Filed with the Securities and Exchange Commission on November 21, 1997.
Securities Act Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------
PROTOSOURCE CORPORATION
(Name of small business issuer in its charter)
California 7373 77-0190772
---------- ---- ----------
(State or jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code No.) Identification No.)
2300 Tulare Street, Suite 210
Fresno, CA 93721
(209) 490-8600
(Address and telephone number of principal executive offices)
2300 Tulare Street, Suite 210
Fresno, CA 93721
(209) 490-8600
(Address of principal place of business or intended
principal place of business)
Raymond J. Meyers, Chief Executive Officer
2300 Tulare Street, Suite 210
Fresno, CA 93721
(209) 490-8600
(Name, address, and telephone number of agent for service)
Copies of all communications to:
Gary A. Agron, Esq. Snow Becker Krauss P.C.
5445 DTC Parkway, Suite 520 Charles Snow, Esq.
Englewood, CO 80111 605 Third Avenue
(303) 770-7254 New York, New York 10158
(303) 770-7257 (Fax) (212) 687-3860
(212) 949-7052 (fax)
Approximate date of proposed sale to public: As soon as practicable after
the effective date of the Offering.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box:
CALCULATION OF REGISTRATION FEE
================================================================================
Title of each class Amount to Proposed Proposed Amount of
of securities be registered maximum price maximum registration
to be registered per unit aggregate fee
offering
price
================================================================================
Units, consisting of 1,035,000
one share of Common Units $6.00(1) $6,210,000 $1882
Stock, no par value
and one Warrant
Common Stock, no 1,035,000 $6.00(2) $6,210,000 $1882
par value, underlying Shares
Warrants included in
the Units
Underwriter's 90,000 $.0011 $ -0-
Warrants Warrants
Units underlying 90,000 $7.20(4) $648,000 $ 196
Underwriter's Units(3)
Warrants consisting of
one share of Common
Stock and one
Warrant
Common Stock, no 90,000 $6.00(2) $540,000 $ 164
par value, underlying Shares
Warrants included in
Underwriter's
Warrants
Totals....................................... $13,608,000 $4124
ii
(1) Based upon the closing bid price of the Registrant's Common Stock on the
Electronic Bulletin Board of the NASD (the "Bulletin Board") on November
18, 1997, which is the price for which the Units are to be offered.
(2) Represents the closing bid price of the Registrant's Common Stock on the
Bulletin Board on November 18, 1997.
(3) Pursuant to Rule 416 of the Securities Act of 1933, as amended, the number
of shares issuable upon exercise of the Underwriter's Warrants is subject
to adjustment with anti-dilution provisions of such warrants.
(4) Based upon 120% of the Unit public offering price.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
(EXHIBIT INDEX LOCATED ON PAGE OF THIS FILING)
iii
Subject to Completion Dated November 21, 1997
PROTOSOURCE CORPORATION
900,000 Units
ProtoSource Corporation (the "Company") is offering (the "Offering")
through Andrew, Alexander, Wise & Company, Inc. as representative of the
underwriters (the "Underwriter"), 900,000 Units of the Company's securities
("Units"). Each Unit consists of one share of no par value common stock ("Common
Stock") and one redeemable common stock purchase warrant ("Warrant"), priced at
$_____ per Unit representing the closing bid price of the Common Stock on the
Electronic Bulletin Board of the National Association of Securities Dealers,
Inc. ("Bulletin Board") on the date of this Prospectus. The Common Stock and
Warrants are separately tradeable immediately upon issuance. Each Warrant is
exercisable to purchase one share of Common Stock at an exercise price of $_____
per share (100% of the closing bid price of the Common Stock one day prior to
the date hereof on the Bulletin Board) for a period of five years from the date
hereof and may be redeemed by the Company after one year from the date hereof
for $.10 per Warrant on 30 days' written notice to the Warrantholders if the
closing bid price of the Common Stock on the NASDAQ SmallCap Market or the
Bulletin Board is at least $____ per share (150% of the closing bid price of the
Common Stock on the Bulletin Board one day prior to the date hereof) for 20
consecutive trading days, ending not earlier than 15 days before the Warrants
are called for redemption. See "Risk Factors" and "Underwriting."
The Company's Common Stock currently trades on the Bulletin Board under the
symbol "PSCO". On November 18, 1997, the closing bid price of the Common Stock
on the Bulletin Board was $5.75 per share. The Company has applied to list the
Common Stock and Warrants (but not the Units) on the NASDAQ SmallCap Market.
---------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION ("COMMISSION")
NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND SHOULD BE CONSIDERED ONLY BY PERSONS ABLE TO SUSTAIN
A TOTAL LOSS OF THEIR INVESTMENT. SEE "RISK FACTORS."
--------------------------------------
The Units are offered by the Underwriter on a firm commitment basis,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriter and subject to certain conditions, including the right of the
Underwriter to reject orders in whole or in part. It is anticipated that
delivery of certificates representing the securities will be made against
payment therefor in New York, New York on or about three business days from the
date of this Prospectus.
1
================================================================================
Price to Public Underwriting Discounts Proceeds to Company
and Commissions(1) (2)(3)
- -------------------------------------------------------------------------------
Per Unit.............$__________ $_______________ $____________
- -------------------------------------------------------------------------------
Total................$__________ $_______________ $____________
===============================================================================
(1) Excludes a nonaccountable expense allowance payable to the Underwriter of
$________, a $180,000 three year consulting fee, and the issuance of
warrants to the Underwriter (the "Underwriter's Warrants") to purchase up
to 90,000 Units at a price of $______ per Unit. The Company has granted
certain registration rights with respect to the Units underlying the
Underwriters' Warrants and has agreed to indemnify the Underwriter against
certain liabilities, including liabilities under the Securities Act of 1933
(the "1933 Act"). See "Underwriting."
(2) Before deducting costs of the Offering estimated to be $________, including
the Underwriter's nonaccountable expense allowance. See "Underwriting."
(3) Does not include the exercise of the Underwriter's option (the
"Overallotment Option"), exercisable within 45 days from the date of this
Prospectus, to purchase from the Company up to 135,000 additional Units on
the same terms as the Units offered hereby solely to cover overallotments,
if any. If the Overallotment Option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $__________, $__________ and $________, respectively. See
"Underwriting."
Andrew, Alexander, Wise & Company, Inc.
17 State Street
New York, New York 10004
(800) 303-5424
The date of this Prospectus is __________, 1997.
2
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., a Registration Statement on Form SB-2 (the
"Registration Statement") under the 1933 Act with respect to the securities
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement, certain items of which are omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and the securities offered by this Prospectus, reference
is made to such Registration Statement and the exhibits thereto. Statements
contained in this Prospectus as to the contents of any contract or other
documents are not necessarily complete and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement for a full statement of the provisions thereof; each such
statement contained herein is qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act") and, in accordance therewith,
files reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information may be inspected and copied at
public reference facilities of the Commission at 450 Fifth Street N.W.,
Washington, D.C. 20549; 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; 7 World Trade Center, New York, New York 10048; and 5757 Wilshire
Boulevard, Los Angeles, California 90036. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth Street
N.W., Washington, D.C. 20549 at prescribed rates.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND
WARRANTS INCLUDING OVERALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN
SUCH SECURITIES AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
The Company furnishes annual reports which include audited financial
statements to its stockholders. The Company may also furnish quarterly financial
statements to its stockholders and such other reports as may be authorized by
its Board of Directors.
3
PROSPECTUS SUMMARY
The following is a summary of certain information contained in this
Prospectus and is qualified in its entirety by the detailed information and
financial statements that appear elsewhere herein. Except for the historical
information contained herein, the matters set forth in this Prospectus include
forward-looking statements which are subject to risks and uncertainties that may
cause actual results to differ materially. These risks and uncertainties are
detailed throughout the Prospectus and will be further discussed from time to
time in the Company's periodic reports filed with the Commission. The
forward-looking statements included in the Prospectus speak only as of the date
hereof.
The Company
The Company provides Internet access and related services to individuals,
public agencies and businesses in six small Central California cities. As of
September 30, 1997, the Company had 2,700 subscribers for whom it provided
Internet access up from 250 subscribers in July 1995. See "History." The Company
intends to acquire other small Internet providers in markets with populations of
less than 500,000 that are located in various Central California cities between
Sacramento and Bakersfield. The Company believes that certain of these local
Internet providers currently doing business in the Company's target markets are
unable 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 throughout Central
California, (ii) developing diversified services similar to its larger
competitors, such as hourly-based access services, special access to 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. The Company's long-term plan is to target a select number of
such markets and increase revenues through acquisition in these markets. The
Company is not currently negotiating to acquire, nor has it entered into any
agreement to acquire, any other companies. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business -
Introduction.".
The Company's strategy is to provide low cost direct Internet access 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 computer oriented companies. The Company will also seek to generate
additional revenues by (i) increasing monthly Internet access fees while
offering additional Internet products and services, (ii) offering monthly
community access services, (iii) providing Internet consulting services, and
(iv) generating marketing service fees from businesses seeking a Web site on the
Internet.
4
The Offering
Securities offered (1).................... 900,000 Units, each Unit consisting
of one share of Common Stock and
one Warrant
Offering price............................ $___________ per Unit
Common Stock outstanding
prior to the Offering (1)................ 665,333 shares
Common Stock Outstanding
After the Offering (1)................... 1,565,333
Use of Proceeds........................... For repayment of debt, acquisition
of small Internet access providers
and other computer oriented
companies, for marketing expenses
and working capital.
See "Use of Proceeds"
Bulletin Board Symbol..................... PSCO - Common Stock
Proposed NASDAQ SmallCap Symbols.......... PSCO - Common Stock
PSCOW - Warrants
Transfer Agent............................ Corporate Stock Transfer, Inc.
- ----------
(1) Excludes (i) up to 900,000 shares issuable upon exercise of the Warrants,
(ii) up to 270,000 shares issuable upon exercise of the Overallotment
Option and the Warrants included therein, and (iii) up to 453,333 shares
issuable upon exercise of other outstanding warrants and options. See
"Dilution", "Capitalization", "Management-Executive Compensation", "Certain
Transactions", "Description of Securities" and "Underwriting."
5
Summary Financial Information
The following financial information is derived from the financial
statements of the Company appearing elsewhere herein and should be read in
conjunction with such financial statements. See "Financial Statements."
Nine Months Ended
Year Ended December 31, September 30,
-------------------------- --------------------------
1996 1995 1997 1996
(Unaudited) (Unaudited)
Income Statement Data:
Revenues $ 697,581 $ 100,901 $ 550,969 $ 544,590
(Loss) from continuing
operations (672,791) (974,578) (1,455,284) (417,782)
Net (loss) (1,409,800) (1,816,285) (1,455,284) (681,982)
Net (loss) per share (7.74) (22.04) (2.61) ( 7.69)
Weighted average number
of shares outstanding 182,037 82,439 557,897 86,667
September 30,
1997 As Adjusted(1)
Balance Sheet Data:
Working capital (deficit) $ (584,615) $__________
Total assets 3,255,812 __________
Long-term debt 1,812,493 __________
Total liabilities 2,716,996 __________
Stockholders' equity 538,816 __________
----------
(1) As adjusted to give effect to the receipt and application of the estimated
net proceeds of the Offering without giving effect to exercise of the
Warrants, the Underwriter's Warrants or other outstanding warrants or stock
options. See "Use of Proceeds" and "Description of Securities."
6
THE COMPANY
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 size
of the customer into "Classic" (appropriate for customers whose annual sales are
less than $10 million), "Classic Advantage" (appropriate for customers whose
annual sales are between $10 million and $100 million) and "Classic Custom"
(appropriate for customers whose annual sales exceed $100 million). Prices
ranged from $20,000 for a "Classic" program to $200,000 for a "Classic Custom"
program. The Company also 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 February 1995, the Company completed an initial public offering ("IPO")
of its securities, consisting of the sale of 46,000 Units to the public at
$82.50 per Unit. Each Unit consisted of one share of Common Stock and one common
stock purchase warrant (the "Prior Warrants") to purchase an additional share of
Common Stock at $97.50 per share until February 1998. McClurg Capital
Corporation, the Representative of the Underwriters of the IPO (the "Prior
Representative"), received warrants (the "Prior Representative's Unit Warrants")
to purchase 4,000 Units at $99.00 per Unit until February 2000. In May 1997, the
Company registered 186,666 Common Stock Purchase Warrants and 186,666 shares of
Common Stock underlying these Warrants together with 426,667 shares of Common
Stock (collectively the "May 1997 Securities").
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 Internet locations to six, and
increased its subscribers to 2700 at September 30, 1997.
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. 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.
7
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 which were previously
exercisable into shares of Common Stock on a fifteen for one basis, (ii) agreed
not to sell an aggregate of 30,300 shares of Common Stock owned by them until
October 1999, except with the prior written consent of the Prior Representative,
(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. The value of the Classic
Line assets were determined as a result of negotiations between the Company and
the SSC Principals. See "Certain Transactions."
