SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from _______________ to ________________
Commission File No. 33-86242
PROTOSOURCE CORPORATION
(Name of Small Business Issuer in its Charter)
California 77-0190772
- ------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2800 28th Street, Suite 170
Santa Monica, California 90405
----------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (559) 490-8600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of
the Act:
No Par Value Common Stock
Redeemable Common Stock Purchase Warrants
(Title of Class)
<PAGE>
Check whether the Registrant (1) 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
As of March 17, 2000, 1,884,332 shares of the Registrant's no par value
Common Stock were outstanding. As of March 17, 2000, the market value of the
Registrant's no par value Common Stock, excluding shares held by affiliates, was
$11,777,075 based upon a closing bid price of $6.25 per share of Common Stock on
the Nasdaq SmallCap Market.
Check if there is no disclosure contained herein of delinquent filers in
response to Item 405 of Regulation S-B, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
The Registrant's revenues for its most recent fiscal year were $1,125,225.
The following documents are incorporated by reference into Part III, Items
9 through 12 hereof: None.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
The following is a summary of certain information contained in
this Report and is qualified in its entirety by the detailed
information and financial statements that appear elsewhere herein.
Except for the historical information contained herein, the matters set
forth in this Report 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 Report 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 Report speak only as of the
date hereof.
Introduction
The Company provides Internet access, Web development, Web
hosting and related services to individuals, public agencies and
businesses on a national level. The Company operates its own Internet
network facilities in Central California and offers Internet access
nationwide through three "backbone" providers with which it has
agreements. As of December 31, 1999, the Company had approximately
6,500 subscribers for whom it provided Internet access. The Company
seeks to acquire other small Internet providers in markets with
populations less than 2,000,000. The Company believes that certain of
these local Internet providers currently doing business in the
Company's target markets may 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 kinds of financial and
administrative burdens by (i) expanding its operations nationwide, (ii)
developing diversified services similar to its larger competitors, such
as special access packages for business and high speed access, and
(iii) investing in automated billing and administrative systems. The
Company believes these resources will not only allow it to compete
effectively with larger access firms entering the Company's markets,
but also will facilitate the Company's efforts to attract small
Internet providers.
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. The Company also designed and sold customized computer
system configurations 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 July 1995, the Company acquired ValleyNet Communications
("ValleyNet"), a small Internet access provider for $50,000 in cash and
the issuance of 334 shares of the Company's Common Stock. At the time
of its acquisition, ValleyNet operated out of one location in Fresno,
California and had 250 subscribers. Since that time, the Company has
increased its capacity to offer Internet services nationwide and
increased its subscribers to 6,500 at December 31, 1999.
<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 carried as an asset on its financial
statements, due to the high degree of uncertainty as to the payment of
the promissory note. As a part of the transaction, the Company received
an exclusive worldwide license through December 2006 to market the
Classic Line subject to the payment of a royalty of 16% of gross sales
to the Canadian company. To date, the Company has not incurred any
liability to pay royalties.
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 the liabilities of the
Classic Line and certain other liabilities, 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 part of the Divestiture Agreement,
the SSC Principals also (i) canceled 900,000 shares of Convertible
Preferred Stock held by them (and one other individual) 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, (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 former 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.
In May 1998, the Company sold 1,137,000 units of its
securities at $5.75 per unit (the "May 1998 Public Offering"). Each
unit consisted of one share of Common Stock and one redeemable Common
Stock purchase warrant exercisable at $6.33 per share until May 13,
2003.
In June 1998, the Company entered into a settlement agreement
with SSC and the SSC Principals pursuant to which it settled certain
claims asserted by it and the SSC Principals by accepting a $275,000
promissory note from the SSC Principals payable interest only until
June 2000. A subsequent settlement agreement was reached between the
parties as of March 31, 1999, which required a final payment in the
amount of $105,000 to settle all matters. The obligation was satisfied
on April 1999.
The Company was incorporated in the State of California as
SHR Corporation in July 1988, and changed its name to "ProtoSource
Corporation" in October 1994. The Company's principal executive offices
are located at 2800 28th Street, Suite 170, Santa Monica, California
90405, telephone (559) 490-8600.
Strategy
The Company's strategy is to provide low cost direct Internet
access and other Internet related products and services to subscribers
or customers in target markets. The Company will seek to effectuate
this strategy by acquiring small Internet providers, by expanding
marketing operations in its existing markets, by offering Internet
related products and services and by acquiring other Internet related
companies. The Company will also seek to generate additional revenues
by (i) increasing monthly Internet access fees while offering
<PAGE>
additional Internet products and services, (ii) providing Internet
consulting services, and (iii) generating marketing service fees from
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 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 in
order to offer additional Internet products and services, 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 more users access to the Internet 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. In December 1999, the Company entered into an agreement with
New Edge, Inc to provide DSL Internet access to businesses and
consumers in the central California Valley.
Providing Internet Consulting Services. The Company provides
its customers with a number of Internet services such as consulting
services for network setup, Internet application implementation,
Intranet design, and Web site implementation.
Generating Marketing Service Fees. The Company designs and
develops 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, to assure subscriber access.
Acquisition Strategies
The Company will seek to acquire local Internet access
providers in its target markets. The criteria for such acquisition
candidates calls for attracting companies that (i) are located in
markets with a population under 2,000,000, (ii) have been in business a
minimum of one year, (iii) have at least 1000 subscribers, (iv) have
current owners and staff with strong technical backgrounds, (v) enjoy
strong community contacts, and (vi) can contribute positively to the
Company's revenue growth and profitability. The Company may also
acquire or enter into partnership or joint venture agreements with
other small computer oriented companies.
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, MCI, Sprint and
some of the regional Bell operating companies, are offering, or have
announced plans to offer, Internet access or on-line services. The
<PAGE>
Company also faces significant competition from Internet access
consolidators such as Verio, Earthlink, OneMain.com and from on-line
service firms such as America OnLine (AOL) 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, MCI
and PSI offer retail software packages and Compuserve 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
service businesses will further consolidate in the future, which could
result in increased price and other competition in the industry and
consequently adversely impact the Company. In the last year, a number
of on-line services have 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, 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 December 31, 1999, the Company employed 23 full-time
employees and one part-time employee. 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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 400 square feet for its
corporate office space at 2800 28th Street, Suite 170, Santa Monica,
California 90405 on a month-to-month lease for $1,025 per month. The
Company also leases 4,000 square feet of space for its offices and
operating facilities at 2300 Tulare Street, Suite 210, Fresno,
California 93721. The lease term is five years, ending May 2002 and
requires minimum annual payments of $40,250 increasing every year to a
maximum of $55,375 in 2002.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and Common Stock purchase warrants
trade on the Nasdaq SmallCap Market under the symbols "PSCO" and
"PSCOW", respectively. 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.
