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, 2000
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 St., Suite 210
Fresno, CA 93721
------------------------------------------------
(address of principal executive offices, zip code)
Registrant's telephone number, including area code: (559) 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 were 3,501,586 shares of the registrant's common stock, no par value
outstanding on November 1, 2000.
<PAGE>
ProtoSource Corporation
Index
Page
----
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at September 30, 2000 3
Condensed Consolidated Statements of Operations for the
three months ended September 30, 2000 and 1999 5
Condensed Consolidated Statements of Operations
for nine months ended September 30, 2000 and 1999 6
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000 and 1999 7
Notes to Condensed Consolidated 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 Consolidated Balance Sheet
September 30, 2000
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 240,783
Accounts receivable - trade, net of allowance
for doubtful accounts of $21,693 178,471
Prepaid expenses and other 182,877
Inventory 258,298
------------
Total current assets 860,429
------------
Property and equipment, at cost:
Equipment 1,017,265
Furniture 170,227
Leasehold improvements 6,462
On-Site Equipment 700,348
------------
1,894,302
Less accumulated depreciation and amortization (969,977)
------------
Net property and equipment 924,325
------------
Other assets:
Goodwill, net of accumulated amortization of $345,873 8,582,107
Investment in Corporation, net of impairment $561,161 1,340,323
Debt issuance costs, net of accumulated amortization
of $803,770. 918,730
Deferred offering costs 125,557
Deposits 43,758
------------
Total other assets 11,010,475
------------
Total assets $ 12,795,229
============
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
3
<PAGE>
ProtoSource Corporation
Condensed Consolidated Balance Sheet
September 30, 2000
(Unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 615,796
Accrued expenses 292,678
Deferred revenue 54,607
Current portion of long-term debt 1,518,670
------------
Total current liabilities 2,481,751
------------
Long-term debt, net of current portion above:
Individuals and other 1,610,183
Obligations under capital leases 71,537
Less current portion above (1,518,670)
------------
Total long-term debt 163,050
------------
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, 3,501,586 shares
issued and outstanding 20,993,125
Additional paid in capital 221,324
Accumulated deficit (11,064,021)
------------
Total stockholders' equity 10,150,428
------------
Total liabilities and stockholders' equity $ 12,795,229
============
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
4
<PAGE>
ProtoSource Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended September 30,
--------------------------------
2000 1999
----------- -----------
Net revenues $ 436,675 $ 237,021
----------- -----------
Operating expenses:
Cost of revenues 221,438 140,403
Sales and marketing 131,168 104,362
General and administrative 653,615 350.552
Amortization and Depreciation 286,268 46,261
Investment Impairment 561,161 --
----------- -----------
Total operating expenses 1,853,650 641,578
----------- -----------
Operating loss (1,416,975) (404,557)
----------- -----------
Other income (expense):
Interest income 23,214 17,049
Interest expense (492,059) (4,705)
----------- -----------
Total other income (expense) (468,845) 12,344
----------- -----------
Loss before provision for income taxes (1,885,820) (392,213)
Provision for income taxes 1,279 --
----------- -----------
Net Loss $(1,887,099) $ (392,213)
=========== ===========
Net Income (Loss) Per
Share of Common Stock:
Basic $ (.69) $ (.22)
Diluted $ (.69) $ (.22)
Weighted Average Number of
Common Shares Outstanding:
Basic 2,741,686 1,772,188
Diluted 2,741,686 1,772,188
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements
5
<PAGE>
ProtoSource Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
Nine months ended September 30,
-------------------------------
2000 1999
----------- -----------
Net revenues $ 1,187,820 $ 759,708
----------- -----------
Operating expenses:
Cost of revenues 561,503 308,898
Sales and marketing 305,435 249,269
General and administrative 1,484,483 978,447
Amortization and Depreciation 437,390 138,781
Investment Impairment 561,161 --
----------- -----------
Total operating expenses 3,349,972 1,675,395
----------- -----------
Operating loss (2,162,152) (915,687)
----------- -----------
Other income (expense):
Interest income 38,730 77,577
Interest expense (882,546) (20,324)
Other income, net -- 105,000
----------- -----------
Total other income (expense) (843,816) 162,253
----------- -----------
Loss before provision for income taxes (3,005,968) (753,434)
Provision for income taxes 1,279 --
----------- -----------
Net Loss $(3,007,247) $ (753,434)
=========== ===========
Net Income (Loss) Per
Share of Common Stock:
Basic $ (1.34) $ (.42)
Diluted $ (1.34) $ (.42)
Weighted Average Number of
Common Shares Outstanding:
Basic 2,250,615 1,775,177
Diluted 2,250,615 1,775,177
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
ProtoSource Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,007,247) $ (753,434)
Adjustments to reconcile net loss to net cash
(used) by operating activities:
