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, 1999 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)
<TABLE>
<CAPTION>
<S> <C>
CALIFORNIA 77-0190772
(State of other jurisdiction of (IRS Employer
Incorporation of organization) Identification No.)
</TABLE>
2800 28TH STREET, SUITE 170
SANTA MONICA, CALIFORNIA 90405
(address of principal executive offices, zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 314-9801
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
----------------------
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 1,865,998 shares of the registrant's common stock, no par value
outstanding on November 1, 1999.
<PAGE>
ProtoSource Corporation
Index
<TABLE>
<CAPTION>
PAGE
Part I Financial Information
Item 1. Financial Statements
<S> <C> <C> <C>
Condensed Balance Sheet at September 30, 1999 3
Condensed Statements of Operations
for the three months ended September 30,1999 and 1998 5
Condensed Statements of Operations
for the nine months ended September 30,1999 and 1998 6
Condensed Statements of Cash Flows
for the nine months ended September 30,1999 and 1998 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
</TABLE>
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.
<PAGE>
PROTOSOURCE CORPORATION
CONDENSED BALANCE SHEET
SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Assets
Current assets:
<S> <C>
Cash and cash equivalents $ 1,259,356
Accounts receivable:
Trade net of allowance for doubtful accounts of $7,500 96,507
Prepaid Expenses and other 83,130
-------------------
Total current assets 1,438,993
-------------------
Property and equipment, at cost:
Equipment 944,776
Furniture 147,533
Leasehold improvements 6,463
1,098,772
Less accumulated depreciation and amortization (794,007)
--------------------
Net property and equipment 304,765
-------------------
Other assets:
Goodwill, net of accumulated amortization of $5,156 16,089
Investment in Corporation 1,800,000
Note receivable, net of allowance for uncollectibility of $168,000 ---
Deposits 15,420
-------------------
Total other assets 1,831,509
-------------------
Total assets $3,575,267
===================
</TABLE>
See accompanying notes
<PAGE>
PROTOSOURCE CORPORATION
CONDENSED BALANCE SHEET
SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C>
Accounts payable $ 103,131
Accrued expenses:
Payroll taxes and wages 38,896
Other 26,987
Deferred revenue 9,302
Current portion of long-term debt 70,448
Total current liabilities 248,764
----------------------
Long-term debt, net of current portion above:
Obligations under capital leases 110,189
Less current portion above (70,448)
----------------------
Total long-term debt 39,741
----------------------
Commitments and contingencies -
Stockholders' 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,
1,772,188 shares issued and outstanding 10,792,672
Additional paid in capital 10,658
Accumulated deficit (7,516,568)
-----------------------
Total stockholders' equity 3,286,762
----------------------
Total liabilities and stockholders' equity $ 3,575,267
======================
</TABLE>
See accompanying notes
<PAGE>
PROTOSOURCE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30,
------------------------------------------
1999 1998
--------------------------------------------
<S> <C> <C>
NET REVENUES $ 237,021 $ 270,722
----------------------------------------------
OPERATING EXPENSES:
Cost of revenues 140,403 74,505
Sales and marketing 104,362 50,287
General and Administrative 396,813 338,939
--------------------------------------------
Total operating expenses 641,578 463,731
--------------------------------------------
Operating loss (404,557) (193,009)
--------------------------------------------
OTHER INCOME (EXPENSE):
Interest Income 17,049 61,089
Interest Expense (4,705) (6,825)
--------------------------------------------
Total other income (expense) 12,344 54,264
Loss from operations before provision (392,213) (138,745)
for income taxes
Provision for income taxes - -
-------------------------------------------
Net Loss $ (392,213) $ (138,745)
============================================
Net Income (Loss) Per Share of Common Stock:
Basic $ (.22) $ (.08)
Diluted $ (.22) $ (.08)
Weighted Average Number of Common Shares
Outstanding:
Basic 1,772,188 1,802,333
Diluted 1,772,188 1,802,333
</TABLE>
See accompanying notes
<PAGE>
PROTOSOURCE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------------------
1999 1998
--------------------------------------------
<S> <C> <C>
NET REVENUES $ 759,708 $ 685,280
----------------------------------------------
OPERATING EXPENSES:
Cost of revenues 308,898 209,571
Sales and marketing 249,269 114,490
General and Administrative 1,117,228 887,243
--------------------------------------------
Total operating expenses 1,675,395 1,211,304
--------------------------------------------
Operating loss (915,687) (526,024)
OTHER INCOME (EXPENSE):
Interest Income 77,577 88,506
Interest Expense (20,324) (694,823)
Other Income, net 105,000 73,479
--------------------------------------------
Total other income (expense) 162,253 (532,838)
--------------------------------------------
Loss from operations before provision (753,434) (1,058,862)