In October 1996, the Company sold 400,000 shares of its Common Stock to a
group of investors for $3.75 per share or a total of $1,500,000 (the "Common
Stock Placement"). Included in the $1,500,000 was the conversion of $200,000 of
debt to equity which was originally represented by a bridge loan for which the
Company issued 26,667 shares of its Common Stock to the bridge lenders as
additional consideration for the $200,000 loan. The Company also issued 186,666
Warrants exercisable at $3.75 per share in connection with the bridge loan and
the private placement. The 426,667 shares, 186,666 Warrants and 186,666 shares
underlying the Warrants were registered with the Commission in May 1997.
Between June and September 1997, the Company issued 150,000 shares of its
Common Stock as additional consideration for a $750,000 bridge loan (the "Bridge
Loan") advanced to it by eight bridge lenders. The Company intends to repay the
Bridge Loan with proceeds of the Offering.
The Company was incorporated in the State of California as SHR Corporation
on July 1, 1988, and changed its name to "ProtoSource Corporation" in October
1994. The Company's principal executive offices are located at 2300 Tulare
Street, Suite 210, Fresno, California 93721, telephone (209) 490-8600.
8
RISK FACTORS
In evaluating the Company's business, prospective investors should consider
carefully the following factors in addition to the other information presented
in this Prospectus.
Prospective purchasers of the Common Stock should carefully consider the
following risk factors and the other information contained in this Prospectus
before making an investment in the Common Stock. Information contained in this
Prospectus contains "forward-looking statements" which can be identified by the
use of forward-looking terminology such as "believes," "expects," "may,"
"should" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. See, e.g., "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business - Strategy." No assurance can be given that the future results covered
by the forward-looking statements will be achieved. The following matters
constitute cautionary statements identifying important factors with respect to
such forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results covered in
such forward-looking statements. Other factors could also cause actual results
to vary materially from the future results covered in such forward- looking
statements.
Limited History of Operations; Significant Losses: Deficit In Working
Capital. The Company was incorporated in July 1988 but has only provided
Internet access services since July 1995. Prior to August 1996, the Company was
engaged primarily in the agricultural software development business and incurred
significant losses of $373,096, $1,816,285 and $1,409,800 for the years ended
December 31, 1994, 1995 and 1996, respectively. For the nine months ended
September 30, 1997, the Company reported a loss of $1,455,284 and had a working
capital deficit of $584,615, which could significantly limit its operations. See
"Financial Statements." There can be no assurance that the Company will achieve
profitability or positive cash flow from operations. The Company expects to
focus in the near term on building and increasing its Internet subscriber base,
which will require it to significantly increase its expenses for personnel,
marketing, network infrastructure and the development of new services. As a
result, the Company believes that it may incur further losses in the near term.
The Company may find it necessary to seek additional equity capital if its cash
flow continues to be insufficient to fund its desired growth. There can be no
assurance that the Company can obtain such additional capital, and if it is
unable to do so, it will be unable to expand its operations, should it require
such capital. (See also "Risk Factors - Need for Additional Financing.") The
Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets such as
the Internet. To address these risks, the Company must, among other things,
respond to competitive developments, attract, retain and motivate qualified
persons, and continue to upgrade its technologies and commercialize services
incorporating such technologies. There can be no assurance that the Company will
be successful in addressing these and other risks.
9
Risks Associated With Defaults by SSC and the SSC Principals. The Company
is the payee of a promissory note from SSC guaranteed by the SSC principals
which bears interest at 10% per annum and is due January 2007. SSC and the SSC
principals have also agreed (i) to assume certain trade accounts payable of the
Company in the approximate amount of $500,000 and (ii) to sublease from the
Company certain office space at a rental of $12,000 per month through February
1998. In the event SSC and the SSC principals default on, or for any reason
elect not to pay, any of these obligations, the Company's operations would be
materially adversely affected. The Company has not received rental payments on
the aforesaid sublease since April 1997 and has been advised by certain of its
trade account creditors that such creditors have not received payments on the
accounts from SSC or the SSC principals. Some of these creditors have threatened
to bring suit against the Company and the Company has been required to return
possession of the subject office space to the Company's landlord. See "Business
- - Properties, "Business - Litigation", and "Certain Transactions."
Litigation. The Company is involved in a number of litigation matters
generally resulting from defaults by SSC and the SSC Principals and claims
against the Company filed by the SSC Principals. Payment of any judgments or
settlements in connection with these litigation matters together with the costs
of defending such matters could materially and adversely affect the Company's
operations. See "Business - Litigation."
Risks Associated With Acquisitions. Although the Company intends to
increase revenues in part through acquisition of small Internet access providers
and other computer oriented companies using proceeds of the Offering, it has
limited experience in this regard and may acquire companies with limited
operating or negative operating history. Should the Company acquire other
companies that incur operating losses, the Company's operating results will be
further adversely affected. The Company is not negotiating to acquire nor has it
entered into any agreements to acquire any such companies and there can be no
assurance it will complete any such acquisitions in the future.
Fluctuations in Operating Results. As a result of the Company's limited
Internet services operating history, the Company has limited historical
financial data on which to predict future operating expenses. Moreover, the
Company may experience fluctuations in operating results in the future caused by
various factors, some of which are outside of the Company's control, including,
but not limited to, general economic conditions, specific economic conditions in
the Internet services industry, user demand for the Internet, the amounts of
capital expenditures and other costs related to the expansion of operations, the
timing of customer subscriptions, the introduction of new Internet services by
the Company or its competitors, the mix of such services sold and the channels
through which those services are sold. As a strategic response to a changing
competitive environment, the Company may elect, from time to time, to make
certain pricing, service or marketing decisions or acquisitions that could have
a material adverse effect on the Company's business, results of operations and
cash flow from quarter to quarter. See "Business" and "Financial Statements."
10
Competition. The market for Internet services is new, intensely
competitive, rapidly evolving and subject to rapid technological change. The
Company expects competition to persist and intensify in the future. Almost all
of the Company's current and potential competitors have longer operating
histories, greater name recognition, larger customer bases and significantly
greater financial, technical and marketing resources than the Company. Such
competition could materially adversely affect the Company's business, operating
results or financial condition. Moreover, because many of the Company's
competitors possess financial resources significantly greater than those of the
Company, such competitors could initiate and support prolonged price competition
to gain market share. If significant price competition were to develop, the
Company likely would be forced to lower its prices, possibly for a protracted
period, which would have a material adverse effect on its financial condition
and results of operations and could threaten its economic viability. In
addition, the Company believes that the Internet service and on-line services
business is likely to encounter consolidation in the near future, which could
result in increased price and other competition in the industry and consequently
have an adverse impact on the Company's business, financial condition and
results of operations. See "Business - Competition."
New and Uncertain Market; New Entrants. The market for local Internet
service providers is in its early stages. Since this market is new, and because
current and future competitors are likely to introduce new products, it is
difficult to predict the forms of competition or the competitors that may
develop. There can be no assurance that the Company's local Internet provider
business can compete against new or developing competitors or that any local
provider can maintain its customer base against formidable national or other new
local competitors, or that Internet access will remain attractive to
subscribers. See "Business - Marketing."
Few Barriers to Entry. There are few significant barriers to entry in the
Internet access business. Accordingly, the Company expects ongoing substantial
competition in its markets from new local Internet service providers, as well as
existing local and national Internet providers. The Company's success will
depend on its ability to compete against these new and existing providers.
Importance of Entering New Markets and Identifying Acquisitions. The
Company's business plan calls for it to continue to enter new local markets in
order to grow. Entry into new local markets depends in part on acquiring small
access providers in secondary markets at favorable prices. Because there are a
limited number of small access providers in the Company's target markets, there
can be no assurance that the Company can acquire such companies on favorable
terms, or at all, or that it can obtain financing for such acquisitions. Should
the Company be unable to locate companies in suitable local markets for
acquisitions its growth would be adversely affected. See "Business - Strategy."
Technological Changes. The Internet is characterized by rapidly changing
technology, evolving industry standards, changes in customer needs and frequent
new service and product introductions. The Company's future success will depend,
in part, on its ability to effectively use new technologies, to continue to
enhance its current Internet access and other services, to develop new services
that meet changing customer needs, to advertise and market its services and to
11
influence and respond to emerging industry standards and other technological
changes on a timely and cost effective basis.
Government Regulation and Legal Uncertainties. The Company is not currently
subject to direct regulation by any government agency, other than regulations
applicable to businesses generally, and there are currently few laws or
regulations directly applicable to providing Internet access or other services
on the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that laws and regulations may be adopted with respect
to the Internet which may decrease the demand for Internet access, increase the
Company's cost of doing business or otherwise have an adverse effect on the
Company's operating results or financial condition.
Dependence on the Internet. The Company's business will depend in large
part upon a robust industry and infrastructure for providing Internet access and
carrying Internet traffic. Notwithstanding current interest and worldwide
subscriber growth, the Internet may not prove to be a viable marketplace because
of inadequate development of the necessary infrastructure or timely development
of complementary products, such as high speed modems. Because global commerce
and on-line exchange of information on the Internet, Web and other open area
networks are new and evolving, it is difficult to predict with any assurance
whether the Internet will prove to be economically viable in the long term. If
the necessary infrastructure or complementary products are not developed, or if
the Internet does not become an economically viable marketplace, the Company's
business, operating results and financial condition will be materially adversely
affected. See "Business - The Internet and the World Wide Web."
Potential Liability for Information Disseminated On-Line. Civil actions
have been brought for libel and negligence in connection with electronic
messages posted through on-line access systems. Such actions seek to impose
liability upon Internet access and service providers for information
disseminated through their systems. Any actions against the Company could
significantly and adversely effect its operations. The Company does not carry
insurance against such actions or liabilities arising thereunder.
Risk of System Failure; Limited Insurance. The success of the Company is
dependent upon its ability to offer high quality, uninterrupted access to the
Internet. Any system failure that causes interruptions in the Company's Internet
operations could have a material adverse effect on the Company. If the Company's
subscriber base expands, there will be increased stress placed upon the
Company's server hardware and traffic management systems. The Company's server
hardware is also vulnerable to damage from fire, earthquakes, power loss,
telecommunications failures and similar events. The Company carries property
damage insurance with a basic policy limitation of $250,000, subject to
deductibles and exclusions. Such coverage, however, may not be adequate to
compensate the Company for all losses that may occur. Moreover, significant or
prolonged system failure could damage the reputation of the Company and result
in the loss of subscribers.
12
Need for Additional Financing. The Company may be required to seek debt or
equity financing in the future to fund expansion activities and acquisitions of
small access providers. There can be no assurance that additional financing will
be available to the Company on acceptable terms, or at all. Any future equity
financing may involve substantial dilution to the interests of the Company's
stockholders. See "Financial Statements."
Dependance Upon Management. The Company's success is dependent in part upon
the continued employment of Raymond J. Meyers, its Chief Executive Officer. The
Company has an employment agreement with Mr. Meyers, and intends to apply for
key man life insurance upon his life in the face amount of $1,000,000. The loss
of the services of Mr. Meyers for whatever reason would have a material adverse
effect upon the Company's operations. See "Management."
No Dividends. The Company does not intend to pay any cash dividends on its
Common Stock in the foreseeable future. Earnings, if any, will be used to
finance growth. See "Description of Securities - Dividends."
Possible Volatility of Securities Prices. The future market price of the
Company's securities may be highly volatile, as has been the case with the
securities of other small capitalization companies. Factors such as the
Company's operating results and public announcements by the Company or its
competitors may have a significant effect on the market price of the Company's
securities. In addition, market prices for securities of many small
capitalization companies have experienced wide fluctuations in response to
variations in quarterly operating results, general economic indicators and other
factors beyond the control of the Company. The registration of the securities
offered hereby coupled with the exercise of the Warrants could further increase
the volatility of the Common Stock by increasing the number of shares of the
Company's publicly traded Common Stock outstanding.
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock in the open market or the availability of such shares for sale could
adversely affect the market price for the Common Stock. As of the date hereof,
there are 665,333 shares of the Company's Common Stock outstanding, of which (i)
46,000 shares were registered for sale in the Company's IPO, (ii) 426,667 shares
and 186,666 shares underlying 186,666 Common Stock Purchase Warrants were
registered in May 1997, (iii) 42,666 shares may currently be sold under Rule
144, and (iv) 150,000 shares may be sold under Rule 144 commencing in July 1998.
The holders of 30,300 shares have agreed to refrain from selling such shares
until October 1999 without the prior written consent of the Underwriter. The
Underwriter's Warrants (and the component securities) together with 150,000
shares of Common Stock issued in connection with the Bridge Loan are subject to
piggy-back and demand registration rights. See "Description of Securities -
Common Stock Eligible for Future Sale" and "Underwriting."
Authorization and Issuance of Preferred Stock; Prevention of Changes in
Control. The Company's Articles of Incorporation authorize the issuance of up to
5,000,000 shares of Preferred Stock with such rights and preferences as may be
13
determined from time to time by the Board of Directors. Accordingly, under the
Articles of Incorporation, the Board of Directors may, without shareholder
approval, issue Preferred Stock with dividend, liquidation, conversion, voting,
redemption or other rights which could adversely affect the voting power or
other rights of the holders of the Common Stock. The issuance of any shares of
Preferred Stock having rights superior to those of the Common Stock may result
in a decrease in the value or market price of the Common Stock and could be used
by the Board of Directors as a device to prevent a change in control of the
Company. The Company has no other anti-takeover provisions in its Articles of
Incorporation or Bylaws. Holders of the Preferred Stock, if issued, may be
granted the right to receive dividends, certain preferences in liquidation, and
conversion rights at the discretion of the Board of Directors. See "Description
of Securities - Use of Preferred Stock As Anti-Takeover Device" and "Principal
Stockholders."