<TABLE>
<CAPTION>
Common Stock Warrants
By Quarter Ended: High Low High Low
<S> <C> <C> <C> <C>
March 31, 2000 (through March 21, 2000) ....... $7.18 $5.75 $1.69 $1.13
December 31, 1999 ......................................... $7.44 $5.75 $2.00 $1.13
September 30, 1999 ........................................ $7.63 $6.25 $2.19 $1.13
June 30, 1999 ............................................. $9.25 $6.63 $3.75 $1.25
March 31, 1999 ............................................ $8.31 $6.25 $3.00 $1.53
December 31, 1998 ......................................... $7.38 $5.38 $2.00 $0.66
September 30, 1998 ........................................ $5.50 $5.38 $1.06 $0.63
June 30, 1998 ............................................. $6.50 $5.38 $1.00 $0.75
March 31, 1998 ............................................ $6.25 $5.25
</TABLE>
As of March 20, 2000, the Company had approximately 900 record
and beneficial stockholders.
Dividend Policy
The Company has never paid cash dividends on its Common Stock
and intends to retain earnings, if any, for use in the operation and
expansion of its business. The amount of future dividends, if any, will
be determined by the Board of Directors based upon the Company's
earnings, financial condition, capital requirements and other
conditions.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
Year Ended December 31, 1999 vs. Year Ended December 31, 1998
Net Sales
For calendar 1999, Internet services revenues were $1,125,225
versus $882,651 in calendar 1998, an increase of 27.5%. The increase in
revenue is primarily due to an increase in the Internet access
subscriber base from acquisition and internal marketing activities and
web design and development projects. Management believes revenues will
continue to increase as the Company (i) develops and implements
marketing programs focusing on increasing name brand recognition and
differentiation of service offerings (i.e., Internet access, web site
development and electronic commerce), and (ii) by entering into
agreements with or acquiring other Internet related companies.
Operating Expenses
1999 operating expenses totaled $2,566,218 versus $2,068,145
in 1998. This increase of $498,073 is primarily attributed to higher
network lines, salary, legal, insurance and advertising costs. The
increase to network lines expense of $152,855 is attributed to the
upgrade of network backbone capacity and the expansion of the dial-in
Internet serving area. The increase in employee salary and payroll tax
expense from 1998 to 1999 totaled $211,203. This increase is attributed
to the hiring of additional senior management and operations staff. The
company incurred approximately $30,000 of legal fees associated with
SEC registration and reporting requirements. Management believes that
operating expenses will increase as revenues increase.
Operating Loss
The Company's 1999 operating loss totaled $1,440,993 versus
$1,185,494 in 1998. This increase in operating loss of $255,499 is
primarily attributed to higher operating expenses as noted above and
lower than expected Internet access revenue growth. Management believes
that operating results will improve as revenues increase.
Interest Income (Expense)
Net interest income (expense) for 1999 totaled $75,103 versus
($577,261) in 1998. Interest expense was reduced from $705,021 in 1998
to $16,763 in 1999 primarily due to the debt issuance costs and
associated interest total of $561,059 included in the 1998 expense
total. Interest income for 1999 totaled $91,866 versus $127,760 in 1998
and is attributed to investments made with the net proceeds of the
Company's May 1998 secondary stock offering.
Other Income
Net other income decreased from $73,479 in 1998 to $72,250 in
1999. Net other income for 1999 is comprised of $105,000 from the
collection of a note receivable which was previously written off as
uncollectable and the write off of a $32,750 note receivable deemed
uncollectable.
<PAGE>
Liquidity and Capital Resources
For the year ended December 31, 1999, The Company used cash of
$1,078,513 for operating activities. The Company had working capital of
$554,668 at December 31, 1999. As of December 31, 1999, the Company had
$677,319 in cash and cash equivalents and $284,873 of total
liabilities.
Capital expenditures relating primarily to the purchase of
computer equipment, furniture, fixtures and other assets amounted to
$63,793 and $54,082 for the years ended December 31, 1999 and 1998,
respectively. The capital investment is mainly in computer equipment to
sustain the future growth of the Company.
In connection with the 1998 cancellation of the Company's Shaw
Avenue capital lease, the Company agreed to purchase 15,112 shares of
its common stock from the landlord. The stock was purchased in February
1999 for $91,522 ($6.06 per share) and was subsequently retired to the
corporate treasury.
On April 30, 1999, the Company entered into strategic
alliances with and has purchased 12.7%, on a non-diluted basis, of the
outstanding common stock of Infosis Corp. ("Infosis"), a privately held
corporation. The Company 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 the Company's available cash.
30,000 of the purchased shares were paid to Andrew, Alexander, Wise and
Company, Incorporated ("AAWC") as a finders fee. After payment of the
30,000 shares of Infosis Common Stock to AAWC, the Company owns 570,000
shares of Infosis common stock.
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 October 28, 1999, and
effective as of November 1, 1999, between the Company and the
shareholders of MicroNet.
In December 1999, the Company entered into a non-binding
letter of intent to acquire certain assets of Innovative Software
Designs, Inc. ("Innovative"), a Minnesota based Internet service
provider. Innovative has filed for protection from creditors pursuant
to Chapter 11 of the United States Bankruptcy Code. The letter of
intent was subsequently amended to make it a binding letter of intent
pursuant to which the Company will acquire all of Innovative's assets
and operating liabilities (less those discharged in the bankruptcy
proceeding), for an aggregate purchase price of approximately
$3,500,000, of which $1,000,000 of the purchase price will be paid in
cash and $2,500,000 will be paid in shares of the Company's stock at
the thirty day average of the closing price of the common stock prior
to the closing of the transaction.
On February 22, 2000, the Company executed a letter of intent
with an Underwriter to offer 800,000 shares of the Company's common
stock at approximately $6.25 per share on a firm commitment basis. The
Company will also grant the Underwriter an option to purchase an
additional 120,000 shares from the Company to cover over-allotments for
a period of forty-five days from the effective date of the registration
Statement.
The Company will pay the Underwriter a commission equal to ten
percent of the gross proceeds of the offering and a non-accountable
expense allowance equal to three percent of the gross proceeds of the
offering. In connection with the offering, the Company has agreed to
issue to the Underwriter a warrant, for $10, to purchase up to 80,000
shares of common stock. The Underwriter's warrant is exercisable for a
period of four years beginning one year from the effective date of the
Registration Statement. The exercise price of the Underwriter's warrant
shall be an amount equal to 120% of the price of the shares sold to the
public. There can be no assurance that the Offering will be
successfully completed.