Depreciation and amortization 1,163,159 138,781
Investment impairment 561,161 --
Bad debt recovery -- (105,000)
Changes in operating assets, net of effect of
acquisition:
Accounts receivable (34,658) (42,408)
Inventory (9,794) --
Prepaid expenses and other assets 169,790 13,532
Accounts payable 189,263 (18,587)
Accrued expenses 3,402 5,286
Deferred revenue 32,492 (4,445)
----------- -----------
Net cash (used) by operating activities (932,432) (766,275)
----------- -----------
Cash flows from investing activities:
Cash received from acquisition 35,290 --
Purchase of property and equipment (41,305) (28,957)
Deposits and other assets (3,241) --
Employee receivable 5,000 --
Receipt of principal on notes receivable -- 105,000
Investment in corporation (101,484) (1,800,000)
Loan to corporation (500,000) --
Acquisition costs (270,342) --
----------- -----------
Net cash (used) by investing activities (876,082) (1,723,957)
----------- -----------
Cash flows from financing activities:
Proceeds from borrowing 1,541,028 --
Payments on notes payable (53,951) (44,774)
Offering costs incurred (125,557) --
Debt issuance costs incurred (222,500) --
Purchase of common stock -- (91,522)
Issuance of common stock 232,958 --
----------- -----------
Net cash provided (used) by financing activities 1,371,978 (136,296)
----------- -----------
Net (decrease) in cash and cash equivalents (436,536) (2,626,528)
Cash and cash equivalents at beginning of period 677,319 3,885,884
----------- -----------
Cash and cash equivalents at end of period $ 240,783 $ 1,259,356
=========== ===========
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
7
</TABLE>
<PAGE>
ProtoSource Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
-------------------------------
2000 1999
---------- ----------
Supplemental Disclosure of Cash Flow information:
Cash paid during the period for:
Interest $ 40,372 $ 20,324
Income taxes -- --
Supplemental Disclosure of Noncash
Investing and Financing Activities:
Issuance of common stock in connection
with financing $1,500,000 $ --
Return of common stock from adjustment of
acquisition cost 26,497 --
Issuance of common stock for acquisition
of corporation 7,736,990 --
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
8
<PAGE>
ProtoSource Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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, 2000 are not necessarily indicative of
results of operations that may be expected for the year ending December 31,
2000. 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, 1999 previously filed with the Securities
and Exchange Commission.
Per Share Information
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 weighted average number of
common shares outstanding. Diluted earnings per share is computed on the basis
of the weighted 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 all periods presented and the inclusion of stock options and other
incremental shares would be antidilutive. Options and warrants to purchase
2,021,595 and 1,669,833 shares of common stock at September 30, 2000 and 1999,
respectively were not included in the computation of diluted earnings per share
because the Company had a net loss and their effect would be antidilutive.
9
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Three Months ended September 30, 2000 vs. Three Months ended September 30, 1999
Net Revenues. For three months ended September 30, 2000 net sales were
$436,675 versus $237,021 in the same period of the prior year. The increase in
revenues of $199,654 is primarily attributed to acquisition of ISP accounts from
Micronet Services, Inc. (approximately $86,930), completed web development
projects (approximately $35,026), outsourced technical support (approximately
$27,299), DSL (approximately $13,961) and cable services revenue of Suncoast
Automation ($32,447). The Company believes that revenues will continue to
increase as marketing plans are executed that focus on DSL, Web development and
outsourcing technical support for other ISP's, and once additional capital is
raised, installing cable TV systems in timeshare resorts (comprising
approximately 3,500 units) already contracted by Suncoast Automation.
Operating Expenses. For three months ended September 30, 2000, total
operating expenses were $1,853,650 versus $641,578 in the same period of the
prior year. This increase of $1,212,072 is attributed to the operating expenses
of Suncoast Automation during August and September ($200,340), salary costs
(approximately $81,125), an investor relations contract executed in August 2000
(approximately $141,181), impairment of our investment in Infosis ($561,161 as
discussed in the Liquidity and Capitalization section) and amortization costs
($235,851). The increase in amortization costs is primarily attributed to the
amortization of the goodwill (approximately $39,001) from the MicroNet
acquisition in late 1999 and amortization of the goodwill (approximately
$196,850) from the Suncoast Automation acquisition in August 2000. The increase
in cost of revenues ($81,035) is a result of an increase in network line expense
of $40,834 which is primarily due to network upgrades and increased network
usage, and the cost of revenues for Suncoast Automation ($40,201). The Company
believes that recurring operating expenses will increase as revenues increase
but will decrease as a percentage of revenue.