Elimination of Director Liability. The Company's Articles of Incorporation
contain a provision eliminating directors' liability to the Company or to its
stockholders for monetary damages for breach of fiduciary duty, except in
circumstances involving a financial benefit to a director, intentional
infliction of harm to the Company or other wrongful acts, such as the breach of
a director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of criminal law. The Company's Bylaws contain
provisions obligating the Company to indemnify its directors and officers to the
fullest extent permitted under California law. These provisions could serve to
insulate officers and directors of the Company against liability for actions
which damage the Company or its stockholders. See "Description of Securities -
Limitation on Liability."
Underwriter's Influence on the Market. A significant amount of the Common
Stock and Warrants offered hereby may be sold to customers of the Underwriter.
Subsequently, such customers may engage in transactions for the sale or purchase
of such securities through or with the Underwriter. Although it has no
obligation to do so, the Underwriter intends to make a market in the Company's
Common Stock and Warrants and may otherwise affect transactions in the Common
Stock and Warrants. This market making activity may terminate at any time. If it
participates in the market, the Underwriter may exert a dominating influence on
the market, if one develops, for the Common Stock and Warrants. The price and
liquidity of the Common Stock and Warrants may be significantly affected by the
degree, if any, of the Underwriter's participation in such market. The
Underwriter may also engage in market making activities and soliciting brokerage
activities with respect to the purchase or sale of the Common Stock and Warrants
on the NASDAQ SmallCap Market where such securities are anticipated to trade.
However, no assurance can be given that the Underwriter will continue to
participate as market maker for the Common Stock and Warrants or that other
broker-dealers will make a market in such securities. See "Underwriting."
Representatives' Lack of Underwriting Experience. The Underwriter commenced
business as a broker-dealer in May 1996, and has not acted as an underwriter in
any prior public offerings, although it has participated as a dealer in
offerings underwritten by others and its Chief Executive Officer has more than
ten years experience in public offering financing. The Underwriter's lack of
underwriting experience may (i) adversely affect the development or continuation
14
of a trading market for the Common Stock and Warrants, (ii) have limited the
effectiveness of the Underwriter in negotiating the offering price of the Units
and the exercise price of the Warrants, and (iii) negatively influence the
market price of the Common Stock and Warrants following the Offering. The
Underwriter assisted the Company in a previous private placement of its
securities and with the Bridge Loan, pursuant to which the Underwriter received
cash commissions and common stock purchase warrants. See "Underwriting."
Non-Registration in Certain Jurisdictions of Shares of Common Stock
Underlying the Warrants. The Warrants are not convertible or exercisable unless,
at the time of exercise, the Company has a current prospectus covering the
shares of Common Stock issuable upon exercise of the Warrants and such shares of
Common Stock have been registered, qualified or deemed to be exempt under the
securities laws of the states of residence of the holders of such Warrants.
There can be no assurance that the Company will have or maintain a current
prospectus or that the securities will be qualified or registered under any
state law. Although the Company has undertaken and intends to use its best
efforts to maintain a current prospectus covering the Common Stock issuable upon
exercise of the Warrants following completion of the Offering to the extent
required by federal securities laws, there can be no assurance that the Company
will be able to do so. The value of the Warrants may be greatly reduced if a
prospectus covering the Common Stock issuable upon exercise of the Warrants is
not kept current or if the Common Stock issuable upon exercise of the Warrants
is not qualified, or exempt from qualification, in the states in which the
holders of the Warrants reside. Persons holding Warrants who reside in
jurisdictions in which such securities are not qualified and in jurisdictions
where there is no exemption will be unable to exercise their Warrants and would
either have to sell their Warrants in the open market or allow them to expire
unexercised. If, and when, the Warrants become redeemable by the terms thereof,
the Company may exercise its redemption right even if it is unable to qualify
the Common Stock issuable upon exercise of the Warrants for sale under
applicable state securities laws. See "Description of Securities Warrants."
Redemption of the Warrants. The Warrants may be redeemed by the Company
under certain circumstances (if there is a current prospectus covering exercise
of the Warrants) upon 30 days' written notice to the Warrantholders at $.10 per
Warrant. In such event, the Warrants will be exercisable until the close of
business on the date fixed for redemption in such notice. Any Warrants not
exercised by such time will cease to be exercisable, and the holders will be
entitled only to the redemption price, which is likely to be substantially less
than the market value of the Warrants. Accordingly, such redemption could force
the Warrantholders to exercise the Warrants and pay the exercise price at a time
when it might be disadvantageous for them to do so or to sell the Warrants at
the then market price when they might otherwise prefer to hold the Warrants. See
"Description of Securities - Warrants."
The Common Stock and the Warrants, which comprise the Units offered hereby,
are detachable and separately transferable immediately upon issuance. Purchasers
may buy Warrants in the aftermarket or may move to jurisdictions in which the
shares of the Common Stock underlying the Warrants are not registered or
15
qualified during the period that the Warrants are exercisable. In this event,
the Company would be unable to issue Common Stock to those persons desiring to
exercise their Warrants unless and until such shares could be qualified for sale
in jurisdictions in which the purchasers reside, or an exemption from
qualification exists in such jurisdiction. In this event, Warrantholders would
have no choice but to attempt to sell the Warrants in a jurisdiction where such
sale is permissible or allow them to expire unexercised. See "Description of
Securities Warrants."
Risks Associated With Penny Stocks Such as the Company's; Lack of
Liquidity. The Commission has adopted rules that define "penny stock" and such
definition includes the securities of the Company until such time as its
securities are listed on the NASDAQ SmallCap Market. In such event,
broker-dealers dealing in the Company's securities will be subject to specific
disclosure rules for transactions involving penny stocks such as the Company's
which require the broker-dealer among other things to (i) determine the
suitability of purchasers of the securities and obtain the written consent of
purchasers to purchase such securities and (ii) disclose the best (inside) bid
and offer prices for such securities and the price at which the broker-dealer
last purchased or sold the securities. The additional burdens imposed upon
broker-dealers might discourage them from affecting transactions in the
Company's securities, which would reduce the liquidity of the Company's
securities making it more difficult for stockholders to sell the securities
should they desire to do so.
Maintenance Criteria for the NASDAQ SmallCap Market Securities. The Company
has applied to have the Common Stock and Warrants listed on the NASDAQ SmallCap
Market. The NASD, which administers the NASDAQ SmallCap Market, sets the
criteria for continued eligibility on the NASDAQ SmallCap Market. In order to
continue to be included on the NASDAQ SmallCap Market, a company must maintain
$2 million in net tangible assets, a $1 million market value of its public
float, at least 300 holders of its Common Stock and a minimum bid price of $1
per share. The Company's failure to meet these maintenance criteria or future
maintenance requirements imposed by the NASDAQ SmallCap Market may result in the
discontinuance of the inclusion of the Company's securities in the NASDAQ
SmallCap Market. In such event, trading, if any, in the securities may then
continue to be conducted in the non-NASDAQ over-the-counter market on the
Bulletin Board.
16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997, and as adjusted to give effect to the sale of the 900,000
Units offered hereby and application of the estimated net proceeds without
giving effect to the exercise of the Warrants, the Overallotment Option, the
Underwriter's Warrants, or other outstanding warrants or options. See "Use of
Proceeds" and "Description of Securities."
September 30,
1997 As Adjusted
----------- -----------
Short term debt $ 789,358 $ 39,358
----------- -----------
Long term debt $ 1,812,493 1,812,493
----------- -----------
Stockholders' equity:
Preferred Stock, 5,000,000 no par value
shares authorized, none
issued and outstanding -- --
Common Stock, 10,000,000 no par value
shares authorized, 665,333 shares
issued and outstanding, 1,565,333 as
adjusted 5,590,455 -----------
Accumulated deficit (5,051,639) (5,051,639)
----------- -----------
Total stockholders' equity 538,816
----------- -----------
Total capitalization $ 3,140,667 $
=========== ===========
17
PRICE RANGE OF COMMON STOCK
The Company's Common Stock traded on the NASDAQ SmallCap Market under the
symbol "PSCO" from February 9, 1995, until July 10, 1996, when it was delisted
from the NASDAQ SmallCap Market and commenced trading on the Bulletin Board. The
Company currently trades on the Bulletin Board under the symbol "PSCO."
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 Bulletin Board but does not include retail markup, markdown or
commissions.
Price
----------------
By Quarter Ended: High Low
- ----------------- ----- -----
December 31, 1997 (through November 18, 1997)................ $6.25 $5.25
September 30, 1997........................................... 6.30 5.25
June 30, 1997................................................ 5.50 3.15
March 31, 1997 .............................................. 4.65 3.15
December 31, 1996............................................ 11.25 3.15
September 30, 1996........................................... 15.00 8.40
June 30, 1996................................................ 26.25 8.40
March 31, 1996............................................... 31.95 14.10
December 31, 1995............................................ 37.50 26.25
September 30, 1995........................................... 60.00 15.00
June 30, 1995................................................ 73.20 50.10
March 31, 1995............................................... 75.00 63.75
As of November 18, 1997, the Company had approximately 365 record and
beneficial stockholders.
USE OF PROCEEDS
The net proceeds of the Offering will be used (i) to repay $750,000 of
Bridge Loan debt incurred by the Company for working capital and bearing
interest at 12% per annum, due the earlier of the closing of the Offering or
September 15, 1998, (ii) to acquire small Internet access providers and other
small computer oriented companies ($2,000,000), (iii) for marketing expenses to
increase the Company's Internet access customer base ($450,000), and (iv) for
working capital ($______). See "Business - Strategy."
18
SELECTED FINANCIAL DATA
The selected financial data set forth below for the years ended December
31, 1996 and 1995 is derived from the Company's financial statements which have
been audited by Angell & Deering. The financial information for the nine months
ended September 30, 1997, and 1996, has been derived from the unaudited
financial statements of the Company. In the opinion of management, the unaudited
financial statements include all adjustments (consisting only of normal
recurring adjustments) that are necessary for a fair presentation of the
financial position and results of operations of such periods. Results of
operations for the nine months ended September 30, 1997, may not be indicative
of results for the year ending December 31, 1997. The selected financial data is
qualified in its entirety by, and should be read in conjunction with, the
financial statements and the notes thereto included elsewhere herein. See
"Financial Statements."
Year Ended December 31, Nine Months Ended September 30,
------------------------------ -------------------------------
1996 1995 1997 1996
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Income Statement Data:
Revenues $ 697,581 $ 100,901 $ 550,969 $ 544,590
(Loss) from continuing
operations (672,791) (974,578) (1,455,284) (417,782)
Net (loss) (1,409,800) (1,816,285) (1,455,284) (681,982)
Net (loss) per share (7.74) (22.04) (2.61) (7.69)
Weighted average number
of shares outstanding 182,037 82,439 557,897 88,667
September 30,
1997 As Adjusted (1)
---------- ---------------
Balance Sheet Data: (Unaudited) (Unaudited)
Working capital (deficit) $(584,615) _________
Total assets 3,255,812 _________
Long-term debt 1,812,493 _________
Total liabilities 2,716,996 _________
Stockholders' equity 538,816 _________
----------
(1) As adjusted to give effect to the receipt and application of the estimated
net proceeds of the Offering without giving effect to exercise of the
Warrants, the Underwriter's Warrants or other outstanding warrants or stock
options. See "Use of Proceeds" and "Description of Securities."
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Background
The Company provides Internet access and related services to individuals,
public agencies and businesses in six small Central California Cities. As of
September 30, 1997, the Company had 2700 subscribers for whom it provided
Internet access. The Company intends to acquire other small Internet providers
in markets with populations of less than 500,000 that are located in various
Central California cities between Sacramento and Bakersfield. The Company
believes that certain of these local Internet providers currently doing business
in the Company's target markets are unable 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 throughout Central California, (ii) developing diversified services
similar to its larger competitors, such as hourly-based access services, special
access packages for business and high speed access, and (iii) investing in
automated billing and administrative systems. The Company believes these
resources will not only allow it to compete effectively with larger access firms
entering the Company's markets, but will also facilitate the Company's efforts
to attract small Internet providers. The Company's long-term plan is to increase
revenues through acquisitions in such markets together with the acquisition of
small companies which provide related Internet products and services. The
Company is not currently negotiating to acquire, nor has it entered into any
agreement to acquire, any other companies.
Results of Operations
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Net Sales. For the nine months ended September 30, 1997, net sales were
$550,969 versus $544,590 in the same period of the prior year, representing a
increase of $6,379. The slight increase in net sales is primarily attributed to
higher customer retention rates.
Gross Profit. For the nine months ended September 30, 1997, gross profit
was $343,668 versus $387,667 in 1996, representing a decrease of $44,009. The
decrease in gross profit is attributed to higher telecommunications costs.
