UNITED STATES SECURITIES AND EXCHANGES COMMISSION
Washington D.C. 20549
------------------------
Form 10-QSB
(Mark One)
[ X ] Quarterly Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998 or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from _____ to _____
Commission file number 33-86242
ProtoSource Corporation
-----------------------
(exact name of registrant as specified in its charter)
California 77-0190772
---------- ----------
(State of other jurisdiction of (IRS Employer
Incorporation of organization) Identification No.)
2300 Tulare Street, Suite 210
Fresno, California 93721-2226
-----------------------------
(address of principal executive offices, zip code)
Registrant's telephone number, including area code: (209) 490-8600
----------------------
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
There are 1,787,221 shares of the registrant's common stock, no par value
outstanding on October 31, 1998.
<PAGE>
ProtoSource Corporation
Index
Page
----
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheet at September 30,1998 3
Condensed Statements of Operations
for the three months ended September 30,1998 and 1997 5
Condensed Statements of Operations
for the nine months ended September 30,1998 and 1997 6
Condensed Statements of Cash Flows
for the nine months ended September 30,1998 and 1997 7
Notes to Condensed Unaudited Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information
Other Information 13
Signatures 13
When used in this report, the words "estimate," "project," "intend," "believe"
and "expect" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risk and uncertainties that could
cause actual results to differ materially, including competitive pressures, new
product introductions by the Company and its competitors and changes in the
rates of subscriber acquisition and retention. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. The Company undertakes no obligation to publicly release
updates or revisions to these statements.
2
<PAGE>
ProtoSource Corporation
Condensed Balance Sheet
September 30, 1998
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 4,118,837
Accounts receivable:
Trade, net of allowance for doubtful accounts of $7,500 70,424
Other 49,887
Current portion of note receivable 57,999
-----------
Total current assets 4,297,147
-----------
Property and equipment, at cost:
Leasehold improvements 2,956
Equipment 944,776
Furniture 114,203
-----------
1,061,935
Less accumulated depreciation and amortization (590,061)
-----------
Net property and equipment 471,874
-----------
Other assets:
Goodwill, net of accumulated amortization of $4,485 16,760
Note receivable, net of current portion above and net
of allowance for doubtful note receivable of $48,701 193,299
Deposits and other assets 12,296
-----------
Total other assets 222,355
-----------
Total assets $ 4,991,376
===========
See accompanying notes
3
<PAGE>
ProtoSource Corporation
Condensed Balance Sheet
September 30, 1998
(Unaudited)
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 6,657
Accrued expenses:
Payroll taxes, wages and other 40,635
Interest 1,274
Current portion of long-term debt 42,000
------------
Total current liabilities 90,566
------------
Long-term debt, net of current portion above:
Obligations under capital leases 184,383
Less current portion above (42,000)
------------
Total long-term debt 142,383
------------
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,
1,787,221 shares issued and outstanding 10,884,194
Accumulated deficit (6,125,767)
------------
Total shareholders' equity 4,758,427
------------
Total liabilities and shareholders' equity $ 4,991,376
============
See accompanying notes
4
<PAGE>
ProtoSource Corporation
Condensed Statements of Operations
(Unaudited)
Three months ended September 30,
--------------------------------
1998 1997
---------------------------
Net revenues $ 270,722 $ 190,839
----------- -----------
Operating expenses:
Cost of revenues 74,505 90,914
Sales and marketing 50,287 21,596
General and Administrative 338,939 317,124
----------- -----------
Total operating expenses 463,731 429,634
----------- -----------
Operating loss (193,009) (238,795)
----------- -----------
Other income (expense):
Interest Income 61,089 30,559
Interest Expense (6,825) (204,934)
Other Income, net -- 48,584
----------- -----------
Total other income (expense) 54,264 (125,791)
----------- -----------
Loss from operations before provision (138,745) (364,586)
for income taxes
Provision for income taxes -- --
----------- -----------
Net Loss $ (138,745) $ (364,586)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Basic $ (.08) $ (.57)
Diluted $ (.08) $ (.57)
Weighted Average Number of Common Shares
Outstanding:
Basic 1,802,333 636,365
Diluted 1,802,333 636,365