Operating Loss. The Company's operating loss for the period ending
September 30, 2000 totaled $1,416,975 versus $404,557 in 1999. This increase of
$1,012,418 is due to an increase in total operating expenses as described above.
Management believes that operating results will improve as revenues increase.
Interest income. Net interest expense totaled $468,845 for the period
ending September 30, 2000 versus net interest income of $12,344 in 1999. The
increase in interest expense is a result of interest expense associated with the
bridge loans completed in May 2000 and the amortization of debt issuance costs
incurred with these bridge loans.
10
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Nine Months Ended September 30, 2000 vs. Nine Months Ended September 30, 1999
Net Revenues. For nine months ended September 30, 2000 net sales were
$1,187,820 versus $759,708 in the same period of the prior year. The increase of
$428,112 in revenues is attributed to acquisition of ISP accounts from MicroNet
Services, Inc. (approximately $289,816), outsourced technical support
(approximately $38,323), completed web development projects (approximately
$67,726) and cable services revenues from Suncoast Automation ($32,447). The
Company believes that revenues will continue to increase as marketing plans are
executed that focus on increasing DSL, Web development and outsourcing technical
support for other ISPs and once additional capital is raised, installing cable
TV systems in timeshare resorts (comprising approximately 3,500 units) already
contracted by Suncoast Automation.
Operating Expenses. For nine months ended September 30, 2000, total
operating expenses were $3,349,972 versus $1,675,395 in the same period of the
prior year. This increase of $1,674,577 is attributed to the operating expenses
of Suncoast Automation during August and September ($200,340), salary costs
(approximately $243,375), an investor relations contract executed in August 2000
(approximately $141,181), impairment of our investment in Infosis ($561,161 as
discussed in the Liquidity and Capitalization section) and amortization costs
($313,853). The increase in amortization costs is primarily attributed to the
amortization of the goodwill (approximately $117,003) from the MicroNet
acquisition in late 1999 and amortization of the goodwill (approximately
$196,850) from the Suncaost Automation acquisition in August 2000. The increase
in cost of revenues of $252,605 is comprised of increased network line expense
of approximately $212,404 which is due to network upgrades and increased network
usage and to the cost of revenues for Suncoast Automation ($40,201). The Company
believes that operating expenses will increase as revenues increase but will
decrease as a percentage of revenue.
Operating Loss. The Company's operating loss for the period ending
September 30, 2000 totaled $2,162,152 versus $915,687 in 1999. This increase of
$1,246,465 is due to an increase in total operating expenses. Management
believes that operating results will improve as revenues increase.
Interest income. Net interest expense totaled $843,816 for the period
ending September 30, 2000 versus net interest income of $57,253 in 1999. The
increase in interest expense is a result of interest expense associated with the
bridge loans completed in May 2000 and the amortization of debt issuance costs
incurred with these bridge loans.
Other income. Net other income for the nine months ended September 30, 2000
was $0 versus $105,000 for the same period in 1999. The 1999 total of $105,000
was due to collection of a note receivable which was previously written off as
uncollectable.
11
<PAGE>
Liquidity and Capital Resources
For the nine months ended September 30, 2000, the Company used $932,432 of cash
for operating activities. The Company has a working capital deficit of
$1,621,322 at September 30, 2000 which is a decrease of $2,157,320 from December
31, 1999. As of September 30, 2000, the Company had $240,783 in cash and cash
equivalents and total liabilities of $2,644,801.
On April 30, 1999, we entered into strategic alliances with and purchased
12.7%, on a non-diluted basis, of the outstanding common stock of Infosis Corp.,
a privately held corporation. We paid an aggregate of $1.8 million for 600,000
shares of Infosis common stock. At the time of the purchase, the $1.8 million
payment represented 51.1% of our available cash. 30,000 of the purchased shares
were paid to Andrew, Alexander, Wise & Co., Inc., as a finder's fee. After
payment of the 30,000 shares of Infosis common stock to AAWC, we owned 570,000
shares of Infosis common stock.