Sales and Marketing. Sales and marketing expenses were $50,403 for the nine
months ended September 30, 1997 versus $47,528 in 1996. The increase in sales
and marketing expenses was caused by increased advertising and travel . The
Company believes that sales and marketing expenses will continue to increase if
funds are available to the Company to promote its products and services.
20
General and Administrative. General and administrative expenses increased
from $693,014 in 1996 to $1,157,315 in 1997. The increase in general and
administrative costs is primarily attributed to costs associated with its May
1997 Registration Statement covering the May 1997 Securities and expenses
associated with the Bridge Loan.
Operating Loss. For the nine months ended September 30, 1997, the operating
loss was $864,050 compared to an operating loss of $352,875 in the same period
of 1996. The operating loss in 1997 is attributed to the significant increases
in general and administrative expenses described above. The Company intends to
reduce costs and increase revenues in order to improve future operating results.
Interest Expense. Net interest expense increased to $794,663 for the nine
months ended September 30, 1997 from $136,187 in the same period of 1996, as a
result of costs associated with the Bridge Loan. This interest expense includes
financing costs of $750,000 in connection with the issuance of 150,000 shares of
Common Stock in the Bridge Loan. The interest expense was somewhat offset by the
interest earned on cash and short term investments.
Other Income. Net other income increased to $203,429 for the nine months
ended September 30, 1997, as a result of rental income generated by the
Company's office building and miscellaneous sales.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Sales. For fiscal 1996, Internet services revenues were $697,581 versus
$100,901 in fiscal 1995, which represents a 591% increase in revenue. The
increases are attributed to increases in the number of Internet users worldwide
and the Company's increased market penetration in the Central California area.
Management believes that the Company's revenues will continue to increase as it
increases the number of points of presence ("POPS") through which it markets its
Internet services. The number of POPS to be developed in any given geographic
area depends upon the Company's estimate of "demand" in such geographic area. In
turn, demand is based upon the population and rate of population growth, the
number of existing access providers, the number of access subscribers and the
growth rate of such access subscribers in the particular area.
Operating Expenses. Operating expenses were $1,121,773 in 1996 versus
$1,079,503 in 1995. The increased operating expense is the result of increased
depreciation expense, additional personnel expenses and legal and accounting
expenses related to the Company's restructuring and the divestiture of the
Classic Line. Management believes that the operating expenses will remain at the
same level or decrease due to reduced personnel and facilities expenses as a
result of the Classic Line sale. The decreases may be somewhat offset by the
increases in operating expenses as the Company's Internet business grows.
21
Operating Loss. For fiscal 1996, the operating loss was $424,192 compared
to an operating loss of $978,602 in 1995 which represents a 56% decrease. The
decrease in the operating loss in 1996 is attributed to the significant
increases in Internet services revenues by $596,680. Management believes that
operating results will improve as revenues increase and operating expenses
decrease.
Interest Expenses. Net interest expense for 1996 was $268,721 compared to
$109,301 in 1995. The increase in interest expense is primarily attributed to
additional interest expense related to the building which the Company acquired
under a 20-year capital lease. The net interest expense increased as a result of
a decrease in interest income in 1996.
Financing Costs. Financing costs were $126,000 in 1996, which represented
commissions and expenses related to the issuance of 26,667 shares of the
Company's Common Stock to investors. The Common Stock issued was valued at $3.75
per share and resulted in a financing expense of $100,000 to the Company.
Liquidity and Capital Resources
For the nine months ended September 30, 1997, the Company used cash of
$1,018,558 for operating activities. The Company had a working capital
deficiency of $584,615 at September 30, 1997 which is primarily attributed to
the short term liability treatment of the Bridge Loan. The Company intends to
reduce the working capital deficit by (i) increasing sales, (ii) reducing
certain low margin operations and (iii) obtaining long-term financing. There can
be no assurance that the Company will be successful in these actions and if
unsuccessful, the Company may be required to substantially reduce its
operations.
Capital expenditures relating primarily to the purchase of computer
equipment, furniture and fixtures, and other assets amounted to $80,887 and
$448,210 for the nine months ended September 30, 1997 and 1996 respectively. In
addition, the Company acquired through lease $69,959 of computer equipment for
its Internet operations during the nine month period ended September 30, 1997.
Between June and September 1997, the Company received $750,000 from
proceeds of the Bridge Loan, which was used for working capital, marketing
expenses and the purchase of capital equipment. In connection with the Bridge
Loan, the Company agreed to issue 150,000 restricted shares of its Common Stock,
subject to certain piggy-back and demand registration rights at the Company's
expense. The fair market value of the Common Stock issued was charged to
operations as an additional financing expense for the nine months ended
September 30, 1997.
22
BUSINESS
Introduction
The Company provides Internet access and related services to individuals,
public agencies and businesses in six small Central California cities. As of
September 30, 1997, the Company had 2,700 subscribers for whom it provided
Internet access up from 250 subscribers in July 1995. See "History." The Company
intends to acquire other small Internet providers in markets with populations of
less than 500,000 that are located in various Central California cities between
Sacramento and Bakersfield. The Company believes that certain of these local
Internet providers currently doing business in the Company's target markets are
unable 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 throughout Central
California, (ii) developing diversified services similar to its larger
competitors, such as hourly-based access services, special access to 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. The Company's long-term plan is to target a select number of
such markets and increase revenues through acquisition in these markets. The
Company is not currently negotiating to acquire, nor has it entered into any
agreement to acquire, any other companies. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
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 computer oriented companies. The Company will also seek to generate
additional revenues by (i) increasing monthly Internet access fees while
offering additional Internet products and services, (ii) offering monthly
community access services, (iii) providing Internet consulting services, and
(iv) generating marketing service fees from businesses seeking a Web site on the
Internet.
The Internet and the World Wide Web
The Internet is a worldwide network that links thousands of public and
private computer networks. The Internet began in 1969 as a project of the
Advanced Research Projects Agency ("ARPA") of the U.S. Department of Defense to
connect different types of computers across geographically disparate areas. The
ARPA network was designed to allow any computer on the network to communicate
with any other computer on the network through an open communications protocol
known as TCP/IP.
23
Initially, use of the Internet was limited to governmental, educational and
commercial organizations with a working knowledge of certain computer operating
systems and commands, and the primary use made of the Internet was the
communication of information via electronic mail. However, there has been a
rapid growth in the use and popularity of the Internet in the past several
years. According to industry sources, users in more than 130 countries
throughout the world are connected to the Internet including 24 million users in
North America, 17.6 million of whom use the Web.
The dramatic growth in the number of Internet users is attributable to a
number of developments and factors. The first was the introduction in 1992 of
the World Wide Web ("Web"), a client/server system of hyperlinked multimedia
databases which began to unlock the potential of the Internet as a mass medium.
The Web, developed by the European Laboratory for Research Physics ("CERN") in
Switzerland, advanced the potential of the Internet in several significant ways.
First, it enabled full multimedia presentation (including text, graphics, video
and audio) over the Internet. Second, through the Web's system of standardized
information protocols and a communications format called HyperText Transfer
Protocol ("HTTP"), users were allowed to access information (to "navigate") on
the Web without entering complex alphanumeric commands. Third, using HyperText
Markup Language ("HTML"), document authors were able to link text or images in
one document to other documents anywhere else on the Web. When the user selected
or, if using a mouse, clicked on the hypertext in one document (often displayed
on the screen as highlighted words or images), the linked document was
automatically accessed and displayed.
The Web is based on a client/server system in which certain computers
("servers") store information in files and respond to requests issued by remote
user computers to view or download files, thus allowing multiple, geographically
dispersed users to view and use the information stored on a single server. The
user must use software, known as a browser, that can read HTML documents and
follow their hypertext links to retrieve and display linked documents from
servers such as the Company.
An early limitation to growth of the Web was that the browser software
initially provided by CERN was text-based and contained limited retrieval and
display capabilities. However, in January 1993, the National Center for
Supercomputing Applications ("NCSA") at the University of Illinois at
Urbana-Champaign significantly advanced the use of Web technology with the
introduction of NCSA Mosaic for X Window on the UNIX platform, the first
graphical user interface browser for the Web. The NCSA Mosaic graphical user
interface allows users to access the diverse information archives, data
protocols and data formats of the Internet using point-and-click, mouse-driven
commands. NCSA Mosaic, which is offered to users on a free-with-copyright basis
(making it available for use without charge and without the right to
distribute), served as a catalyst for increased use of the Web. When NCSA
released a version of NCSA Mosaic for Windows in September 1993, the Web became
accessible to personal computer users for the first time.
The increased popularity of the Internet is also attributable to the
proliferation of information and services available on the Internet, as well as
24
the expanded use of home personal computers which increasingly contain modems as
a standard feature. Among the types of publications and information available to
Internet users are newspapers, magazines, weather updates, government documents
and industry newsletters, as well as a variety of commercial products and
services.
In order to support the continued growth and popularity of the Internet,
certain infrastructure elements must expand to handle the resulting increases in
Internet demand and traffic. These elements include widespread, inexpensive
Internet access, either through Internet access providers such as the Company or
on-line services, and widely available high-speed communications channels to
accommodate the increasing number and size of files available for downloading.
As business organizations have begun to realize the potential of the
Internet as an inexpensive and effective means of offering products and services
directly to customers and potential customers, businesses are increasingly
advertising and selling such products and services on the Web. For example,
business organizations are now using the Web to provide product information and
support to existing customers, to advertise products and services and to offer
products and services for sale by means of on-line catalogs. It is this market,
as well as Internet access, that the Company seeks to address.
Computer users wishing to access the vast array of information and services
available on the Web use a browser that can read HTML documents, follow
hypertext links and interface with the diverse information archives and data
formats of the Web. The basic needs of most individual computer users casually
browsing the Web can be fulfilled by a number of different browsers available
today.
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 compputer oriented companies. The Company will also seek to generate
additional revenues by (i) increasing monthly Internet access fees while
offering additional Internet products and services, (ii) offering monthly
community access services, (iii) providing Internet consulting services, and
(iv) 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 Web is the driving force
behind the growth in Internet subscribers who use the Web to access information
as well as to engage in commerce and communication. The Company intends to
continue to provide low-priced direct Internet access through the Company's
telecommunication network infrastructure which is comprised of two high speed
dedicated data lines that connect directly to the backbone of the Internet. The
25
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 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.
Offering Monthly Community Access Services. Local public agencies, (such as
city agencies, police departments and libraries), are seeking to provide
information resources directly to their citizens through Community Web sites.
Believing that its subscribers will be willing to pay a recurring fee for such
community information access, the Company intends to offer such access in 1998.
Providing Internet Consulting Services. The Company provides 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
Central California target markets. The criteria for such acquisition candidates
calls for attracting companies that (i) are located in markets with a population
under 500,000; (ii) have been in business a minimum of one year; (iii) have at
least 300 subscribers; (iv) have current owners and staff with strong technical
backgrounds, (v) enjoy strong community contacts, and (vi) offer projected
annual growth rates in excess of 200%. The Company may also seek to acquire
other small computer oriented companies. The Company is not negotiating to
acquire, nor has it entered into any agreement to acquire, any such companies.
Marketing
The Company primarily markets its products and services to customers who
are new to the Internet, and who seek to access information using
point-and-click graphical interface. Marketing is conducted through a small
sales force which contacts prospective customers through advertisements in
26
computer, professional and business publications. The Company also attracts
customers by participating in industry trade shows and educational seminars and
through referrals from existing customers. In addition, the Company seeks
strategic alliances with local computer retailers who offer Internet access fee
discounts to their customers and through joint advertising efforts with
television and radio stations. The Company may also distribute Internet services
through retail channels.
Direct mailings, telemarketing programs, co-marketing agreements and joint
promotional efforts among organizations and individual users are strategies that
the Company may employ in the future. Finally, the Company seeks to retain
business customers and individual users through what it perceives to be
responsive customer support and services programs.
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 Company also faces significant competition from Internet access consolidates
such as Verio, Inc. and from on-line service firms such as America Online (AOL),
CompuServe, and Prodigy. The Company believes that new competitors which may
include computer software and services, telephone, media, publishing, cable
television and other companies, are likely to enter the on-line services market.
The ability of some of the Company's competitors to bundle Internet access
software with other popular products and services could give those competitors
an advantage over the Company. For example, NETCOM, MCI and PSI offer retail
software packages and AOL and Prodigy bundle their software with new PCs.
Many of the Company's competitors possess financial resources significantly
greater than those of the Company and, accordingly, could initiate and support
prolonged price competition to gain market share. If significant price
competition were to develop, the Company might be forced to lower its prices,
possibly for a protracted period, which would have a material adverse effect on
its financial condition and results of operations and could threaten its
economic viability. In addition, the Company believes that the Internet service
and on-line 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, technical expertise, local
presence in a market, ease of use, variety of value-added services and
reliability. The Company believes it is able to compete favorably in these
areas. The Company's success in its markets will depend heavily upon its ability
27
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 September 30, 1997, the Company employed ten full-time and two
part-time individuals. The Company believes it maintains good relations with its
employees. None of the Company's employees are represented by a labor union or
covered by a collective bargaining agreement.