for income taxes
Provision for income taxes - -
-------------------------------------------
Net Loss $ (753,434) $ (1,058,862)
=============================================
Net Income (Loss) Per Share of Common Stock:
Basic $ (.42) $ (.85)
Diluted $ (.42) $ (.85)
Weighted Average Number of Common Shares
Outstanding:
Basic 1,775,177 1,240,080
Diluted 1,775,177 1,240,080
</TABLE>
See accompanying notes
<PAGE>
PROTOSOURCE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-----------------------------------------
1999 1998
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (753,434) $ (1,058,862)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 138,781 683,081
Bad debt recovery (105,000) -
Loss on termination of capital lease - 6,953
Changes in operating assets:
Accounts receivable (42,408) (50,521)
Deposits and other assets 13,532 783
Accounts payable (18,587) (89,450)
Accrued liabilities 5,286 (33,353)
Deferred revenues (4,445) -
---------------------------------------------
Net cash (used) by operating activities (766,275) (541,369)
---------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (28,957) (46,202)
Increase in notes receivable - (104,028)
Receipt of principal on notes receivable 105,000 268,701
Payment for termination of capital lease - (150,000)
Investment in corporation (1,800,000) -
---------------------------------------------
Net cash (used) by investing activities (1,723,957) (31,529)
---------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock - 6,537,750
Payments on notes payable and capital lease obligations (44,774) (798,675)
Offering costs incurred - (1,068,323)
Purchase of common stock (91,522) (77,165)
---------------------------------------------
Net cash provided (used) by financing activities (136,296) 4,593,587
--------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,626,528) 4,020,689
Cash and cash equivalents at beginning of period 3,885,884 98,148
--------------------------------------------
Cash and cash equivalents at end of period $ 1,259,356 $ 4,118,837
============================================
</TABLE>
See accompanying notes
<PAGE>
PROTOSOURCE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(continued)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------------------
1999 1998
-------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
<S> <C> <C>
Interest $20,324 $ 211,265
Income taxes - -
SUPPLEMENTAL DISCLOSURE OF NON CASH
INVESTING AND FINANCING ACTIVITIES:
Acquisition of equipment under capital lease $ - $ 80,515
</TABLE>
See accompanying notes
<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, 1999
are not necessarily indicative of results of operations that may be expected for
the year ending December 31, 1999. 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, 1998
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
1,669,833 and 1,659,334 shares of common stock at September 30, 1999 and 1998,
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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 VS. THREE MONTHS ENDED SEPTEMBER 30, 1998
NET REVENUES. For the three months ended September 30, 1999, net revenues
were $237,021 versus $270,722 in the same period of the prior year. The decrease
in net revenue of $33,701 is primarily attributed to a decrease in Web
development revenue and revenue generated from providing technical support
services to other Internet Service Providers (ISPs). The Company believes that
revenue will increase as other ISPs are acquired and as additional marketing
programs are implemented.
OPERATING EXPENSES. For the three months ended September 30, 1999, total
operating expenses were $641,578 versus $463,731 in the same period of the prior
year. This increase of $177,847 is primarily attributed to higher network lines
costs associated with several network capacity upgrades, higher sales and
marketing expense associated with the introduction of new marketing efforts, and
increases in consulting fees. 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, 1999, was $404,557 versus $193,009 in 1998, representing an
increase of $211,548. The increase in operating loss was primarily attributed to
lower revenues and higher operating expenses, as noted above. Management
believes that operating results will improve as revenues increase.
INTEREST INCOME (EXPENSE). Net interest income totaled $12,344 for the
three months ended September 30, 1999, versus net interest income of $54,264 in
1998. The decrease in net interest income is primarily attributable to a
decrease of interest income of approximately $44,040.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. NINE MONTHS ENDED SEPTEMBER 30, 1998
NET REVENUES. For the nine months ended September 30, 1999, net revenues
were $759,708 versus $685,280 in the same period of the prior year representing
an increase of 10.9%. The Company increased sales and marketing efforts in the
nine-month period resulting in the growth of Internet subscribers and Web
development revenue. The Company believes that revenues will continue to
increase as additional marketing plans are implemented and as a result of
acquisitions of other ISPs or other computer-oriented companies.