<PAGE>
The Underwriter has also agreed to act as placement agent for
a minimum $250,000 bridge financing on a best efforts basis prior to
the public offering described above. The bridge financing is to be in
the form of units containing promissory notes with interest at 10%. In
addition, each $25,000 unit will contain 4,000 shares of the Company's
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. The Underwriter will be paid a 10% commission and a 3%
non-accountable expense allowance and 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.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
PROTOSOURCE CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Financial Statements Page
<S> <C>
Independent Auditors' Report F-2
Balance Sheet as of December 31, 1999 F-3
Statements of Operations for the years ended
December 31, 1999 and 1998 F-5
Statements of Changes in Stockholders' Equity for the
years ended December 31, 1999 and 1998 F-6
Statements of Cash Flows for the years ended
December 31, 1999 and 1998 F-7
Notes To Financial Statements F-9
</TABLE>
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, 1999 and the related statements of
operations, changes in stockholders' equity and cash flows for the
years ended December 31, 1999 and 1998. 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, 1999 and the results of its operations
and its cash flows for the years ended December 31, 1999 and 1998 in
conformity with generally accepted accounting principles.
Angell & Deering
Certified Public Accountants
Denver, Colorado
February 17, 2000, except for
Note 14 as to which the date
is February 22, 2000
F-2
<PAGE>
PROTOSOURCE CORPORATION
BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash and cash equivalents $ 677,319
Accounts receivable:
Trade, net of allowance for
doubtful accounts of $39,698 97,752
Employees 5,000
Prepaid expenses 38,451
------------
Total Current Assets 818,522
-----------
Property and Equipment, at cost:
Equipment 979,613
Furniture 147,533
Leasehold improvements 6,462
-------------
1,133,608
Less accumulated depreciation and amortization (846,439)
-----------
Net Property and Equipment 287,169
-----------
Other Assets:
Goodwill, net of accumulated amortization
of $32,020 762,165
Investment in corporation 1,800,000
Deposits 17,325
-----------
Total Other Assets 2,579,490
----------
Total Assets $3,685,181
==========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-3
<PAGE>
PROTOSOURCE CORPORATION
BALANCE SHEET
DECEMBER 31, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C>
Current Liabilities:
Accounts payable $ 96,639
Accrued expenses:
Payroll taxes and wages 47,113
Other 49,750
Deferred revenue 6,911
Current portion of long-term debt 63,441
------------
Total Current Liabilities 263,854
------------
Long-Term Debt, net of current portion above:
Obligations under capital leases 84,460
Less current portion above (63,441)
------------
Total Long-Term Debt 21,019
------------
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, 1,879,332 shares issued and outstanding 11,428,924
Additional paid in capital 28,158
Accumulated deficit (8,056,774)
-----------
Total Stockholders' Equity 3,400,308
-----------
Total Liabilities and Stockholders' Equity $ 3,685,181
===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-4
<PAGE>
PROTOSOURCE CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---- ----
Net Revenues:
Internet service fees and other $ 1,125,225 $ 882,651
----------- -----------
Total Revenues 1,125,225 882,651
----------- -----------
Operating expenses:
Selling, general and administrative 1,835,744 966,528
Network lines 494,897 342,042
Depreciation and amortization 218,077 748,917
Stock compensation expense 17,500 10,658
------------ ------------
Total Operating Expenses 2,566,218 2,068,145
----------- -----------
Operating Loss (1,440,993) (1,185,494)
----------- -----------
Other Income (Expense):
Interest income 91,866 127,760
Interest expense (16,763) (705,021)
Rent and other income 72,250 73,479
Loss on disposal of assets -- (6,953)
------------- -----------
Total Other Income (Expense) 147,353 (510,735)
------------- -----------
Income (Loss) Before
Provision For Income Taxes (1,293,640) (1,696,229)
Provision for income taxes -- --
------------- ------------
Net Loss $(1,293,640) $(1,696,229)
=========== ===========
Net Loss Per Share of Common Stock:
Basic $ (.72) $ (1.24)
Diluted $ (.72) $ (1.24)
Weighted Average Number of
Common Shares Outstanding:
Basic 1,789,453 1,365,484
Diluted 1,789,453 1,365,484
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-5
<PAGE>
PROTOSOURCE CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Additional
Common Stock Paid In Accumulated
Shares Amount Capital Deficit
------ ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 665,333 $ 5,590,455 $ -- $ (5,066,905)
Issuance of common stock and
warrants in public offering
(net of offering costs of .. 1,137,000 5,370,904 -- --
$1,166,846)
Repurchase of common stock
for cash ................... (15,112) (77,165) -- --
Issuance of fractional shares
from 1997 stock splits ..... 79 -- -- --
Compensation from issuance of
stock options to Directors . -- -- 10,658 --
Net loss .................... -- -- -- (1,696,229)
---------- ------------ ------------ -------------
Balance at December 31, 1998 1,787,300 10,884,194 10,658 (6,763,134)
Issuance of common stock upon
exercise of stock options .. 28,334 106,252 -- --
Repurchase of common stock
for cash ................... (15,112) (91,522) -- --
Compensation from issuance of
stock options .............. -- -- 17,500 --
Issuance of common stock in
connection with acquisition 78,810 530,000 -- --
Net loss .................... -- -- -- (1,293,640)
---------- ------------ ------------ -------------
Balance at December 31, 1999 1,879,332 $ 11,428,924 $ 28,158 $ (8,056,774)
========== ============ ============ =============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-6
<PAGE>
PROTOSOURCE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---- ----
Cash Flows From Operating Activities:
Net loss $(1,293,640) $(1,696,229)
Adjustments to reconcile net loss to net cash
(used) by operating activities:
Depreciation and amortization 218,077 748,917
Provision for bad debts 32,198 173,000
Compensation from issuance of stock options 17,500 10,658
Loss on termination of capital lease -- 6,953
Changes in operating assets and liabilities:
Accounts receivable (75,851) (31,609)
Prepaid expenses and other assets 57,807 (34,550)
Accounts payable (25,079) 25,611
Accrued liabilities (2,689) (14,665)
Deferred revenue (6,836) 13,747
------------ ------------
Net Cash (Used) By Operating Activities (1,078,513) (798,167)
----------- ------------
Cash Flows From Investing Activities:
Purchase of property and equipment (63,793) (54,082)
Payment for termination of capital lease -- (150,000)
Increase in note receivable -- (24,999)
Increase in employee receivables (5,000) --
Receipt of principal on note receivable -- 250,817
Deposits (1,501) --
Investment in corporation (1,800,000) --
Cash paid for acquisition (203,985) --
----------- --------------
Net Cash Provided (Used) By Investing Activities (2,074,279) 21,736
----------- ------------
Cash Flows From Financing Activities:
Payments on notes payable (70,503) (828,095)
Issuance of common stock 106,252 6,537,750
Offering costs incurred -- (1,068,323)
Purchase of common stock (91,522) (77,165)
----------- ------------
Net Cash Provided (Used) By Financing Activities (55,773) 4,564,167
----------- -----------
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-7
<PAGE>
PROTOSOURCE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net Increase (Decrease) in Cash and Cash Equivalents $(3,208,565) $3,787,736
Cash and Cash Equivalents at Beginning of Year 3,885,884 98,148
----------- -----------
Cash and Cash Equivalents at End of Year $ 677,319 $3,885,884
=========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 16,763 $ 222,737
Income taxes -- 1,600
Supplemental Disclosure of Noncash
Investing and Financing Activities:
Acquisition of equipment under capital leases $ -- $ 80,515
Issuance of common stock in connection with acquisition 530,000 --
</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 service provider.