Properties
In September 1994, the Company acquired, under a 20-year non-cancelable
capital lease, an office building, including land and improvements located at
2580 West Shaw, Fresno, California 93711. The lease requires initial annual
minimum lease payments of $188,000, increasing every five years to a maximum
annual payment of $338,000 in 2009. Under the lease, the Company has an option
to purchase the building and land for $1,800,000 until April 30, 1997. Such
amount increases to $1,900,000 through April 30, 1998. After April 30, 1998, the
option amount increases annually by the percentage increase in the Consumers
Price Index, as further described in the lease. Upon exercise of the purchase
option, the principal portion of the lease payments made by the Company will be
applied toward the down payment for the purchase price based upon an amortized
20-year note with interest accruing at 9% per annum. The Company does not occupy
any space in the building, although it leased a portion of it to SSC and the SSC
Principals based upon monthly payments to the Company of $12,000 through
February 1998. See "Certain Transactions". In May 1997, as a result of the
Company's default on the lease, the Company agreed to return possession of the
office building to the landlord. Accordingly, the landlord collects rents
directly from the tenants of the office building and the Company is responsible
for the difference between such aggregate rents and the Company's lease payment
to the landlord. As of the date hereof, the landlord is collecting monthly rents
aggregating approximately $9,200 and the Company's monthly leasehold obligation
is approximately $15,600 leaving a monthly balance due from the Company to the
landlord of approximately $6,400.
The Company 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. The Company also
leases approximately 250 square feet for its corporate office space in Santa
Monica, California on a month-to-month lease for $600 per month.
28
Litigation
As a result of the failure of SSC and the SSC Principals to pay certain
trade account payables and certain office rent under a sublease from the
Company, the Company has been threatened with litigation from such trade
creditors (currently aggregating approximately $25,000) and has been required to
return possession of the SSC subleased office space to the Company's landlord.
The Company believes that the total contingent liability to trade account
creditors arising from defaults by SSC and the SSC Principals does not exceed
$100,000. Moreover, the total amount due from SSC and the SSC Principals under
the Company's office sublease aggregates approximately $100,000.
In May 1997, the SSC Principals brought an administrative labor claim
against the Company seeking unpaid wages in the amount of approximately
$160,000. This Company believes the claim to be without merit and intends to
vigorously defend it.
The Company is a defendant in a civil action entitled "P/K Associates, Inc.
et al. v. Fresno Business Journal, Inc., et al" civil action number 97-5546
filed in the United State District Court for the Eastern District of California.
The suit alleges certain copyright violations against the Fresno Business
Journal and the Company. The Company believes the claims are without merit and
intends to vigorously defend them.
In February 1997, three of the Company's former employees brought a civil
action against the Company entitled "David J. Dague, et al. v. ProtoSource
Corporation" for back wages aggregating approximately $45,000. The Company
alleges that these amounts, if due, are the responsibility of SSC and the SSC
Principals under the Divestiture Agreement. The Company is unable to predict the
outcome to the litigation.
29
MANAGEMENT
Officers and Directors
The name, age and position of each of the Company's executive officers and
directors are set forth below:
Officer/Director
Name Age Position Since
---- --- -------- -----
Raymond J. Meyers 41 Chief Executive Officer 1996
Chief Financial Officer
and Director
David A. Appell 34 Director 1997
Dickon Pownall-Gray (1) 43 Director 1997
- ----------
(1) Mr. Pownall-Gray will become a director of the Company at the closing of
the Offering.
Directors hold office for a period of one year from their election at the
annual meeting of stockholders or until their successors are duly elected and
qualified. Officers of the Company are elected by, and serve at the discretion
of, the Board of Directors. In January 1997, in connection with the sale of the
Company's Classic Line, the SSC Principals resigned as officers and directors
and Raymond J. Meyers, Andrew Chu, Steven A. Kriegsman and Howard P. Silverman
were elected as officers and directors. In May 1997 Mr. Kriegsman resigned and
in August 1997 Messrs. Chu and Silverman resigned.
Background
The following is a summary of the business experience, for at least the
last five years, of each executive officer and director of the Company:
Raymond J. Meyers became the Company's Chief Executive Officer in December
1996. From 1985 to 1996, he was employed by Transamerica Corporation holding a
variety of positions, most recently (from 1991 to 1996) as Director of Business
Services for Transamerica Telecommunications. Mr. Meyers graduated from Rutgers
University in 1979, with a Bachelor of Arts degree in Economics.
David A. Appell became a Director of the Company in September 1997. Since
January 1997, he has served as an investment banker for the Underwriter, and
since February 1992, he has been engaged in the private practice of law. Mr.
Appell also serves as a director of Allied Capital Services, LLC, a consulting
firm which provides financing and real estate development services. From April
1996 to January 1997 he served as Managing Director of Investment Banking for
R.D. White & Co., Inc. Mr. Appell is the General Partner of HPH Capital Growth
30
L.P., a New York Limited Partnership created to raise and manage funds for
equity investments. From December 1993 through April 1996 he served as house
counsel for Comart, Inc., an introducing broker registered with the commodities
futures trading commission. Mr. Appell received a Judicial Doctorate degree from
Cardozo Law School and holds a BBA in Accounting from Pace University. He is a
Member of the New York State Bar and New Jersey State Bar. He is a registered
options principal, general securities representative, uniform securities agent
and general securities principal. He is also registered as a commodity trading
advisor and commodity pool operator.
Dickon Pownall-Gray will become a director of the Company at the closing of
the Offering. Since 1994 he has acted as an independent consultant and an
investment manager for his own account. Since 1995 he has also been a
stockholder and a director of Infosis, Inc. From 1992 to 1993 he served as
Senior Vice President in charge of acquisitions for Preferred Health Care, Inc.
From 1988 to 1991 he was Chief Executive Officer and a founder of CareSys, Inc.,
a medical monitoring and database cost containment company. In 1991 he sold
CareSys, Inc. to Preferred Health Care, Inc. From 1985 to 1987 he served as
Chief Executive Officer of Health Care Systems. From 1982 to 1984 he was a
senior consultant for Bain & Co. in its London office. Mr. Pownall-Gray holds an
MBA from the London Business School, an MA in Sports Science from the University
of California Berkeley, a BA (Honors History and Sports Science) from the
University of Birmingham.
Executive Compensation
None of the Company's executive officers or directors currently receive
compensation in excess of $100,000 per year except Mr. Meyers, the Company's
Chief Executive Officer, who receives a salary of $130,000 per year pursuant to
an Employment Agreement which expires in January 1999. The Employment Agreement
also provides for cash bonuses ranging from $25,000 (if the Company earns at
least $500,000 before taxes in any year) to $75,000 (if the Company earns at
least $1,250,000 before taxes in any year). In connection with his employment,
Mr. Meyers was also granted options to purchase 36,667 shares of Common Stock
vesting over a three year period at $3.75 per share exercisable at any time
until October 2001. No executive officer or director received compensation in
excess of $100,000 for the calendar years ended December 31, 1996, 1995 or 1994.
Compensation for all officers and directors as a group for the calendar year
ended December 31, 1996, aggregated $64,000.
31
The following table discloses certain compensation paid to the Company's
executive officers for the calendar years ended December 31, 1996, 1995 and
1994.
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
------------------- -----------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name
and
Prin- Other All
cipal Annual Restricted Other
Posi- Compen- Stock Options/ LTIP Compen-
tion Year Salary($) Bonus($) sation($) Award(s)($) SARS(#) Payouts ($) sation($)
- ------------ ---- --------- -------- --------- ----------- ------- ---------- ---------
James C. 1996 $61,925 $ 0 0 0 0 0 0
Robinson 1995 61,425 5,941 0 0 0 0 0
Chief Execu- 1994 57,226 25,000 0 0 0 0 0
tive Officer
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.
The Plan is administered by the Board of Directors. As of September 30,
1997, 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
32
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 for reissuance. Shares issued upon exercise of
an option will rank equally with other shares then outstanding.
As of the date of this Prospectus, no options have been granted under the
Plan.
33
PRINCIPAL STOCKHOLDERS
The following table sets forth information concerning the holdings of
Common Stock (without giving effect to any shares issuable upon exercise of the
Warrants, the Overallotment Option, or the Underwriter's Warrants) by each
person who, as of the date of this Prospectus, holds of record or is known by
the Company to hold beneficially or of record more than 5% of the Company's
Common Stock, by each director, and by all directors and executive officers as a
group. All shares are owned beneficially and of record and all share amounts
include warrants and options exercisable within 60 days from the date hereof.
The address of all persons listed below is in care of the Company at 2300 Tulare
Street, Suite 210, Fresno, California 93721.
Percent of Percent of
Amount of Class Prior to Class After
Name Ownership Offering Offering
- --------------- --------- ------------- -----------
Raymond J. Meyers (1) 13,333 2.0% .8%
Andrew Chu(2) 38,999 5.5% 2.4%
David A. Appell 0 0% 0%
Dickon Pownall-Gray 0 0% 0%
Steven A. Kriegsman(3) 117,667 15.0% 7.0%
Anaka Prakash 38,667 5.8% 2.5%
World Spirit, Inc. 50,000 7.5% 3.2%
All officers and directors as
a group (3 persons)(1) 13,333 2.0% .8%
- ----------
(1) Represents stock options to purchase 13,333 shares at $3.75 per share at
any time until October 2001. Mr. Meyers holds an additional 23,334 stock
options which vest in 1998 and 1999.
(2) Represents common stock purchase warrants to purchase 38,999 shares at
$3.75 per share at any time until October 2001.
(3) Represents common stock purchase warrants to purchase 117,667 shares at
$3.75 per share at any time until October 2001. All common stock purchase
warrants are held by the Kriegsman Group of which Mr. Kriegsman is the
President and a principal stockholder.
34
CERTAIN TRANSACTIONS
Management of the Company believes that the transactions described below
were no more or less fair than the terms of transactions which the Company might
otherwise have entered into with third party nonaffiliated entities. All related
party transactions have been and will continue to be approved by a majority of
the disinterested members of the Company's Board of Directors.
In November 1994, the Company issued 857,140 shares of its Convertible
Preferred Stock to five of the Company's then officers and directors, each share
of which was convertible for no additional consideration into one share of
Common Stock for each fifteen shares of Preferred Stock. The Convertible
Preferred Stock was canceled and returned to the Company by the five holders in
connection with the Divestiture Agreement described below.
In February 1995, the Company loaned $35,000 to Charles T. Howard, the
Company's then President. Interest on the loan is payable monthly at the rate of
9% per annum and the promissory note evidencing the indebtedness was due in
April 1997 and remains unpaid. The promissory note is secured by 3,333 shares of
the Company's Common Stock owned by Mr. Howard and was transferred to SSC as a
part of the Divestiture Agreement described below.
In October 1996, the Company issued 146,666 common stock purchase warrants
to the Kriegsman Group ("KG") for consulting services. Steven A. Kriegsman who
subsequently became a director of the Company is the President and controlling
stockholder of KG. KG subsequently assigned 35,666 of such warrants to Andy Chu,
the Company's President and a director. KG also assigned 3,333 of the 10,000
stock options it received from the SSC Principals to Mr. Chu to provide him with
an equity stake in the Company. KG believed that the Company's success and
therefore the economic success of its investment in the Company depended in part
upon the participation of Mr. Chu as the Company's then President.
In October 1996, the Company issued 146,667 common stock purchase warrants
to the Underwriter as compensation for it assisting the Company in the private
placement of 400,000 shares of the Company's Common Stock to a group of
investors for $3.75 per share. The Underwriter subsequently assigned 56,667 of
such warrants to Howard P. Silverman, a former director of the Company, for his
assistance to the Underwriter in connection with the private placement. At the
time the subject Warrants were assigned, Mr. Silverman was not a director of the
Company. The Company also paid to the Underwriter a cash commission of 10% of
the gross proceeds raised ($150,000) and a nonaccountable expense allowance of
3% of such gross proceeds ($45,000). In June 1997, the Underwriter and Mr.
Silverman returned 106,667 warrants to the Company without consideration.
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,
35
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 which were previously
exercisable into shares of Common Stock on a fifteen for one basis, (ii) agreed
to refrain from the sale of an aggregate of 30,300 shares of Common Stock owned
by them until October 1999, except with the prior written consent of the
Underwriter, (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, then a director of the Company, an option to purchase up to 10,000
shares of Common Stock held by the SSC principals at any time until October
2001, and (v) personally guaranteed ,on a joint and several basis, the $770,850
promissory note and all other obligations of SSC to the Company. The Classic
Line assets were valued as a result of negotiations between the Company and the
SSC Principals.
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 10,000,000 shares of common stock, no
par value (the "Common Stock"), of which 665,333 shares are currently
outstanding. Upon issuance, the shares of Common Stock are not subject to
further assessment or call. The holders of Common Stock are entitled to one vote
for each share held of record on each matter submitted to a vote of
stockholders. Cumulative voting for election of directors is permitted. Subject
to the prior rights of any series of Preferred Stock which may be issued by the
Company in the future, holders of Common Stock are entitled to receive ratably
such dividends that may be declared by the Board of Directors out of funds
legally available therefor, and, in the event of the liquidation, dissolution or
winding up of the Company, are entitled to share ratably in all assets remaining
after payment of liabilities. Holders of Common Stock have no preemptive rights
and have no rights to convert their Common Stock into any other securities. The
outstanding Common Stock is, and the Common Stock to be outstanding upon
completion of the Offering will be, validly issued, fully paid and
non-assessable.