OPERATING EXPENSES. For the nine months ended September 30, 1999, total
operating expenses were $1,675,395 versus $1,211,304 in the same period of the
prior year. This increase of $464,091 is primarily attributed to higher network
expenses, increased sales and marketing expenses, administrative expenses
associated with the filing of three corporate stock registration statements, and
higher payroll and insurance expenses. 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, 1999, was $915,687 versus $526,024 in 1998, representing an
increase of $389,663. The increase in the operating loss was primarily
attributed to increased operating expenses, as noted above. Management believes
that operating results will improve as revenues increase.
INTEREST INCOME (EXPENSE). Net interest income totaled $57,253 for the nine
months ended September 30, 1999, versus net interest expense of $606,317 for the
same period in 1998. Interest income for the nine months ended September 30,
1999, of $77,577 was primarily due to investments made with the net proceeds of
the Company's May 1998 secondary stock offering.
OTHER INCOME. Net other income increased to $105,000 from $73,479 for the
nine months ended September 30, 1999 and 1998, respectively. The 1999 nine month
total of $105,000 was due to a collection of a note receivable which was
previously written off as uncollectable.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1999, the Company used $766,275 of
cash for operating activities primarily as a result of a net loss for the
period. The Company has a working capital surplus of $1,190,229 at September 30,
1999. As of September 30, 1999, the Company had $1,259,356 in cash and cash
equivalents and $248,764 of current liabilities.
Capital expenditures relating primarily to the purchase of computer
equipment, furniture and fixtures, and software amounted to $28,957 for the nine
months ended September 30, 1999. The capital investment is mainly in computer
equipment to sustain future growth of the Company.
On October 28, 1999, the Company consummated their acquisition of
substantially all of the assets of MicroNet Services, Inc., a Connecticut
corporation ("MicroNet"), in exchange for the issuance of 78,810 shares of
ProtoSource Common Stock and $132,500 in cash consideration. The transaction was
completed in accordance with the terms of the asset purchase agreement, dated as
of October 28, 1999, and effective as of November 1, 1999, between the Company,
MicroNet and the shareholders of MicroNet.
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Systems issues associated with the Year 2000
As defined by the Company, Year 2000 compliance refers to applications and
systems which are capable of correct identification, manipulation and
calculation using dates outside the 1900-1999 year range. In this regard, the
Company recognizes the complexity and significance of the Year 2000 issue and
has created a project team comprised of internal personnel to identify products
and systems where the Year 2000 problem may exist and to renovate, replace or
retire those products or systems. The Company's Year 2000 compliance plan
consists of four phases: inventory, assessment, correction and testing. The
Company is currently concluding the correction phase.
Correction will consist of upgrading, replacing or repairing hardware and
software as appropriate. Testing and validation of systems will begin
immediately as components are brought into compliance.
Presently, the Company believes that the cost of addressing Year 2000
issues is not material to its future business, operating results or financial
position. However, the Company cannot predict whether third parties' inability
to meet their critical completion dates will adversely impact the Company.
Further, in the event that any of the Company's significant suppliers do not
successfully and timely achieve Year 2000 compliance, the Company's expectations
regarding associated costs are forward-looking statements, and, as such, subject
to a number of risks and uncertainties.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit 27: Financial Data Schedule
(B) REPORTS OF 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 11, 1999 /S/ WILLIAM CONIS
William Conis
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.01
FINANCIAL DATA SCHEDULE
ARTICLE 5 OF REGULATION S-X
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> dec-31-1999
<PERIOD-END> sep-30-1999
<CASH> 1,259,356
<SECURITIES> 0
<RECEIVABLES> 104,007
<ALLOWANCES> 7,500
<INVENTORY> 0
<CURRENT-ASSETS> 1,438,993
<PP&E> 1,098,772
<DEPRECIATION> 794,007
<TOTAL-ASSETS> 3,575,267
<CURRENT-LIABILITIES> 248,764
<BONDS> 39,741
0
0
<COMMON> 10,792,672
<OTHER-SE> (7,505,910)
<TOTAL-LIABILITY-AND-EQUITY> 3,575,267
<SALES> 0
<TOTAL-REVENUES> 759,708
<CGS> 0
<TOTAL-COSTS> 1,675,395
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,324
<INCOME-PRETAX> (753,434)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (753,434)
<EPS-BASIC> (.42)
<EPS-DILUTED> (.42)
</TABLE>