Revenue Recognition
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. Advance payments for web
development services received prior to completion of the services
performed are also recorded as deferred revenue until the services are
completed.
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
at the date of purchase to be cash equivalents.
Property and Equipment
Depreciation and amortization of equipment, furniture and leasehold
improvements are computed using the straight-line method over estimated
useful lives of three to seven years. Assets held under capital lease
obligations, 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
$190,896 and $220,168 for the years ended December 31, 1999 and 1998,
respectively.
Amortization
Goodwill is being amortized using the straight-line method over an
estimated useful life of 5 to 15 years.
Debt issuance costs are being amortized using the straight-line
method over the fifteen month term of the loans.
Investment
The Company's investment is in a privately-held corporation which
represents less than a ten percent ownership interest in the
corporation. The Company's investment in the corporation is recorded
using the cost method of accounting.
Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standards
("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
No. 123 had been applied in measuring compensation expense.
Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the
Company reviews for the impairment of long-lived assets, certain
identifiable intangibles, and associated goodwill, whenever
F-9
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued)
Long-Lived Assets (Continued)
events or changes in circumstances indicate that the carrying value
of an asset may not be recoverable. An impairment loss would be
recognized when the estimated future cash flows is less than the
carrying amount of the asset. No impairment losses have been identified
by the Company.
Advertising
The Company advertises primarily through radio, television and
print media. The Company's policy is to expense advertising costs,
including productions costs, as incurred. Advertising expense was
$123,841 and $29,820 for the years ended December 31, 1999 and 1998,
respectively.
Income Taxes
Deferred income taxes are provided for temporary differences
between the financial reporting and tax basis 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
The Company adopted 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 1999 and 1998 and the inclusion of stock
options and other incremental shares would be antidilutive. Options and
warrants to purchase 1,823,000 and 1,673,333 shares of common stock at
December 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 antidilutive.
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.
Reclassifications
Certain prior period amounts have been reclassified to conform with
the current period presentation.
F-10
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
2. Long-Term Debt
Obligations Under Capital Leases
Long-term debt consists of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
15.4% to 23.0% installment notes due in 2000
to 2001, collateralized by equipment. $ 84,460
--------
Total Long-Term Debt 84,460
Less current portion of long-term debt (63,441)
--------
Long-Term Debt $ 21,019
========
Installments due on debt principal, including the capital leases,
at December 31, 1999 are as follows:
Year Ending
December 31,
2000 $ 63,441
2001 21,019
--------
Total $ 84,460
=======
</TABLE>
3. Income Taxes
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---- ----
Current:
Federal $ -- $ --
State -- --
--------- ---------
Total -- --
--------- ---------
Deferred:
Federal -- --
State -- --
--------- ---------
Total -- --
--------- ---------
Total Provision For Income Taxes $ -- $ --
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Federal statutory rate (25)% (25)%
State franchise taxes,
net of federal benefits (4) (4)
Valuation allowance 29 29
----- ----
Total --% --%
====== ======
</TABLE>
Significant components of deferred income taxes as of December 31,
1999 are as follows:
F-11
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
3. Income Taxes (Continued)
------------------------
<TABLE>
<CAPTION>
<S> <C>
Net operating loss carryforward $ 2,291,200
Vacation accrual 4,100
Allowance for bad debts 13,600
Amortization of goodwill 5,900
Stock option compensation 6,000
------------
Total Deferred Tax Asset 2,320,800
------------
Accelerated depreciation (17,300)
------------
Total Deferred Tax Liability (17,300)
Less valuation allowance (2,303,500)
------------
Net Deferred Tax Asset $ --
============
</TABLE>
The Company has assessed its past earnings history and trends, budgeted
sales, and expiration dates of carryforwards and has determined that it
is more likely than not that no deferred tax assets will be realized. The
valuation allowance of $2,303,500 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 $356,200. The Company will
continue to review this valuation on a quarterly basis and make
adjustments as appropriate.
At December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $8,000,000 and $3,800,000,
respectively. Such carryforwards expire in the years 2007 through 2019
and 2000 through 2004 for federal and state purposes, respectively.
4. Stockholders' Equity
Public Stock Offering
The closing for the Company's secondary offering occurred on May 20,
1998. The Company sold 1,137,000 units of the Company's securities at
$5.75 per unit and paid the Underwriter a 10% commission and a 3%
non-accountable expense allowance. Each unit consisted of one share of
the Company's common stock and one redeemable common stock purchase
warrant. Each warrant is exercisable to purchase one share of common
stock at $6.33 per share until May 13, 2003 and may be redeemed by the
Company anytime after May 13, 1999 if the closing price of the Company's
common stock is at least $8.63 per share for 20 consecutive trading days.
In connection with the offering, the Company issued the Underwriter a
warrant, for $10, to purchase up to 105,000 units which are exercisable
at $9.49 per unit (equal to 165% of the public offering price of the
Units). The Underwriter's warrant is exercisable through May 13, 2003.
The units subject to the Underwriter's warrant are identical to the units
sold to the public. The Company has also retained the Underwriter as a
financial consultant for a period of one year at a monthly fee of $5,000
(a total of $60,000) which was paid in full upon completion of the
Offering. In May 1999, the consulting agreement was extended for an
additional two years at $5,000 per month through May 2001.
F-12
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
5. Preferred Stock
The authorized preferred stock of the Company consists of 5,000,000
shares, no par value. The preferred stock may be issued in series from
time to time with such designation, rights, preferences and limitations
as the Board of Directors of the Company may determine by resolution. The
rights, preferences and limitations of separate series of preferred stock
may differ with respect to such matters as may be determined by the Board
of Directors, including without limitation, the rate of dividends, method
and nature of payment of dividends, terms of redemption, amounts payable
on liquidation, sinking fund provisions (if any), conversion rights (if
any), and voting rights. Unless the nature of a particular transaction
and applicable statutes require approval, the Board of Directors has the
authority to issue these shares without shareholder approval.
6. Stock Options and Warrants
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. The stock option plan
expires in 2004. Under the Company's stock option plan, outstanding
options vest over three years from the grant date and are generally for a
six year term.