Warrants
Each Warrant represents the right to purchase one share of Common stock at
an initial exercise price of $______ per share (100% of the closing bid price of
the Common Stock on the Bulletin Board one day prior to the date hereof) for a
period of five years from the date hereof. The exercise price and the number of
shares issuable upon exercise of the Warrants will be adjusted upon the
occurrence of certain events, including the issuance of Common Stock as a
dividend on shares of Common Stock, subdivisions, reclassifications or
combinations of the Common Stock or similar events. The Warrants do not contain
provisions protecting against dilution resulting from the sale of additional
shares of Common Stock for less than the exercise price of the Warrants or the
36
current market price of the Company's securities and do not entitle Warrant
holders to any voting or other rights as a shareholder until such Warrants are
exercised and Common Stock is issued.
Warrants may be redeemed in whole or in part at the option of the Company
after one year from the date hereof, upon 30 days' notice and with the consent
of the Underwriter, at a redemption price equal to $.10 per Warrant if the
closing price of the Company's Common Stock on the NASDAQ SmallCap Market (or
the Bulletin Board) is at least $_______ per share (150% of the closing price of
the Common Stock on the Bulletin Board one day prior to the date hereof) for 20
consecutive trading days, ending not earlier than 15 days before the Warrants
are called for redemption.
Holders of Warrants may exercise their Warrants for the purchase of shares
of Common Stock only if a current prospectus relating to such shares is then in
effect and only if such shares are qualified for sale, or deemed to be exempt
from qualification under applicable state securities laws. The Company is
required to use its best efforts to maintain a current prospectus relating to
such shares of Common Stock at all times when the market price of the Common
Stock exceeds the exercise price of the Warrants until the expiration date of
the Warrants, although there can be no assurance that the Company will be able
to do so.
The shares of Common Stock issuable on exercise of the Warrants will be,
when issued in accordance with the Warrants, duly and validly issued, fully paid
and non-assessable. At all times that the Warrants are outstanding, the Company
will authorize and reserve at least that number of shares of Common Stock equal
to the number of shares of Common Stock issuable upon exercise of all
outstanding Warrants.
For the term of the Warrants, the holders thereof are given the opportunity
to profit from an increase in the per share market price of the Company's Common
Stock, with a resulting dilution in the interest of all other stockholders. So
long as the Warrants are outstanding, the terms on which the Company could
obtain additional capital may be adversely affected. The holders of the Warrants
might be expected to exercise the Warrants at a time when the Company would, in
all likelihood, be able to obtain additional capital by a new offering of
securities on terms more favorable than those provided by the Warrants.
Prior Warrants
In connection with the IPO, the Company issued 46,000 Prior Warrants. Each
Prior Warrant represents the right to purchase one share of Common Stock at an
exercise price of $97.50 per share at any time until February 9, 1998. The
exercise price and the number of shares issuable upon exercise of the Prior
Warrants are subject to adjustment in certain events including the issuance of
Common Stock as a dividend on shares of Common Stock, subdivisions or
combinations of the Common Stock or similar events. The Prior Warrants do not
contain provisions protecting against dilution resulting from the sale of
additional shares of Common Stock for less than the exercise price of the Prior
Warrants or the current market price of the Company's securities.
37
Prior Warrants may be redeemed in whole or in part at the option of the
Company upon 30 days' notice, at a redemption price equal to $.01 per Prior
Warrant if the closing price of the Company's Common Stock is at least $112.50
per share for 30 consecutive trading days.
Holders of Prior Warrants may exercise their Prior Warrants for the
purchase of shares of Common Stock only if a current prospectus relating to such
shares is then in effect and only if such shares are qualified for sale, or
deemed to be exempt from qualification under applicable state securities laws.
The Company is required to use its best efforts to maintain a current prospectus
relating to such shares of Common Stock at all times when the market price of
the Common Stock exceeds the exercise price of the Prior Warrants until the
expiration date of the Prior Warrants, although there can be no assurance that
the Company will be able to do so.
Other Warrants
In October 1996, the Company issued to the Underwriter, Howard P. Silverman
and KG an aggregate of 186,666 Warrants, which, along with the underlying
186,666 shares of Common Stock, were registered for public sale by the Company
in May 1997. Each Warrant entitles the holder to purchase one share of Common
Stock for $3.75 per share at any time until October 2001. See "Certain
Transactions."
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock, no
par value (the "Preferred Stock"), none of which is currently outstanding. In
December 1994, the Company issued 900,000 shares of Preferred Stock to five of
the Company's then executive officers. All such shares were subsequently
canceled with the agreement of the holders. The Preferred Stock may, without
action by the stockholders of the Company, be issued by the Board of Directors
from time to time in one or more series for such consideration and with such
relative rights, privileges and preferences as the Board may determine.
Accordingly, the Board has the power to fix the dividend rate and to establish
the provisions, if any, relating to voting rights, redemption rates, sinking
fund provisions, liquidation preferences and conversion rights for any series of
Preferred Stock issued in the future.
Use of Preferred Stock As Anti-Takeover Device
It is not possible to state the actual effect of any authorization of
Preferred Stock upon the rights of holders of Common Stock until the Board
determines the specific rights of the holders of any other series of Preferred
Stock. The Board's authority to issue Preferred Stock also provides a convenient
vehicle in connection with possible acquisitions and other corporate purposes,
but could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock. Accordingly, the future
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders and therefore, may be used as an "anti-takeover" device adversely
affecting the holders of the Common Stock and depressing the value of the Common
38
Stock. The Company has no current plans to issue any other Preferred Stock. See
"Risk Factors - Control by Management; Authorization and Issuance of Preferred
Stock; Prevention of Changes in Control."
Common Stock Eligible For Future Sale
Sales of substantial amounts of Common Stock in the open market or the
availability of such shares for sale could adversely affect the market price for
the Common Stock. The Company is registering for public sale 900,000 Units,
consisting of 900,000 shares of Common Stock, 900,000 Warrants and 900,000
shares of Common Stock underlying the warrants. As of the date hereof, there are
665,333 shares of the Company's Common Stock outstanding, of which (i) 46,000
shares were registered for sale in the Company's IPO, (ii) 426,667 shares and
186,666 shares underlying 186,666 Common Stock Purchase Warrants were registered
in May 1997, (iii) 42,666 shares may currently be sold under Rule 144, and (iv)
150,000 shares may be sold under Rule 144 commencing in July 1998. The holders
of 30,300 have agreed to refrain from selling such shares until October 1999,
without the prior written consent of the Underwriter. See "Underwriting."
The Company has granted certain demand and piggy-back registration rights
in connection with (i) the Underwriter's Warrants and the component securities,
and (ii) the issuance of 150,000 shares of Common Stock as a part of the Bridge
Loan. See "Underwriting."
Transfer Agent and Warrant Agent
Corporate Stock Transfer, Inc., 370 Seventeenth Street, Suite 2350, Denver,
Colorado 80202, is the Company's transfer agent and warrant agent.
Dividends
The Company has not paid cash dividends on its Common Stock and does not
intend to pay any cash dividends on its Common Stock in the foreseeable future.
Earnings, if any, will be retained to finance growth. The Company has no
financing or other agreements which prohibit payment of dividends.
Limitation on Liability
The Company's Articles of Incorporation provide that liability of directors
to the Company for monetary damages is eliminated to the full extent provided by
California law. Under California law, a director is not personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director except for liability arising from (i) any breach of the director's
duty of loyalty to the Company or its shareholders; (ii) acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law; (iii) authorizing the unlawful payment of a dividend or other distribution
on the Company's capital stock or the unlawful purchases of its capital stock,
or (iv) any transaction from which the director derived any improper personal
benefit.
39
The effect of this provision in the Articles of Incorporation is to
eliminate the rights of the Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover monetary damages from a
director for breach of the fiduciary duty of care as a director (including
breaches resulting from negligent or grossly negligent behavior) except in the
situations described above. This provision does not limit or eliminate the
rights of the Company or any stockholder to seek non-monetary relief such as an
injunction or rescission in the event of a breach of a director's duty of care
or any liability for violation of the federal securities laws.
UNDERWRITING
The underwriters named below acting through Andrew, Alexander, Wise &
Company, Inc. (the "Underwriter") have severally agreed, subject to the terms
and conditions of the Underwriting Agreement, to purchase from the Company the
number of Units set forth opposite their names below:
Number
Underwriters Of Units
- ------------ --------
Andrew Alexander Wise & Company, Inc, ............................
Total.................................................................900,000
The Company has been advised by the Underwriter that it proposes to offer
the Units purchased by it directly to the public at the public offering set
forth on the cover page of this Prospectus and to certain dealers at a price
that represents a concession of $.___ per Unit. The Underwriter is committed to
purchase and pay for all of the Units if any Units are taken. After the initial
public offering of the Units, the offering price and the selling terms may be
changed in the sole discretion of the Underwriter.
The Company has also granted the Underwriter an Overallotment Option,
exercisable within 45 days from the date of this Prospectus, to purchase from
the Company up to 135,000 Units solely to cover overallotments. The Underwriter
is under no obligation to exercise its Overallotment Option or purchase any
Units subject to the Overallotment Option.
The Underwriter will purchase the Units (including Units subject to the
Overallotment Option) from the Company at a price of $______ per Unit. In
40
addition, the Company has agreed to pay the Underwriter a 3% nonaccountable
expense allowance on the aggregate initial public offering price of the Units,
including Units subject to the Overallotment Option.
The Company has agreed to issue the Underwriter's Warrants to the
Underwriter for a consideration of $100. The Underwriter's Warrants are
exercisable at any time in the four-year period commencing one year from the
date of this Prospectus to purchase up to an aggregate of 90,000 Units for
$______ per Unit in cash or on a cashless basis by exchanging the "value" of the
existing Underwriter's Warrants (such "value" based upon the difference between
the exercise price and the market price of the Underwriter's Warrants on the
date of exercise) for additional Units at $___ per Unit. The Underwriter's
Warrants are not transferable for one year from the date of this Prospectus
except (i) to an Underwriter or a partner or officer of an Underwriter or (ii)
by will or operation of law. During the term of the Underwriter's Warrants, the
holder thereof is given the opportunity to profit from an increase in the per
share market price of the Company's securities. As long as the Underwriter's
Warrants are outstanding, the Company may find it more difficult to raise
additional equity capital. At any time at which the Underwriter's Warrants are
likely to be exercised, the Company would probably be able to obtain additional
equity capital on more favorable terms. If the Company files a registration
statement relating to an equity offering under the provisions of the 1933 Act at
any time during the five-year period following the date of this Prospectus, the
holders of the Underwriter's Warrants or underlying Units will have the right,
subject to certain conditions, to include in such registration statement, at the
Company's expense, all or part of the underlying Units at the request of the
holders. Additionally, the Company has agreed, for a period of five years
commencing on the date of this Prospectus, on demand of the holders of a
majority of the Underwriter's Warrants or the Units issued or issuable
thereunder, to register the Units underlying the Underwriter's Warrants one time
at the Company's expense. The registration of securities pursuant to the
Underwriter's Warrants may result in substantial expense to the Company at a
time when it may not be able to afford such expense and may impede future
financing. The number of Units covered by the Underwriter's Warrants and the
exercise price are subject to adjustment under certain events to prevent
dilution.
In connection with the Offering, the Underwriter and selling group members
(if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock and
Warrants. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may bid
or purchase Common Stock or Warrants for the purpose of stabilizing their market
prices. The Underwriter may also create a short position for the account of the
Underwriter by selling more securities in connection with the Offering than it
is committed to purchase from the Company and in such case may purchase
securities in the open market following completion of the Offering to cover all
or a portion of such short Overallotment Option. Any of the transactions
described in this paragraph may result in the maintenance of the securities at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
41
In connection with the Offering, the Underwriters may also purchase and
sell the Common Stock and Warrants in the open market. These transactions may
include overallotment and stabilizing transactions as described above, and
purchases to cover syndicate short positions created in connection with the
Offering. Stabilizing transactions consist of certain bids or purchases for the
purposes of preventing or retarding a decline in the market price of the Common
Stock and Warrants; and syndicate short positions involve the sale by the
Underwriters of a greater number of shares of Common Stock or of Warrants than
they are required to purchase from the Company in the Offering. The Underwriter
also may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the Common Stock and Warrants sold
in the Offering for their account may be reclaimed by the Underwriter if such
securities are repurchased by the Underwriter in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Common Stock and Warrants, which may be higher than the
price that might otherwise prevail in the open market; and these activities, if
commenced, may be discontinued at any time. These transactions may be effected
on the Bulletin Board in the over-the-counter market.
Certain of the Company's shareholders (holding an aggregate of 30,300
shares) have entered into lock-up agreements with the Underwriter pursuant to
which they have agreed not to sell or otherwise dispose of any of their shares
of Common Stock (including shares issuable upon exercise of stock options) for a
period of three years from the date of this Prospectus without the prior written
consent of the Underwriter.