See accompanying notes
5
<PAGE>
ProtoSource Corporation
Condensed Statements of Operations
(Unaudited)
Nine months ended September 30,
-------------------------------
1998 1997
---------------------------
Net revenues $ 685,280 $ 550,969
----------- -----------
Operating expenses:
Cost of revenues 209,571 207,301
Sales and marketing 114,490 50,403
General and Administrative 887,243 1,059,815
----------- -----------
Total operating expenses 1,211,304 1,317,519
----------- -----------
Operating loss (526,024) (766,550)
----------- -----------
Other income (expense):
Interest Income 88,506 104,015
Interest Expense (694,823) (308,762)
Other Income, net 73,479 203,429
----------- -----------
Total other income (expense) (532,838) (1,318)
----------- -----------
Loss from operations before provision (1,058,862) (767,868)
for income taxes
Provision for income taxes -- --
----------- -----------
Net Loss $(1,058,862) $ (767,868)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Basic $ (.85) $ (1.38)
Diluted $ (.85) $ (1.38)
Weighted Average Number of Common Shares
Outstanding:
Basic 1,240,080 557,897
Diluted 1,240,080 557,897
See accompanying notes
6
<PAGE>
<TABLE>
<CAPTION>
ProtoSource Corporation
Condensed Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
-------------------------------
1998 1997
--------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,058,862) $ (767,868)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 683,081 333,099
Loss on termination of capital lease 6,953 --
Changes in operating assets:
Accounts receivable (50,521) (132,667)
Deposits and other assets 783 (51,830)
Accounts payable (89,450) (95,978)
Accrued liabilities (33,353) (253,299)
----------- -----------
Net cash (used) by operating activities (541,369) (968,543)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (46,202) (33,402)
Other assets -- --
Increase in notes receivable (104,028) --
Receipt of principal on notes receivable 268,701 --
Payment for termination of capital lease (150,000) --
----------- -----------
Net cash (used) by investing activities (31,529) (33,402)
----------- -----------
Cash flows from financing activities:
Increase in notes payable -- 750,000
Issuance of common stock 6,537,750 970
Payments on notes payable and capital lease obligations (798,675) (72,411)
Debt issuance costs incurred -- (97,500)
Offering costs incurred (1,068,323) --
Purchase of treasury stock (77,165) --
----------- -----------
Net cash provided by financing activities 4,593,587 581,059
----------- -----------
Net increase (decrease) in cash and cash equivalents 4,020,689 (420,886)
Cash and cash equivalents at beginning of period 98,148 482,357
----------- -----------
Cash and cash equivalents at end of period $ 4,118,837 $ 61,471
=========== ===========
See accompanying notes
7
</TABLE>
<PAGE>
ProtoSource Corporation
Condensed Statements of Cash Flows
(continued)
(Unaudited)
Nine months ended
September 30,
-------------------
1998 1997
-------------------
Supplemental Disclosure of Cash Flow information:
Cash paid during the period for:
Interest $211,265 $148,678
Income taxes -- --
Supplemental Disclosure of Non cash
Investing and Financing Activities:
Acquisition of equipment under capital lease $ 80,515 $ 69,959
Issuance of common stock in
connection with financing -- $750,000
See accompanying notes
8
<PAGE>
ProtoSource Corporation
Notes to Condensed Unaudited Financial Statements
Basis of Presentation
The accompanying financial information of the Company is prepared in accordance
with the rules prescribed for filing condensed interim financial statements and,
accordingly, does not include all disclosures that may be necessary for complete
financial statements prepared in accordance with generally accepted accounting
principles. The disclosures presented are sufficient, in management's opinion,
to make the interim information presented not misleading. All adjustments,
consisting of normal recurring adjustments, which are necessary so as to make
the interim information not misleading, have been made. Results of operations
for the nine months ended September 30, 1998 are not necessarily indicative of
results of operations that may be expected for the year ending December 31,
1998. It is recommended that this financial information be read with the
complete financial statements included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997 previously filed with the Securities
and Exchange Commission.
Per Share Information
As of December 31, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share," which specifies the method of
computation, presentation and disclosure for earnings per share. SFAS No. 128
requires the presentation of two earnings per share amounts, basic and diluted.