The following table contains information on the stock options under the
Company's plan for the years ended December 31, 1998 and 1999. The
outstanding agreements expire from May 2004 to November 2005.
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
<S> <C> <C>
Options outstanding at December 31, 1997 -- $ --
Granted 56,750 5.75
Exercised -- --
Cancelled (2,750) 5.75
-------- -----
Options outstanding at December 31, 1998 54,000 5.75
Granted 78,500 6.71
Exercised -- --
Cancelled (16,500) 5.75
------- -----
Options outstanding at December 31, 1999 116,000 $6.67
======= =====
</TABLE>
1999 Executive Officers Stock Option Plan
In May 1999, the Company's Board of Directors authorized a stock option
plan which provides for the grant of incentive and nonqualified options
to eligible officers and directors 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. The
stock option plan expires in 2009. Under the Company's stock option plan,
options are generally for a six year term. The Company had previously
granted options to its Chief Executive Officer in 1996 which were added
to this stock option plan in May 1999 and are reflected as outstanding at
December 31, 1998 in the table below.
F-13
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
6. Stock Options and Warrants (Continued)
1999 Executive Officers Stock Option Plan (Continued)
The following table contains information on the stock options under the
Company's plan for the year ended December 31, 1999. The outstanding
agreements expire from October 2001 to November 2005.
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
<S> <C> <C> <C> <C>
Options outstanding at December 31, 1998 36,667 $3.75
Granted 100,000 6.88
Exercised -- --
Cancelled -- --
------- -------
Options outstanding at December 31, 1999 136,667 $6.04
======= =======
</TABLE>
Financing Warrants
As a part of a restructuring of its operations in 1996, the Company
granted an Underwriter and a financial consulting firm warrants to
purchase common stock. The warrants are exercisable at $3.75 per share
for a four year period through October 31, 2001. In 1999 28,334 warrants
were exercised and as of December 31, 1999, 158,333 warrants are
outstanding.
Severance Warrants
The Company issued 20,000 warrants to a former officer in connection with
termination of his employment. The warrants are exercisable at anytime
after January 31, 2000 at $6.00 per share until November 2004.
Board of Directors Options
The Company issued 45,000 stock options to its three Non-Employee
Directors in October 1998. The options vest over a three year period and
are exercisable at $6.00 per share and the options are for a five year
term.
Warrants From Secondary Offering
The Company issued warrants in connection with a secondary offering of
its common stock (Note 4).
7. Commitments and Contingencies
Leases
The Company leases certain computer equipment and furniture and fixtures
under noncancellable capital leases. The Company leases its facilities
and certain computer equipment under noncancellable operating leases. The
Company's facilities lease contains a five year renewal option.
The following is a schedule of future minimum lease payments at December
31, 1999 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:
F-14
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
7. Commitments and Contingencies (Continued)
Leases (Continued)
<TABLE>
<CAPTION>
Year Ending Capital Operating
December 31, Leases Leases Total
------------ ------ ------ -----
<S> <C> <C> <C> <C>
2000 $ 73,678 $ 54,918 $128,596
2001 22,375 56,016 78,391
2002 -- 23,340 23,340
-------------- --------- ---------
Total Minimum Lease
Payments 96,053 $134,274 $230,327
======== ========
Less amount representing interest (11,593)
---------
Present Value of Net Minimum
Lease Payments $ 84,460
=========
</TABLE>
Rent expense amounted to approximately $72,081 and $62,703 for the
years ended December 31, 1999 and 1998, respectively.
Leased equipment under capital leases as of December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Equipment $ 188,738
Less accumulated amortization (125,924)
---------
Net Property and Equipment Under Capital Lease $ 62,814
=========
</TABLE>
8. Stock-Based Compensation Plans
In accordance with the provisions of SFAS No. 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 recognize compensation expense based upon the fair value at
the grant date for awards under these plans consistent with the
methodology prescribed by SFAS No. 123, the Company's net income and
earnings per share would be reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---- ----
Net Loss:
As reported $(1,293,640) $(1,696,229)
Pro forma $(1,388,153) $(1,732,742)
Net Loss Per Share of Common Stock:
As reported $ (.72) $ (1.24)
Pro forma $ (.78) $ (1.27)
</TABLE>
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, 1999 and 1998:
F-15
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
8. Stock-Based Compensation Plans (Continued)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Risk free interest rate 5.99% 5.28%
Expected life 5.0 years 5.0 years
Expected volatility 38.18% 41.25%
Expected dividend yield 0% 0%
</TABLE>
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 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.
The weighted average fair value price of options granted in 1999 and 1998
was $2.92 and $2.48, respectively.
The following table summarizes information about the Company's
stock-based compensation plans outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life-Years Price Exercisable Price
------ ----------- ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
$3.75 - 5.50 36,667 1.84 $3.75 36,667 $3.75
$5.75 - 7.00 216,000 5.59 $6.62 12,500 $5.75
------------ ------- ---- ----- ------ -----
$3.75 - 7.00 252,667 5.05 $6.20 49,167 $4.26
============ ======= ==== ===== ====== =====
</TABLE>
Compensation Expense
The Company recorded compensation expense of $17,500 and $10,658 for the
years ended December 31, 1999 and 1998, respectively, for the value of
certain options granted to officers and Directors of the Company. The
valuation of the options and warrants granted to employees is based on
the difference between the exercise price and the market value of the
stock on the measurement date. The valuation of the options granted to
non-employees is estimated using the Black-Scholes option pricing model.
9. Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and accounts receivable. The Company places its cash
equivalents and short term investments with high credit quality financial
institutions and limits its credit exposure with any one financial
institution. 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 in California and throughout the United States. The Company
performs periodic credit evaluations of its customers' financial
condition and generally
F-16
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
9. Concentration of Credit Risk (Continued)
requires no collateral. The Company maintains reserves for potential
credit losses, and such losses have not exceeded management's
expectations.
10. Employee Benefit Plan
Effective May 29, 1997, the Company adopted a 401(K) savings plan for
employees who are not covered by any collective bargaining agreement,
have attained age 21 and have completed one year of service. Employee and
Company matching contributions are discretionary. The Company made
matching contributions of $2,364 and $3,070 for the years ended December
31, 1999 and 1998, respectively. Company contributions vest as follows:
<TABLE>
<CAPTION>
Years of Service Percent Vested
---------------- --------------
<S> <C> <C>
1 33%
2 66%
3 100%
</TABLE>
11. Acquisition
On October 28, 1999, the Company purchased the Internet subscriber base
and Web hosting subscriber base from MicroNet Services, Inc.
("MicroNet"), a New Haven, Connecticut based Internet service provider.