The Company has agreed upon completion of the Offering to retain the
Underwriter as a financial consultant for a period of 36 months at a monthly fee
of $5,000 (a total of $180,000), payable in full upon the closing of the
Offering. The consulting agreement will not require the Underwriter to devote a
specific amount of time to the performance of its duties thereunder.
The Company has agreed (i) to allow the Underwriter to designate one
director or advisor to the Company's Board of Directors for a period of five
years from the date hereof (ii) not to offer any equity securities or grant
options or warrants to purchase Common Stock without the prior written consent
of the Underwriter for a period of three years from the date hereof, (iii) to
grant the Underwriter a right of first refusal for three years from the date
hereof with respect to any private placement or public offering of the Company's
securities, or its subsidiaries and for sales by 5% or greater stockholders of
the Company's securities under Rule 144.
The Company has agreed to indemnify the Underwriter against certain
liabilities including liabilities under the Securities Act and to contribute in
certain events to liabilities incurred by the Underwriter in connection with the
sale of the Units. In the opinion of the Commission, indemnification against
liabilities under the Securities Act is against public policy and is therefore
unenforceable.
42
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon
for the Company by the Law Office of Gary A. Agron, Englewood, Colorado. Snow
Becker Krauss P.C., New York, New York, has acted as counsel for the Underwriter
in connection with the Offering.
EXPERTS
The financial statements of the Company for the years ended December 31,
1995 and 1996, appearing in the Registration Statement have been audited by
Angell & Deering, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
43
PROTOSOURCE CORPORATION
INDEX TO FINANCIAL STATEMENTS
Financial Statements Page
- -------------------- ----
Independent Auditors' Report F-2
Balance Sheets as of September 30, 1997
(Unaudited) and December 31, 1996 F-3
Statements of Operations for the nine months
ended September 30, 1997 and 1996
(Unaudited) and for the years ended
December 31, 1996 and 1995 F-5
Statements Of Changes in Shareholders'
Equity for the nine months ended
September 30, 1997 (Unaudited)
and for the years ended December 31, 1996 and 1995 F-6
Statements Of Cash Flows for the nine months
ended September 30, 1997 and 1996
(Unaudited) and for the
years ended December 31, 1996 and 1995 F-7
Notes To Financial Statements F-9
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
ProtoSource Corporation
We have audited the accompanying balance sheet of ProtoSource Corporation as of
December 31, 1996 and the related statements of operations, changes in
shareholders' equity and cash flows for the years ended December 31, 1996 and
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ProtoSource Corporation as of
December 31, 1996 and the results of its operations and its cash flows for the
years ended December 31, 1996 and 1995 in conformity with generally accepted
accounting principles.
/s/ Angell & Deering
---------------------------------------
Angell & Deering
Certified Public Accountants
Denver, Colorado
February 28, 1997, except for
Note 12 as to which the date
is April 25, 1997
F-2
PROTOSOURCE CORPORATION
BALANCE SHEETS
ASSETS
------
September 30, December 31,
1997 1996
------------ ------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 61,471 $ 482,357
Accounts receivable:
Trade 183,220 29,156
Employees and other -- 21,397
Inventories 8,980 8,980
Prepaid expenses and other 18,932 14,587
Current portion of note receivable 47,285 47,285
---------- ----------
Total Current Assets 319,888 603,762
---------- ----------
Property and Equipment, at cost:
Land 411,176 411,176
Building and improvements 1,381,816 1,381,816
Equipment 777,726 680,377
Furniture 110,387 104,375
Vehicles 10,090 10,090
---------- ----------
2,691,195 2,587,834
Less accumulated depreciation and amortization 659,141 486,441
---------- ----------
Net Property and Equipment 2,032,054 2,101,393
---------- ----------
Other Assets:
Goodwill, net of accumulated amortization
of $2,321 and $2,006, respectively 18,924 19,239
Deferred tax assets 71,550 71,550
Note receivable, net of current portion above 723,565 723,565
Deposits and other assets 89,831 42,346
---------- ----------
Total Other Assets 903,870 856,700
---------- ----------
Total Assets $3,255,812 $3,561,855
========== ==========
The accompanying notes are an integral
part of these financial statements.
F-3
PROTOSOURCE CORPORATION
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
September 30, December 31,
1997 1996
---- ----
(Unaudited)
Current Liabilities:
Accounts payable $ 99,716 $ 195,694
Accrued liabilities 13,929 267,228
Customer deposits 1,500 1,500
Notes payable 750,000 --
Current portion of long-term debt 39,358 39,358
----------- -----------
Total Current Liabilities 904,503 503,780
----------- -----------
Long-Term Debt, net of current portion above:
Bank -- 2,220
Obligations under capital leases 1,851,851 1,852,083
Less current portion above 39,358 39,358
----------- -----------
Total Long-Term Debt 1,812,493 1,814,945
----------- -----------
Commitments and contingencies -- --
Shareholders' Equity:
Preferred stock, no par value;
5,000,000 shares authorized,
none issued and outstanding -- --
Common stock, no par value;
10,000,000 shares authorized,
665,333 and 515,333 shares
issued and outstanding 5,590,455 4,839,485
Accumulated deficit (5,051,639) (3,596,355)
----------- -----------
Total Shareholders' Equity 538,816 1,243,130
----------- -----------
Total Liabilities and
Shareholders' Equity $ 3,255,812 $ 3,561,855
=========== ===========
The accompanying notes are an integral
part of these financial statements.
F-4
PROTOSOURCE CORPORATION
STATEMENTS OF OPERATIONS
Nine Months Ended September 30, Years Ended December 31,
------------------------------- ------------------------
1997 1996 1996 1995
---- ---- ---- ----
(Unaudited)
Net Revenues:
Internet service fees $ 550,969 $ 544,590 $ 697,581 $ 100,901
----------- ----------- ----------- -----------
Total Revenues 550,969 544,590 697,581 100,901
Operating expenses 1,415,019 897,465 1,121,773 1,079,503
----------- ----------- ----------- -----------
Operating Loss (864,050) (352,875) (424,192) (978,602)
----------- ----------- ----------- -----------
Other Income (Expense):
Interest income 104,015 825 3,507 50,891
Interest expense (898,678) (137,012) (272,228) (160,192)
Financing costs -- -- (126,000) --
Rent and other income 203,429 71,280 146,122 124,356
Other, net -- -- -- (10,231)
----------- ----------- ----------- -----------
Total Other Income (Expense) (591,234) (64,907) (248,599) 4,824
----------- ----------- ----------- -----------
Loss From Continuing Operations
Before Provision For Income Taxes (1,455,284) (417,782) (672,791) (973,778)
Provision for income taxes -- -- -- 800
----------- ----------- ----------- -----------
Loss From Continuing Operations (1,455,284) (417,782) (672,791) (974,578)
----------- ----------- ----------- -----------
Discontinued Operations:
Loss from discontinued
operations (Note 2) -- (264,200) (532,663) (841,707)
Loss on disposal (Note 2) -- -- (204,346) --
----------- ----------- ----------- -----------
Loss From Discontinued Operations -- (264,200) (737,009) (841,707)
----------- ----------- ----------- -----------
Net Loss $(1,455,284) $ (681,982) $(1,409,800) $(1,816,285)
----------- ----------- =========== ===========
Net Loss Per Share of Common Stock:
Loss from continuing operations $ (2.61) $ (4.71) $ (3.69) $ (11.82)
Discontinued operations -- (2.98) (4.05) (10.22)
----------- ----------- ----------- -----------
Net Loss $ (2.61) $ (7.69) $ (7.74) $ (22.04)
=========== =========== =========== ===========
Weighted Average Number of
Common Shares Outstanding 557,897 88,667 182,037 82,439
=========== =========== =========== ===========
The accompanying notes are an integral
part of these financial statements.
F-5
PROTOSOURCE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
Series A
Preferred Stock Common Stock
--------------- ------------ Accumulated
Shares Amount Shares Amount Deficit
------ ------ ------ ------ -------
Balance at December 31, 1994 900,000 $-- 42,666 $ 303,595 $ (370,270)
Issuance of common stock and warrants
in public offering (net of offering
costs of $808,476) -- -- 46,000 2,986,524 --
Contribution of shares to the Company
by officers and directors for issuance
in connection with an acquisition -- -- -- 19,375 --
Net loss -- -- -- -- (1,816,285)
----------- ----- ----------- ----------- -----------
Balance at December 31, 1995 900,000 -- 88,666 3,309,494 (2,186,555)
Contribution of capital by officers
through forgiveness of previously
accrued salaries -- -- -- 154,792 --
Issuance of common stock in
connection with bridge loans -- -- 26,667 100,000 --
Issuance of common stock in private
offering (net of offering costs of
$24,801) -- -- 400,000 1,275,199 --
Cancellation of Preferred Stock in
connection with divestiture of assets (900,000) -- -- -- --
Net loss -- -- -- -- (1,409,800)
----------- ----- ----------- ----------- -----------
Balance at December 31, 1996 -- -- 515,333 4,839,485 (3,596,355)
Issuance of common stock (unaudited) -- -- -- 970 --
Issuance of common stock in connection
with bridge loans (unaudited) -- -- 150,000 750,000 --
Net loss (unaudited) -- -- -- -- (1,455,284)
----------- ----- ----------- ----------- -----------
Balance at September 30, 1997
(unaudited) -- $-- 665,333 $ 5,590,455 $(5,051,639)
=========== ===== =========== =========== ===========
The accompanying notes are an integral
part of these financial statements.
F-6
PROTOSOURCE CORPORATION
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, Years Ended December 31,
------------------------------- ------------------------
1997 1996 1996 1995
---- ---- ---- ----
(Unaudited)
Cash Flows From Operating Activities:
Net loss $(1,455,284) $ (681,982) $(1,409,800) $(1,816,285)
Adjustments to reconcile net
loss to net cash provided (used) by
operating activities:
Depreciation and amortization 173,015 268,687 367,049 584,810
Provision for bad debts -- -- -- 508,187
Assets and liabilities disposed of in
divestiture and note receivable received -- -- 17,176 --
Gain on disposal of equipment -- -- (4,607) --
Issuance of common stock for
costs of financing 750,000 -- 100,000 --
Changes in operating assets
and liabilities:
Accounts receivable (132,667) 35,853 163,556 (499,436)
Inventories -- (34,229) 7,079 (4,625)
Deposits and other assets (4,345) (5,523) 15,441 (18,814)
Accounts payable (95,978) 222,036 32,536 (150,623)
Accrued liabilities (253,299) 371,766 344,284 (10,618)
Customer deposits -- 38,915 (4,000) (12,213)
Unearned customer support revenue -- (9,443) (34,542) (5,286)
----------- ----------- ----------- -----------
Net Cash Provided (Used) By
Operating Activities (1,018,558) 206,080 (405,828) (1,424,903)
----------- ----------- ----------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment (33,402) (7,238) (38,421) (403,591)
Proceeds from disposal of equipment -- -- 10,536 --
Software development costs capitalized -- (442,186) (442,100) (592,754)
Receivable from shareholders -- -- -- (35,000)
Other (47,485) 1,214 -- --
----------- ----------- ----------- -----------
Net Cash (Used) By Investing Activities (80,887) (448,210) (469,985) (1,031,345)
----------- ----------- ----------- -----------
Cash Flows From Financing Activities:
Payments on notes payable (72,411) (106,146) (55,675) (625,998)
Proceeds from borrowing 750,000 232,000 200,000 20,000
Issuance of common stock 970 -- 1,300,000 3,795,000
Offering costs incurred -- (20,000) (224,801) (619,990)
----------- ----------- ----------- -----------
Net Cash Provided By Financing Activities 678,559 105,854 1,219,524 2,569,012
----------- ----------- ----------- -----------
The accompanying notes are an integral
part of these financial statements.
F-7
PROTOSOURCE CORPORATION
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, Years Ended December 31,
------------------------------- ------------------------
1997 1996 1996 1995
---- ---- ---- ----
(Unaudited)
Net Increase (Decrease) in Cash and
Cash Equivalents $(420,886) $(136,276) $ 343,711 $ 112,764
Cash and Cash Equivalents at
Beginning of Period 482,357 138,646 138,646 25,882
--------- --------- --------- ---------
Cash and Cash Equivalents at
End of Period $ 61,471 $ 2,370 $ 482,357 $ 138,646
========= ========= ========= =========
Supplemental Disclosure of
Cash Flow Information:
Cash paid during the period for:
Interest $ 148,678 $ 137,012 $ 272,228 $ 174,251
Income taxes -- -- -- 800
Supplemental Disclosure of Noncash
Investing and Financing Activities:
Acquisition of equipment under
capital leases $ 69,959 $ 90,802 $ 90,349 $ 118,701
Common stock contributed by
stockholders for issuance in
acquisition by the Company -- -- -- 19,375
Conversion of account payable to a
note payable -- -- 32,000 --
Capital contribution by officers through
forgiveness of previously accrued salaries -- 154,792 154,792 --
Conversion of note payable into common stock -- -- 200,000 --
The accompanying notes are an integral
part of these financial statements.