Basic earnings per share is calculated using the average number of common shares
outstanding. Diluted earnings per share is computed on the basis of the average
number of common shares outstanding plus the dilutive effect of outstanding
stock options using the "treasury stock" method.
The basic and diluted earnings per share are the same since the Company had a
net loss for 1998 and 1997 and the inclusion of stock options and other
incremental shares would be anti-dilutive. Options and warrants to purchase
1,659,334 and 277,334 shares of common stock at September 30, 1998 and 1997,
respectively were not included in the computation of diluted earnings per share
because the Company had a net loss and their effect would be anti-dilutive.
9
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Three Months Ended September 30, 1998 vs. Three Months Ended September 30, 1997
Net Revenues. For the three months ended September 30, 1998 net revenue
were $270,722 versus $190,839 in the same period of the prior year. The rise in
net revenue of 41.85% is primarily attributed to increased marketing efforts
resulting in the growth of Internet subscribers, continued growth in web hosting
and development revenue, and revenue generated from providing billing and
technical support services to other Internet Service Providers (ISPs). The
Company believes that revenues will continue to increase as: (1) additional
marketing plans are implemented that focus on increasing name brand recognition
and differentiation of products and services; (2) the number of network points
of presence (POPs) are increased through internal network growth and the
acquisition of other Internet Service Providers; (3) plans are developed and
implemented for the external marketing of billing and technical support services
to other ISPs; and (4) other computer oriented companies are acquired.
Operating Expenses. For the three months ended September 30, 1998, total
operating expenses were $463,731 versus $429,634 in the same period of the prior
year. This slight increase of $34,097 or 7.94% is primarily attributed to
increases in both the sales and marketing and the general and administrative
areas. The Company recorded a one-time non-cash expense of $31,268 associated
with the cancellation of the Shaw Avenue capital lease. The Company believes the
cancellation of the capital lease will have a positive effect on future monthly
operating expenses. However, the Company believes that overall operating
expenses will increase as revenues increase.
Operating Loss. The Company's operating loss for the three months ended
September 30, 1998 was $193,009 versus $238,795 in 1997, representing a decrease
of $45,786 or 19.17%. The decrease in operating loss was primarily attributed to
a 41.85% increase in revenue. Management believes that operating results will
continue to improve as revenues increase.
Interest income (expense). Net interest income totaled $54,264 for the
three months ended September 30, 1998 versus net interest expense of $174,375 in
1997. The decrease in net interest expense is attributable to an increase in
interest income realized from investments made with the proceeds of the May 1998
sale of 1,137,000 Units of the Company's securities and a reduction in interest
expense.
Other income. Net other income decreased from $48,584 to $0 for the three
months ended September 30, 1997, and September 30, 1998, respectively. This
decrease in 1998 is due to the elimination of rental income associated with the
Shaw Avenue capital lease. As previously reported, the Shaw Avenue capital lease
was cancelled and rental income will be eliminated from other income in future
reporting periods.
10
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Nine Months Ended September 30, 1998 vs. Nine Months Ended September 30, 1997
Net Revenues. For the nine months ended September 30, 1998, net revenues
were $685,280 versus $550,969 in the same period of the prior year representing
an increase of 24.38%. The Company increased sales and marketing efforts in the
nine month period which resulted in the growth of Internet subscribers and web
hosting and development revenue. The Company believes that revenues will
continue to increase as: (1) additional marketing plans are implemented that
focus on increasing name brand recognition and differentiation of products and
services; (2) the number of network points of presence (POPs) are increased
through internal network growth and the acquisition of other Internet Service
Providers; (3) plans are developed and implemented for the external marketing of
billing and technical support services to other ISPs; and (4) other computer
oriented companies are acquired.
Operating Expenses. For the nine months ended September 30, 1998, total
operating expenses were $1,211,304 versus $1,317,519 in the same period of the
prior year. This decrease of $106,215 or 8.06% is primarily attributed to the
implementation of several cost reduction or cost containment steps. In the
second quarter 1998, the Company successfully cancelled the Visalia, California
office rental lease and the Shaw Avenue capital lease resulting in lower
operating expenses in the third quarter 1998. The Company believes the
cancellation of the capital lease will have a positive effect on future monthly
operating expenses. However, the Company believes that operating expenses will
increase as revenues increase.