The Company paid cash of $132,500 and issued 78,810 shares of the
Company's common stock valued at $530,000. The Company also incurred an
additional $38,955 in cash and common stock which is payable in 2000 for
certain post-closing adjustments which was accrued in 1999. The Company
also incurred legal, accounting, finders fees and other direct costs
related to the acquisition of approximately $71,485. The acquisition was
accounted for using the purchase method of accounting. Results of the
acquired entity are included in the Company's operations commencing on
the acquisition date.
The following presents the unaudited proforma results of operation as if
the acquisition of MicroNet occurred on January 1 of each year. The
proforma information does not purport to be indicative of the results
that actually would have been obtained if the operations had been
combined during the years presented and is not intended to be a
projection of a future results.
<TABLE>
<CAPTION>
1999 1998
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $ 1,966,563 $ 1,795,788
Net income (loss) (1,363,349) (2,026,020)
Net income (loss) per share of common stock (.73) (1.40)
</TABLE>
12. Fair Value of Financial Instruments
Disclosures about Fair Value of Financial Instruments for the Company's
financial instruments are presented in the table below. These
calculations are subjective in nature and involve uncertainties and
significant matters of judgment and do not include income tax
considerations. Therefore, the results cannot be determined with
precision and cannot be substantiated by comparison to independent market
values and may not be realized in actual sale or settlement of the
instruments. There may be inherent weaknesses in any calculation
technique, and changes in the underlying assumptions used could
significantly affect the results. The following table presents a summary
of the Company's financial instruments as of December 31, 1999:
F-17
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
12. Fair Value of Financial Instruments (Continued)
<TABLE>
<CAPTION>
1999
Carrying Estimated
Amount Fair Value
<S> <C> <C>
Financial Assets:
Cash and cash equivalents $677,319 $677,319
Financial Liabilities:
Long-term debt 84,460 84,460
</TABLE>
The carrying amounts for cash and cash equivalents, receivables, accounts
payable and accrued expenses approximate fair value because of the short
maturities of these instruments. The fair value of long-term debt,
including the current portion, approximates fair value because of the
market rate of interest on the long-term debt and the interest rate
implicit in the obligations under capital leases.
13. Proposed Acquisition
In December 1999, the Company entered into a nonbinding letter of intent
to acquire certain assets of Innovative Software Designs, Inc.
("Innovative"), an Internet service provider in Minnesota. Innovative has
filed for protection from creditors pursuant to chapter eleven of the
United States Bankruptcy Code. The Company will acquire Innovative's
subscriber base and certain intangible assets for an aggregate purchase
price of approximately $2,600,000 plus 50% of Innovative's gross revenues
for a period of 90 days following the closing date. $1.6 million of the
purchase price shall be paid in cash and $1 million will be paid in
shares of the Company's stock at the thirty day average of the closing
price of the common stock prior to closing.
14. Proposed Public Stock Offering
On February 22, 2000, the Company executed a letter of intent with an
Underwriter to offer 800,000 shares of the Company's common stock at
approximately $6.25 per share on a firm commitment basis. The Company
will also grant the Underwriter an option to purchase an additional
120,000 shares from the Company to cover over-allotments for a period of
forty-five days from the effective date of the Registration Statement.
The Company will pay the Underwriter a commission equal to ten percent of
the gross proceeds of the offering and a non-accountable expense
allowance equal to three percent of the gross proceeds of the offering.
In connection with the offering, the Company has agreed to issue the
Underwriter a warrant, for $10, to purchase up to 80,000 shares of common
stock. The Underwriter's warrant is exercisable for a period of four
years beginning one year from the effective date of the Registration
Statement. The exercise price of the Underwriter's warrant shall be an
amount equal to 120% of the price of the shares sold to the public. There
can be no assurance that the Offering will be successfully completed.
The Underwriter has also agreed to act as placement agent for a minimum
$1,000,000 bridge financing on a best efforts basis prior to the public
offering described above. The bridge financing is to be in the form of
units which would contain promissory notes with interest at 10% to 12%.
In addition, each $25,000 unit would contain such number of shares of the
Company's common stock equal to $25,000 divided by the closing stock
price on the closing date for the bridge financing. The promissory notes
will be due at the closing of the above public offering or one year from
the date of
F-18
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
14. Proposed Public Stock Offering (Continued)
issuance, whichever occurs first. The Underwriter will be paid a 10%
commission and a 3% nonaccountable expense allowance and 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.
F-19
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Officers and Directors
The name, age and position of each of the Company's executive
officers and directors are set forth below:
<TABLE>
<CAPTION>
Name Age Officer/ Director Since
Position
<S> <C> <C> <C>
William Conis 52 Chief Executive 1998
Officer, Chief Financial
Officer and Director
Andrew Stathopoulos 50 Director 1998
Michael A. Gales 54 Director 1999
Seymour G. Siegel 57 Director 2000
Raymond J. Meyers 43 Former Chief Executive 1996
Officer, Chief Financial
Officer and Director
</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.
Board members receive $100 per hour for time expended on behalf of the
Company including attendance at Board meetings. The Company's audit
committee is composed of all four members of its Board of Directors.
The Company's compensation committee is composed of Messrs.
Stathopoulos and Conis.
<PAGE>
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:
William Conis has been a director since July 1998 and became Chief
Executive Officer and Chief Financial Officer in November 1999. He was
Vice President--Eastern Region for Hitachi Data Systems from July 1997
through July 1999, and was Hitachi's New York-based District Manager
from July 1995 to July 1997. From March 1984 to July 1995, Mr. Conis
was a senior consultant for the Kappa Group, a management consulting
firm located in New Jersey. He earned a Bachelor's degree and Master's
degree in Electrical Engineering from New York University in 1968 and
1971, respectively.
Andrew Stathopoulos has over 25 years experience in finance,
operations, marketing, mergers and acquisitions, engineering,
manufacturing and consulting. In March 1998, he joined the Bank of New
York as a Vice President to launch a software and hardware vendor
management program. From 1996 to 1997, he was Vice President of Finance
for New Alliance Corp., an emerging markets investment bank
specializing in Eastern Europe. He was responsible for financial
reporting, internal audit and controls, mid-office and back-office
operations, information systems, and management reporting. From 1994 to
1996, he was Vice President of Business Development for Nautical
Technology Corp., an independent software developer for the maritime
industry. He was responsible for developing and implementing a new
marketing and sales program, seeking strategic partners and providing
general business advice. Also, from 1994 to 1996, he was Vice President
of Business Development for Interbank of New York, a Greek commercial
bank where he was responsible for identifying and marketing new
products and pursuing new business opportunities. From 1992 to 1994, he
was the Vice President of Finance and Administration for Societe
Generale Energie, an oil trading products firm. He was responsible for
establishing financial controls, accounting and reporting procedures;
monitoring cash flow and working capital requirements; managing human
resources administration; and dealing with auditors, insurers and
vendors. Mr. Stathopoulos holds a BS degree in Industrial Engineering
and an MBA degree in Finance and International Business, both from
Columbia University.
