by the Company to the Partnership of that number
of securities having a fair market value equal to the lesser of the
purchase price and 22.0% of the securities issued or received, as the case
may be, on a fully diluted basis. The Company agrees to jointly elect under
applicable taxing statutes, with the Partnership to complete the
transaction on a tax deferred basis, with respect to the issuance of
securities to the Partnership by allowing the Partnership to transfer the
Software to a Canadian subsidiary of the Company on a tax deferred basis.
F-21
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
11. Sale of Software (Continued)
- --- ----------------------------
In the event that sales revenue earned by the Partnership in any year
under the terms of the Distribution Agreement are less than $475,000
in any calendar year prior to the Exercise Date, the percentage of the
securities to be transferred by the Company to the Partnership shall
be increased by 1% for each 10% shortfall to a maximum of 5% in any
calendar year, provided that the option of the Partnership to acquire
such additional shares shall not be exercisable by the Partnership
until the promissory notes issued by limited partners to the Company
have been paid in full and until such time, such additional options
may be repurchased by the Company for a price equal to 150% of the
cash shortfalls for which the options were issued.
Since the Company is responsible for maintaining, upgrading and
developing future revisions of the Software, the transaction has not
been accounted for as a sale by the Company. In addition, the notes
receivable have not been recorded by the Company as a result of their
long-term nature and they are primarily expected to be repaid as the
Company sells software to third parties and makes payments to the
Partnership pursuant to terms of the Distribution Agreement.
Therefore, repayment prior to 2005 will only occur out of revenue
generated by the Company. This transaction has been accounted for by
the Company on a cost recovery basis and the cash received from the
Partnership will reduce the capitalized software costs and revenue
will be recognized when the capitalized software costs have been
reduced to zero since the Company has, in essence, retained
substantially all rights of ownership.
The software and all rights to the above agreements were sold by the
Company in connection with the divestiture of the software development
division (Note 2).
Subsequent Events
- -----------------
Reverse Stock Split
- -------------------
On March 26, 2997, the Company filed a Proxy Statement for a special meeting of
stockholders to be held April 25, 1997 to vote on a proposed reverse stock split
of the Company's common stock on the basis of two shares for each three shares
outstanding. The Company's stockholders approved the reverse stock split on
April 25, 1997 and accordingly, all share amounts and earnings per share amounts
have been retroactively restated to give effect to the reverse stock split.
F-22
<PAGE>
<TABLE>
<CAPTION>
================================================== =================================================
No dealer, salesman or other person has been
authorized to give any information or to make any
representations other than contained in this
Prospectus in connection with the Offering
described herein, and if given or made, such
information or representations must not be relied 426,667 Shares of Common Stock
upon as having been authorized by the Company.
This Prospectus does not constitute an offer to 293,333 Common Stock
sell, or the solicitation of an offer to buy, the Purchase Warrants
securities offered hereby to any person in any
state or other jurisdiction in which such offer or
solicitation is unlawful. Neither the delivery of 293,333 Shares of Common Stock
this Prospectus nor any sale hereunder shall, underlying Common Stock
under any circumstances, create any implication Purchase Warrants
that there has been no change in the affairs of
the Company since the date hereof.
------------
TABLE OF CONTENTS PROTOSOURCE CORPORATION
Page
----
<S> <C>
Available Information.......................... 2
Prospectus Summary............................. 3
Risk Factors................................... 7
Capitalization................................. 12
Price Range of Common Stock.................... 13
Use of Proceeds................................ 13
Selected Financial Data........................ 14 -------------------------
Management's Discussion and
Analysis of Financial Condition PROSPECTUS
and Results of Operations.................... 15
Business....................................... 19 -------------------------
Management..................................... 25
Principal Stockholders......................... 28
Selling Stockholders........................... 29
Certain Transactions........................... 31
Description of Securities...................... 32
Plan of Distribution........................... 35
Legal Matters.................................. 35
Experts........................................ 35
Financial Statements...........................F-1
Until __________, 1997 (25 days after the date of
this Prospectus), all dealers effecting
transactions in the registered securities, whether
or not participating in this distribution, may be
required to deliver a Prospectus. This is in ---------------, 1997
addition to the obligation of dealers to deliver a
Prospectus when acting as underwriters and with
respect to their unsold allotments or
subscriptions.
================================================== ======================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. Indemnification of Directors and Officers.
Section 5 of the Registrant's Restated Articles of Incorporation provide
that liability of directors for monetary damage is eliminated to the fullest
extent possible with California law. Section 6 provides for indemnification of
all of the Registrant's agents (including officers and directors) subject only
to limits imposed by California law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to officers, directors or persons
controlling the Company, the Company has been advised that, in the opinion of
the Securities and Exchange Commission, Washington, D.C. 20549, such
indemnification is against public policy as expressed in such Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by an officer, director or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
officer, director or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in such Act and will be governed by the final adjudication
of such issue.
ITEM 25. Other Expenses of Issuance and Distribution.(1)
SEC Registration Fee........................ $ 1,016
NASD Filing Fee............................. 0
Blue Sky Legal and Filing Fees.............. 10,000
Printing Expenses........................... 5,000
Legal Fees and Expenses..................... 60,000
Accounting Fees............................. 40,000
Miscellaneous Expenses...................... 8,984
--------
TOTAL....................................... $125,000 (1)
(1) All expenses, except the SEC registration fee, are estimated.
ITEM 26. Recent Sales of Unregistered Securities
---------------------------------------
During the last three years, the Registrant sold the following shares of
its Common Stock which were not registered under the Securities Act of 1933, as
amended.