In January 2000, Infosis issued ProtoSource 120,000 shares of its common
stock as an adjustment to reflect a lower offering price per share in a
concluded private placement of their common stock, which brought ProtoSource's
holdings of Infosis to 690,000 shares.
In July 2000, we purchased an $84,177 convertible promissory note from
Infosis in connection with a bridge financing.
In September 2000, ProtoSource acquired an aggregate of $329,686 principal
amount of Infosis convertible promissory notes at $0.05 on the dollar for a
total acquisition price of $16,484. These convertible promissory notes were then
converted into 329,686 shares of preferred stock of Infosis. Concurrently with
the acquisition of the Infosis promissory notes by ProtoSource, Infosis merged
into P2i, Inc, a privately held corporation. As a result of this merger,
ProtoSource now has a 4.5% interest in P2i, Inc. Based on our re-evaluation of
this investment, we have incurred an impairment expense of $561,161 in this
quarter to write down the investment to its estimated market value at September
30, 2000.
In September 2000, we executed a letter of intent with an underwriter to
offer 600,000 units of our securities at approximately $13.50 per unit on a firm
commitment basis. We will also grant the underwriter an option to purchase an
additional 90,000 units from us to cover over-allotments for a period of
forty-five days from the effective date of the registration statement.
Andrew, Alexander, Wise & Co., Inc. acted as placement agent for $1,500,000
of bridge financing completed in May 2000. The short-term financing was in the
form of units containing promissory notes with interest at 10%. In addition,
each $25,000 unit consisted of 4,000 shares of our common stock. The promissory
notes will be due at the closing of the above public offering or one year from
the date of issuance, whichever occurs first. Andrew, Alexander, Wise & Co.,
Inc. was paid a 10% commission and a 3% non-accountable expense allowance and
was issued warrants to purchase up to 10% of the common stock issuable as part
of the units at an exercise price equal to 120% of the closing price of the
common stock on the day prior to closing.
In connection with this bridge financing, we incurred debt issuance costs
of approximately $1,722,500. The debt issuance cost is being amortized over the
one-year term of the loan.
On August 22, 2000, we acquired all the outstanding common stock of
Suncoast Automation, Inc. in exchange for 1,303,072 shares of our common stock.
In addition, we will deposit 1,000,000 shares of our common stock with an escrow
agent. Over the twenty-seven months following the effective date of
ProtoSource's stock offering, Suncoast's shareholders may earn some or all of
these shares based upon meeting the following criteria: 500,000 shares will be
released when Suncoast installs 19,000 subscribers/rooms and achieves $1,300,000
in cumulative cash flow. The balance of the shares will be released in 10%
increments for each additional increment of 1900 subscribers/rooms and $190,000
in cumulative cash flow added. Suncoast builds, upgrades and maintains cable TV
systems as well as managing programming for the timeshare industry. Suncoast has
developed an interactive system that delivers basic cable TV, premium channel
packages and high-speed Internet access to this market segment. Currently,
Suncoast Automation has approximately 3,700 rooms under contract with two
separate timeshare owners. Additional capital will need to be raised to install
Suncoast's interactive cable TV system in these rooms.
12
<PAGE>
Recently Issued Accounting Standards
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements, in December
1999. The SAB summarizes certain of the SEC staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB 101B, which delays the implementation of 101
until no later than the fourth fiscal quarter of fiscal years beginning after
December 15, 1999. The Company does not believe that adoption of this SAB will
have a material impact on its financial statements.
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
interpretation (FIN) 44, Accounting for Certain Transactions Involving Stock
Compensation, which clarifies the application of APB 25 for certain issues. The
Interpretation is effective July 1, 2000, except for provisions that relate to
modifications that directly or indirectly reduce the exercise price of an award
and the definition of an employee, which are effective after December 15, 1998.
The Company does not believe that adoption of FIN 44 will have a material impact
on its financial statements.
Part II. Other Information
Item 5. Exhibits and Reports on Form 8-K
The Company filed a Form 8-K dated August 22, 2000 for the acquistion of
all of the outstanding capital stock of Suncoast Automation, Inc ("Suncoast") in
exchange for the issuance of 1,303,072 shares of the Company's common stock. The
acquisition was consumated on August 22, 2000 and is effective as of August 1,
2000.
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 20, 2000 By: /s/ William Conis
-------------------------------------
William Conis,
Chief Executive Officer/
Principal Accounting Officer
13