Michael A. Gales became a director in October 1999. Mr. Gales has
served as Executive Vice President/Corporate Finance of Andrew,
Alexander, Wise & Company, Inc., since June 1999. From 1998 to June
1999, Mr. Gales served as Managing Director of InterBank Capital
Group, LLC. Prior to joining InterBank, from 1996 Mr. Gales served as
Managing Director/Corporate Finance of Janssen-Meyers Associates, LP.
From 1990 to 1995, Mr. Gales served as Chief Executive Officer and
Chairman of the Board of Anchor Capital Co., LLC. Prior to 1990, Mr.
Gales spent over 13 years in successively senior management roles in
international engineering and technology licensing operations focusing
on the maritime, petroleum and process industries. Mr. Gales is
Chairman of the Board of TEAMIES, LLC, a privately held television
production and licensing organization focusing on sports related
children's programming.
Seymour G. Siegel (Certified Public Accountant - inactive) became
a director in February 2000. Since 1994, Mr. Siegel, has been
president of Siegel Rich Inc., a New York firm which provides advisory
services to businesses primarily in strategic planning, mergers and
acquisitions. From 1974 to 1990, he was senior partner and founder of
Siegel Rich & Co., CPA's, P.C. In 1990, Siegel Rich & Co. merged with
M.R. Weiser & Co., a large regional accounting firm, where he remained
a senior partner until 1993. Mr. Siegel is also a director of
BarPoint.Com, a public company engaged in the collection and
processing of bar code information.
Raymond J. Meyers became the Company's Chief Executive Officer in
December 1996. From 1985 to 1996, he was employed by Transamerica
<PAGE>
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. Mr. Meyers resigned
from all positions with the Company as of November 1, 1999.
On November 3, 1999, and effective as of November 1, 1999, Raymond
Meyers resigned from his positions as Chief Executive Officer,
President, Chief Financial Officer and Secretary of the Company. In
connection with his resignation, the Company has entered into a
severance agreement with Mr. Meyers, pursuant to which the Company will
pay Mr. Meyers $35,000, over a period of no more than six months, and
grant him 20,000 options to purchase the Company's common stock at an
exercise price of $6.00 per share. In addition, the Company entered
into a six month consulting agreement with Mr. Meyers, pursuant to
which the Company will pay Mr. Meyers at an hourly rate of $100. Mr.
Meyers Resigned as a Director in January 2000.
Section 16(A) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5, and amendments
thereto, furnished to the Company during fiscal year 1999, the Company
is not aware of any director, officer or beneficial owner of more than
ten percent of the Company's Common Stock that failed to file reports
required by Section 16(a) of the Securities Exchange Act of 1934 on a
timely basis during fiscal year 1999.
ITEM 10. EXECUTIVE COMPENSATION
None of the Company's executive officers or directors
currently receive compensation in excess of $100,000 per year except
Mr. Conis, the Company's Chief Executive Officer, who receives a base
salary of $175,000 per year pursuant to an Employment Agreement which
expires on October 31, 2001, subject to renewal. Mr. Conis' base salary
increases to $200,000 per year once the Company's gross revenues run at
the rate of $3,500,000 annually and operating profitability exceeds on
an annual basis $600,000 for at least three consecutive months and
further increases to $250,000 if the Company's gross revenues run at
the rate of $5,000,000 annually and operating profitability on an
annual basis exceeds $1,200,000 for at least three consecutive months.
The Employment Agreement also provides for the issuance of 100,000
stock options exercisable at $6.875 per share, subject to a vesting
schedule. Other than Mr. Meyers, no executive officer or director
received compensation in excess of $100,000 for the calendar years
ended December 31, 1999 or 1998. Compensation for all officers and
directors as a group for the calendar years ended December 31, 1999 and
1998 aggregated $190,054 and $158,753, respectively.
The following table discloses certain compensation paid to the
Company's Chief Executive Officer for the calendar years ended December
31, 1999 and 1998.
<PAGE>
<TABLE>
<CAPTION>
Long Term
Name and Compensation
Principal Other Annual All Other Awards/Securities Underlying
Position Year Salary ($) Compensation Bonus Compensation Options(#)
- -------- ---- ---------- ------------ ----- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
William Conis, Chief
Executive Officer (1)
1999 $27,259 - - - 100,000
1998 - - - - -
Raymond J. Meyers, Former
Chief Executive Officer
(1) 1999 $162,795 - - - 20,000
1998 $140,005 - - - -
</TABLE>
Option Grants in Last Year and Stock Option Grant
The following table provides information on option grants
during the year ended December 31, 1999, to the named executive
officers:
<TABLE>
<CAPTION>
Percent of Total
Number of Options
Common Stock Granted to
Underlying Options Employees in Exercise Price
Name Granted Fiscal Year ($/Share) Expiration Date
- ---- ------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
William Conis 100,000 50.4% $6.875 2004
Raymond J. Meyers 20,000 10.1% $6.00 2004
</TABLE>
Aggregate Option Exercise of Last Fiscal year and Fiscal Year-End
Option Values
The following table provides information on the value of the
named executive officers' unexercised options at December 31, 1999. No
shares of Common Stock were acquired upon exercise of options during
the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
Value of
Number of Unexercised Unexercised In-The-Money
Options at Year End (1) Options at Year End (1)
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
William Conis 5,000 110,000 $0 $0
Raymond J. Meyers 36,667 20,000 $91,668 $5,000
</TABLE>
(1) The closing price of the Common Stock on December 31, 1999, as
reported by on the Nasdaq SmallCap Market was $6.25.
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.
<PAGE>
The Plan is administered by the Board of Directors and
terminates in November 2004. At December 31, 1999, 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 December 31, 1999, 135,250 options have been granted
under the Plan and 116,000 options are outstanding.
1999 Executive Officer Stock Option Plan
In May 1999, the Board of Directors approved the 1999
Executive Officer Stock Option Plan (the "1999 Plan") for the benefit
of the executive officers. The 1999 Plan is intended to provide an
incentive to individuals to act as executive officers and to maintain a
continued interest in the Company's operations. All options under the
1999 Plan will be issued under Section 422A of the Internal Revenue
Code, and include qualified and non-qualified stock options.
The terms of the 1999 Plan provide that the Company is authorized
to grant options to purchase shares of common stock to executive
officers upon the majority consent of the Board of Directors. The
option price to be paid by optionees for shares under qualified stock
options must not be less than the fair market value of the shares as
reported by the Nasdaq SmallCap Market on the date of the grant. The
option price for nonqualified stock options must not be less than 85%
of such fair market value. Options must be exercised within six years
following the date of grant and the optionee must exercise options
during service to the Company or within three months of termination of
such service (12 months in the event of death or disability). The Board
of Directors may extend the termination date of an option granted under
the Plan.