Operating Loss. The Company's operating loss for the nine months ended
September 30, 1998, was $526,024 versus $766,550 in 1997, representing a
decrease of $240,526 or 31.38%. The decrease in the operating loss was primarily
attributed to increased revenue growth and a decrease in operating expenses.
Management believes that operating results will continue to improve as revenues
increase.
Interest income (expense). Net interest expense totaled $606,317 for the
nine months ended September 30, 1998, versus net interest expense of $204,747
for the same period in 1997. The increase in net interest expense of $401,570 is
primarily attributable to the expensing of the remaining debt issuance costs of
$562,333 in connection with the 1997 Bridge Loan financing which was repaid in
May 1998. The interest expense was somewhat offset by the interest earned on
cash and short term investments. The Company believes that the cancellation of
the capital lease and the successful May sale of 1,137,000 Units of the
Company's securities (one share of common stock plus one warrant to purchase one
share of common stock) will substantially reduce future interest expense.
Other income. Net other income decreased to $73,479 from $203,429 for the
nine months ended September 30, 1998 and 1997, respectively. This decrease of
$129,950 was primarily due to lower rental income generated by the Shaw Avenue
building. The company believes that with the cancellation of the Shaw Avenue
capital lease rental income will be eliminated from other income in future
reporting periods.
11
<PAGE>
Liquidity and Capital Resources
For the nine months ended September 30, 1998, the Company used $541,369 of cash
for operating activities primarily as a result of a net loss for the period. The
Company has working capital of $4,206,581 at September 30, 1998. The Company has
obtained long-term financing through the May 1998 sale of 1,137,000 Units of the
Company's securities (one share of common stock and one warrant) at $5.75. As of
September 30, 1998, the Company had $4,118,837 in cash and cash equivalents and
$232,949 of total liabilities.
Capital expenditures relating primarily to the purchase of computer equipment,
furniture and fixtures, and software amounted to $46,202 for the nine months
ended September 30, 1998. The capital investment is mainly in computer equipment
to sustain future growth of the Company.
The Company acquired computer equipment under capital leases totaling $80,515
during the nine months ended September 30, 1998. The computer equipment acquired
allows the Company to meet the requirements of their customers.
Associated with the cancellation of the Shaw Avenue capital lease, the Company
agreed to purchase 15,112 shares of its common stock from the landlord. The
stock was purchased in September for $77,165 ($5.11 per share) and was
subsequently retired to the corporate treasury.
12
<PAGE>
Part II. Other Information
Item 5. Other Information
System issues associated with the Year 2000
The Company has started an internal review of all computer systems, both
hardware and software, to determine if the Company is Year 2000 compliant. The
Year 2000 problem, also known as the Millennium Bug or Y2K, is the inability for
a computer to process information consisting of dates on or after January 1,
2000. Overall, the Company believes it is devoting the necessary resources to
address all the Year 2000 issues over which it has control.
Item 6. Exhibits and Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ProtoSource Corporation,
November 10, 1998 /s/ Raymond J. Meyers
-----------------------------
Raymond J. Meyers
Chief Executive Officer
13
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,118,837
<SECURITIES> 0
<RECEIVABLES> 127,811
<ALLOWANCES> 7,500
<INVENTORY> 0
<CURRENT-ASSETS> 4,297,147
<PP&E> 1,061,935
<DEPRECIATION> 590,061
<TOTAL-ASSETS> 4,991,376
<CURRENT-LIABILITIES> 90,566
<BONDS> 142,383
0
0
<COMMON> 10,884,194
<OTHER-SE> (6,125,767)
<TOTAL-LIABILITY-AND-EQUITY> 4,991,376
<SALES> 0
<TOTAL-REVENUES> 685,280
<CGS> 0
<TOTAL-COSTS> 1,211,304
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 694,823
<INCOME-PRETAX> (1,058,862)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,058,862)
<EPS-PRIMARY> (.85)
<EPS-DILUTED> (.85)
</TABLE>