(i) In June 1994, the Registrant sold to Christopher Howard, 1,905 shares
of Common Stock for $7,050 in cash and services rendered valued at $24,350. Such
services consisted of assisting the Registrant in designing and developing two
of its proprietary products.
<PAGE>
(ii) Between July and November 1994, the Registrant issued an aggregate of
2,667 shares of its Common Stock to Alan T. Bates, Kwok Fu Chu, Liwen Tsai, Alan
Tsang, Capital Planning Specialists, Mitchell Levitts and Margaret Stevens, who
had loaned the Company a total of $400,000, as additional compensation for the
loans.
(iii) In September 1996, the Company issued 26,667 shares of its Common
Stock to the following individuals as additional consideration for a loan to the
Company in the amount of $200,000.
Name Number of Shares
---- ----------------
John Benedetto 6,667
James Ippolito 3,333
Anaka Parkash 6,667
Larry Pensa 3,333
Isaac Paschaldis 6,667
(iv) In October 1996, the Company sold an aggregate of 400,000 shares of
its Common Stock to the following individuals for $.25 per share.
Name Number of Share
---- ---------------
John Benedetto 40,000
Brian A. Brewer 6,667
James Ippolito 20,000
Raymond King 6,667
Jack Ko and Wendy Ko 13,333
Anaka Parkash 40,000
Isaac Paschaldis 53,333
Larry Pensa 20,000
Francis Sajeski and Barbara Sajeski 6,667
Jerry Silberman 6,667
Rao-Qi Zhang 6,667
George P. Argerakis 13,333
Robert Cavallaro 6,667
Ding Chu Fuh Chen 6,667
Murray Frank 6,667
Donald Gross 13,333
Gloria Ippolito 40,000
Chris Meskouris 6,667
James Meskouris 6,667
Matthew Mulhern and Mary Mulhern 26,667
Michael Pizitz 20,000
Bernard Schwartz and Barbara Schwartz 6,667
II-2
<PAGE>
George Stripas and Matthew Ianello 6,666
Kuei-Chi Tsai 6,666
Saul Unter 6,666
Osweld Valenti, Jack Valenti and Barbara Davis 6,666
With respect to the sales made, the Registrant relied on Section 4(2) of
the Securities Act of 1933, as amended (the "1933 Act"), and/or Regulation D,
Rule 506. No advertising or general solicitation was employed in offering the
securities. The securities were offered to a limited number of individuals and
the transfer thereof was appropriately restricted by the Registrant. All
shareholders were accredited investors as that term is defined under Regulation
D under the 1933 Act who were capable of analyzing the merits and risks of their
investment and who acknowledged in writing that they were acquiring the
securities for investment and not with a view toward distribution or resale and
that they understood the speculative nature of their investment.
ITEM 27. Exhibits.
---------
<TABLE>
<CAPTION>
Exhibit No. Title
----------- -----
<S> <C>
2.01 Restated Articles of Incorporation of the Registrant(1)
2.02 Bylaws of the Registrant(1)
5.04 Opinion of Gary A. Agron, regarding legality of the Common Stock and
Warrants (includes Consent)(2)
10.01 1995 Incentive Stock Option Plan(1)
10.02 Capitalized Lease Agreement(1)
10.12 Divestiture Agreement(2)
10.13 Selling Agreement with AAWC(2)
10.14 Warrant Agreement with AAWC(2)
10.15 Lock-up Agreement(2)
10.16 Registration Rights Agreement(2)
23.06 Consent of Angell & Deering(2)
</TABLE>
II-3
<PAGE>
Exhibit No. Title
- ------------ -----
23.07 Consent of Gary A. Agron (See 5.04, above)(2)
23.08 Consent of Angell & Deering. (2)
23.09 Consent of Angell & Deering.
- -----------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 declared effective by the Commission on February 9, 1995, file
number 33-86242.
(2) Previously filed.
ITEM 28. Undertakings.
------------
The Registrant hereby undertakes:
(a) That insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) That subject to the terms and conditions of Section 13(a) of the
Securities Exchange Act of 1934, it will file with the Securities and Exchange
Commission such supplementary and periodic information, documents and reports as
may be prescribed by any rule or regulation of the Commission heretofore or
hereafter duly adopted pursuant to authority conferred in that section.
(c) That any post-effective amendment filed will comply with the applicable
forms, rules and regulations of the Commission in effect at the time such
post-effective amendment is filed.
(d) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
II-4
<PAGE>
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(e) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(f) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
Offering.
(g) To provide to the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriter to permit prompt delivery to each
purchaser.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Fresno, California, on May 12, 1997.
PROTOSOURCE CORPORATION
By: /s/ Raymond J. Meyers
--------------------------------
Raymond J. Meyers
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Raymond J. Meyers Chief Executive Officer May 12, 1997
- ------------------------------ and Director
Raymond J. Meyers
/s/ Andrew Chu President, Chief Financial May 12, 1997
- ------------------------------ Officer, (Principal
Andrew Chu Accounting Officer)
and Director
/s/ Steven A. Kriegsman Director May 12, 1997
- ------------------------------
Steven A. Kriegsman
Director
- ------------------------------
Howard P. Silverman
<PAGE>
EXHIBIT INDEX
Exhibit No. Title
----------- -----
23.09 Consent of Angell & Deering
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use, in this Amendment No. 2 to the Registration
Statement on Form SB-2, of our report dated February 28, 1997, except for Note
12 as to which the date is April 25, 1997 relating to the financial statements
of ProtoSource Corporation for the years ended December 31 1996 and 1995 and the
reference to our firm under the caption "Experts" in the Prospectus contained in
said Registration Statement.
/s/ ANGELL & DEERING
---------------------------------------
Angell & Deering
Certified Public Accounts
Denver, Colorado
May 12, 1997