A total of 150,000 shares of authorized but unissued common stock
have been reserved for issuance pursuant to the 1999 Plan of which
136,667 options are currently outstanding, exercisable at $3.75 to
$6.875 per share.
<PAGE>
Options under the 1999 Plan may not be transferred, except by will
or by the laws of intestate succession. The number of shares and price
per share of the options under the Plan will be proportionately
adjusted to reflect forward and reverse stock splits. The holder of an
option under the 1999 Plan has none of the rights of a shareholder
until shares are issued.
The 1999 Plan is administered by the Board of Directors which has
the power to interpret the 1999 Plan, determine which persons are to be
granted options and the amount of such options. The provisions of the
Federal Employee Retirement Income Security Act of 1974 do not apply to
the 1999 Plan. Shares issuable upon exercise of options will not be
purchased in open market transactions but will be issued by us from
authorized shares. Payment for shares must be made by optionees in cash
from their own funds. No payroll deductions or other installment plans
have been established.
Shares issuable under the 1999 Plan may be sold in the open
market, without restrictions, as free trading securities. No options
may be assigned, transferred, hypothecated or pledged by the option
holder. No person may create a lien on any securities under the 1999
Plan, except by operation of law. However, there are no restrictions on
the resale of the shares underlying the options. The 1999 Plan will
remain in effect until May, 2009 but may be terminated or extended by
the Board of Directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning the
holdings of Common Stock by each person who, as of the date of this
Report, 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 2800 28th Street, Suite 170, Santa Monica,
California 90405.
Amount of Percent of
Name Ownership Class
William Conis(1) 5,300 *
Andrew Stathopoulos (2) 5,000 *
Michael A. Gales - -
Seymour G. Siegel(3) 5,000 .*
All officers and
directors as a
group (4 persons)(1)(2))(3) 15,300 *
----------------------
* Less than 1%
(1) Includes presently exercisable options to purchase 5,000
shares at $6.875 per share. Does not include shares issuable
upon exercise of 110,000 options which are not presently
exercisable.
(2) Represents stock options to purchase 5,000 shares at $6.00
per share at any time until November 2003.
(3) Represents stock options to purchase 5,000 shares at $6.00
per share at any time until February 2005.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Title
<S> <C>
3.01 Restated Articles of Incorporation of the Registrant (1)
3.02 Bylaws of the Registrant (1)
4.01 1995 Incentive Stock Option Plan (1)
4.02 Form of Incentive Stock Option Agreement under the 1995 Executive Officer Stock
Option Plan (1)
4.03 1999 Executive Officer Stock Option Plan (2)
4.04 Form of Incentive Stock Option Agreement under the 1995 Executive Officer Stock
Option Plan (2)
4.05 Form of Non-Statutory Stock Option Agreement under the 1995 Executive Officer
Stock Option Plan (2)
4.06 Warrant Agreement with Andrew, Alexander, Wise & Co., Incorporated (3)
10.01 Capitalized Lease Agreement (1)
10.02 Divestiture Agreement (2)
10.03 Employment Agreement with Mr. Conis (4)
10.04 Severance agreement with Mr. Meyers (4)
10.05 Asset Purchase Agreement, dated as of October 28, 1999, and effective as of
November 1, 1999, by and among MicroNet Services, Inc., Kanfer Associates, Denise
Rosenkrantz, James M. Sette and ProtoSource Corporation (4)
10.06 Form of Consulting Agreement, dated as of November 3, between ProtoSource
Corporation and Raymond J. Meyers. (4)
24.01 Consent of Angell & Deering
</TABLE>
<PAGE>
(1) Incorporated by reference to the Registrant's Registration
Statement on Form SB-2, file number 33-86242.
(2) Incorporated by reference to the Registrant's Registration
Statement on Form S-8, file number 333-85361.
(3) Incorporated by reference to the Registrant's Registration
Statement on Form SB-2, file number 333-20543.
(4) Incorporated by reference to the Registrant's Form 8-K, filed on
November 9, 1999.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized, in Santa Monica,
California, on March 29, 2000.
PROTOSOURCE CORPORATION
By /s/ William Conis
William Conis
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ William Conis Chief Executive Officer March 29, 2000
-----------------
William Conis Chief Financial Officer
(Principal Accounting
Officer), and Director
/s/ Andrew Stathopoulos Director March 29, 2000
-----------------------
Andrew Stathopoulos
/s/ Michael A. Gales Director March 29, 2000
--------------------
Michael A. Gales
/s/ Seymour G. Siegel Director March 29, 2000
---------------------
Seymour G. Siegel
</TABLE>
Exhibit 24.01
CONSENT OF ANGELL & DEERING
To the Board of Directors
of ProtoSource Corporation
We consent to the incorporation by reference in the following
Registrations Statements of ProtoSource Corporation and any amendments
thereto (1) File No. 333-78497 on Form S-8; (2) File No. 333-78437 on
Form S-8, and (3) File No. 333-80773 on Form S-3 of our report dated
February 17, 2000, except for Note 14 as to which the date is February
22, 2000, relating to the balance sheet of ProtoSource Corporation as
of December 31, 1999 and the related statements of operations, cash
flows and changes in stockholders' equity for the years ended December
31, 1999 and 1998, which report appears or is incorporated by reference
in the December 31, 1999 Annual Report on Form 10-KSB of ProtoSource
Corporation.
/s/ Angell & Deering
-----------------
Angell & Deering
Denver, Colorado
February 17, 2000, except for
Note 14 as to which the date
is February 22, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27 - Financial Statement Data
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS INCLUDED IN
THE REGISTRANT'S FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> dec-31-1999
<PERIOD-END> dec-31-1999
<CASH> 677,319
<SECURITIES> 0
<RECEIVABLES> 137,450
<ALLOWANCES> 39,698
<INVENTORY> 0
<CURRENT-ASSETS> 818,522
<PP&E> 1,133,608
<DEPRECIATION> 846,439
<TOTAL-ASSETS> 3,685,181
<CURRENT-LIABILITIES> 263,854
<BONDS> 21,019
0
0
<COMMON> 11,428,924
<OTHER-SE> (8,028,516)
<TOTAL-LIABILITY-AND-EQUITY> 3,685,181
<SALES> 0
<TOTAL-REVENUES> 1,125,225
<CGS> 0
<TOTAL-COSTS> 2,566,218
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 32,198
<INTEREST-EXPENSE> 16,763
<INCOME-PRETAX> (1,293,640)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,293,640)
<EPS-BASIC> (.72)
<EPS-DILUTED> (.72)
</TABLE>