F-8
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
------------------------------------------
Description of Business
-----------------------
ProtoSource Corporation, formerly SHR Corporation, doing business as
Software Solutions Company (the "Company"), was incorporated on July 1,
1988, under the laws of the state of California. The Company is an Internet
services provider.
Unaudited Interim Financial Statements
--------------------------------------
The financial statements as of September 30, 1997 and for the nine months
ended September 30, 1997 and 1996 are unaudited, however, in the opinion of
management of the Company, all adjustments (consisting solely of normal
recurring adjustments) necessary to a fair presentation of the financial
statements for the interim periods have been made.
Reclassifications
-----------------
The former software development, MarketStreet and computer training center
divisions are presented as discontinued operations in accordance with
Accounting Principles Board (APB) Opinion No. 30 (Note 2). The 1995
operations and per share information have been reclassified to present the
operations of the three divisions as discontinued operations also.
Stock Split
-----------
On February 28, 1997, the Company's shareholders adopted a resolution
approving a one for ten reverse stock split of the issued and outstanding
common shares, effective April 2, 1997. All share information and per share
data have been retroactively restated for all periods presented to reflect
the reverse stock split (Note 12).
Revenue Recognition
-------------------
Product sales represent sales of application software to end users.
Equipment sales represent sales of computer and peripheral equipment
bundled with the Company's software. Professional service fees represent
revenue from custom programming, post contract customer support (PCS)
agreements and training and installation related services. Fees associated
with insignificant vendor obligations related to installation of systems
are deferred and recognized upon completion of performance. Other income
represents primarily sales of promotional brochures, marketing materials
and sales of miscellaneous equipment and supplies.
Revenue from product sales is recognized upon delivery to the customer,
provided that no significant vendor or PCS obligations remain, and
collection of the related receivable is deemed probable. Revenue from PCS
agreements is recognized on a straight-line basis over the period of the
PCS agreement.
Revenue from the Internet operations is recognized over the period the
services are provided. Deferred revenue consists primarily of monthly
subscription fees billed in advance.
Cash and Cash Equivalents
-------------------------
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less to be
cash equivalents.
Inventories
-----------
Inventories, consisting of computer equipment and supplies held for resale,
are stated at the lower of cost (determined on the first in, first out
method) or market.
F-9
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued)
-----------------------------------------------------
Property and Equipment
----------------------
Depreciation and amortization of equipment, furniture and vehicles are
computed using the straight-line method over estimated useful lives of
three to seven years. Assets held under capital lease obligations,
exclusive of land, are amortized using the straight-line method over the
shorter of the useful lives of the assets or the term of the lease.
Depreciation of property and equipment charged to operations was $233,201
and $171,695 for the years ended December 31, 1996 and 1995, respectively.
Goodwill
--------
Goodwill is being amortized using the straight-line method over an
estimated useful life of 15 years.
Investment
----------
The Company has a 25% ownership interest in SSC Technologies, Inc. ("SSC").
The Company received the equity interest in connection with the divestiture
of three operating divisions of the Company (Note 2). The cost of its
investment is $--, and since the Company does not have the ability to
exercise influence over operating and financial policies of SSC, the
Company is accounting for its investment in SSC utilizing the cost method
of accounting. Under the cost method, net accumulated earnings of an
investee subsequent to the date of investment are recognized by the
investor only to the extent distributed by the investee as dividends.
Dividends received in excess of earnings subsequent to the date of
investment are considered a return of investment and are recorded as
reductions of cost of the investment.
Software Development Costs
--------------------------
Software development costs are capitalized with respect to those products
for which technological feasibility (as defined in Statement of Financial
Accounting Standards No. 86) has been established. Capitalized amounts are
reported at the lower of unamortized cost or net realizable value. These
costs are amortized into cost of goods sold on a product-by-product basis.
The annual amortization expense is the greater of the amount computed using
the ratio of current revenue to the total anticipated revenue for the
product or the straight-line method over the estimated life of the product
starting when the product is available for general release to customers.
Generally, the Company amortizes these costs over three years. Software
development costs capitalized relate primarily to product enhancements.
Amortization expense for capitalized software was $132,254 and $412,258 for
the years ended December 31, 1996 and 1995, respectively.
Deferred Offering Costs
-----------------------
In connection with the Company's public offering (Note 6), costs incurred
to complete the offering have been deferred and were offset against the
proceeds of the offering.
Stock-Based Compensation
------------------------
During the year ended December 31, 1996, the Company adopted Statement of
Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation". The Company will continue to measure compensation expense
for its stock-based employee compensation plans using the intrinsic value
method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees". See Note 8 for pro forma disclosures of net income and earnings
per share as if the fair value-based method prescribed by SFAS 123 had been
applied in measuring compensation expense.
F-10
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued)
-----------------------------------------------------
Income Taxes
------------
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," in 1992. Under the statement, deferred
income taxes are provided for temporary differences between the financial
reporting and tax bases of assets and liabilities using enacted tax laws
and rates for the years when the differences are expected to reverse.
Net Income (Loss) Per Share of Common Stock
-------------------------------------------
Net income (loss) per share of common stock is based upon the weighted
average number of shares of common stock and common stock equivalents
outstanding during the year. Common stock equivalents represent the
dilutive effect of the assumed exercise of certain outstanding stock
options and warrants.
Estimates
---------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amount of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
2. Discontinued Operations
-----------------------
In 1996, the Company retained the Kriegsman Group ("Kriegsman"), a
financial consulting firm, to assist it with a financial restructuring of
its operations. In connection with the financial restructuring the Company
divested the software development, MarketStreet (advertising division) and
the computer training center divisions. The divisions were to be spun-off
to a new Company owned by the former management of the Company effective
August 31, 1996. The closing for the divestiture occurred on December 31,
1996. All of the assets of the three divisions and the related liabilities
and facilities leases were assumed by the former management and a note
payable was issued by the former management to the Company in the amount of
$770,850 (Note 9). Also included in the assets of the divested divisions
was $500,000 in cash less approximately $200,000 in liabilities which were
paid by the Company which resulted in approximately $300,000 in cash paid
to the divested divisions. The management of the divested divisions also
assumed all litigation and claims related to the divisions which includes
one law suit in the amount of approximately $70,000. The Kriegsman Group
also nominated new members for the Board of Directors upon completion of
the divestiture of the three divisions which were approved in January 1997.
The Company received a 25% ownership interest in the common stock of the
new company formed to acquire the divested divisions and the divested
divisions will lease the principal office from the Company for a period of
eighteen months at the current market rate.
Kriegsman was to use its best efforts to provide a minimum of $1,500,000 of
financing for the Company through bridge loans or equity financing. In
August 1996, a bridge loan of $200,000 was obtained by the Company for
which the Company issued 26,667 shares of common stock to the bridge
lenders as additional consideration for the $200,000 loan. In October and
November 1996 the Company sold 400,000 shares of its common stock at $3.75
per share through an Underwriter, which included the conversion of the
$200,000 bridge loan into common stock. The Company paid the Underwriter a
F-11
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
2. Discontinued Operations (Continued)
----------------------------------
10% sales commission and a 3% nonaccountable expense allowance on the
bridge loan and sale of common stock. The Company also entered into a two
year financial consulting agreement with the Underwriter which provides for
a monthly consulting fee of $5,000 for the two year period.
As a part of the financing transaction, the Company granted both the
Underwriter and Kriegsman warrants to purchase common stock. The Company
granted 146,667 warrants to each which are exercisable at $3.75 per share
for a four year period through October 31, 2001. The Company also agreed to
use its best efforts to file a Registration Statement within 90 days of the
closing of the Private Placement to register the shares issued in the
Private Placement and the shares underlying the warrants issued to the
Underwriter and Kriegsman.
Revenues applicable to the Company's discontinued operations were $540,112
and $1,734,605 for the years ended December 31, 1996 and 1995,
respectively.
3. Long-Term Debt
---------------
Long-term debt consists of the following:
Bank
----
10.5% installment note due in 1997 with monthly
principal and interest payments of $328, collateralized
by an automobile. $ 2,220
Obligations Under Capital Leases
--------------------------------
5.7% to 25.1% installment notes due in 1997 to 2001,
collateralized by equipment. 193,146
13% capital lease for building and land with a 20 year
lease term, with monthly principal and interest
payments of $15,634 for the first five years, $19,021
for the next five years, $23,142 for the next five
years and $28,156 for the next five years with an
escalating purchase option (Note 7). 1,658,937
----------
Total Long-Term Debt 1,854,303
Less current portion of long-term debt (39,358)
----------
Long-Term Debt $1,814,945
==========
Installments due on debt principal, including the capital leases, at
December 31, 1996 are as follows:
Year Ending
December 31,
1997 $ 39,358
1998 26,058
1999 16,325
2000 42,101
2001 10,591
Later years 1,719,870
----------
Total $1,854,303
==========
F-12
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
4. Income Taxes
------------
The components of the provision for income taxes are as follows:
1996 1995
---- ----
Current:
Federal $ -- $ --
State -- 800
-------- --------
Total -- 800
-------- --------
Deferred:
Federal -- --
State -- --
-------- ---------
Total -- --
-------- ---------
Total Provision For
Income Taxes $ -- $ 800
======== =========
The provision for income taxes reconciles to the amount computed by
applying the federal statutory rate to income before the provision for
income taxes as follows:
1996 1995
---- ----
Federal statutory rate (25)% (25)%
State franchise taxes,
net of federal benefits (4) (4)
Valuation allowance 29 29
----- -----
Total -- % -- %
===== =====
Significant components of deferred income taxes as of December 31, 1996 are
as follows:
Net operating loss carryforward $1,051,240
Vacation accrual 2,070
----------
Total deferred tax asset 1,053,310
----------
Accelerated depreciation (43,540)
State income taxes (1,520)
----------
Total deferred tax liability (45,060)
Less valuation allowance (936,700)
----------
Net Deferred Tax Asset $ 71,550
==========
The Company has assessed its past earnings history and trends, sales
backlog, budgeted sales, and expiration dates of carryforwards and has
determined that it is more likely than not that $71,550 of deferred tax
assets will be realized. The remaining valuation allowance of $936,700 is
maintained on deferred tax assets which the Company has not determined to
be more likely than not realizable at this time. The net change in the
valuation allowance for deferred tax assets was an increase of $406,760.
The Company will continue to review this valuation on a quarterly basis and
make adjustments as appropriate.
F-13
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
4. Income Taxes (Continued)
-----------------------
At December 31, 1996, the Company had federal and California net operating
loss carryforwards of approximately $3,900,000 and $1,900,000,
respectively. Such carryforwards expire in the years 2007 through 2011 and
1997 through 2001 for federal and California purposes, respectively.
5. Acquisitions
------------
In July 1995, the Company purchased, from an unrelated individual certain
assets of ValleyNet Communications, an Internet services provider. The
purchase price was $50,000 in cash and 334 shares of the Company's common
stock. The common stock was issued by the Company's shareholders in
accordance with their agreement to use certain of their shares owned
individually in connection with future acquisitions of the Company (Note
9). The assets acquired consists of computer hardware and software, and
goodwill of $21,245 was recorded in connection with the acquisition. The
goodwill is being amortized over a fifteen year useful life.
6. Shareholders' Equity
--------------------
Incentive Stock Option Plan
---------------------------
In November 1994, the Company's Board of Directors authorized and the
shareholders approved, a stock option plan which provides for the grant of
incentive and nonqualified options to eligible officers and key employees
of the Company to purchase up to 150,000 shares of the Company's common
stock. The purchase price of such shares shall be at least equal to the
fair market value at the date of grant. Such options vest at the discretion
of the Board of Directors, generally over a four-year period. The stock
option plan expires in 2004. As of December 31, 1996, no options have been
granted under the Plan.
Preferred Stock
---------------
In December 1994, the Company issued to six individuals, including the
Company's five executive officers, for no consideration, a total of 900,000
shares of Series A Convertible Preferred Stock, no par value. Such shares
are automatically convertible, in varying amounts per year, into shares of
common stock on a fifteen for one basis through 2003 if certain revenue and
net income milestones are met as follows:
(i) an aggregate of 9,375 shares of Series A Preferred Stock will
convert to common stock if the Company reports gross annual revenues
of at least $9,600,000 and annual after tax earnings of at least
$1,550,000 for the calendar year ended December 31, 1996, an
additional 9,375 shares per year will convert to common stock from
1997 to 2002, and 121,875 shares in 2003 if the company reports gross
annual revenues of at least $9,600,000, and annual after tax earnings
of at least $1,550,000 for calendar years 1997 through 2003.
(ii) an aggregate of 9,375 shares of Series A Preferred Stock will
convert to common stock if the Company reports gross annual revenues
of at least $15,500,000 and annual after tax earnings of at least
$3,000,000 for the calendar year ending December 31, 1997, an
additional 9,375 shares per year will convert to common stock from
1998 to 2002, and 131,250 shares in 2003 if the Company reports gross
annual revenues of at least $15,500,000, and annual after tax earnings
of at least $3,000,000 for calendar years 1998 through 2003.
F-14
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
6. Shareholders' Equity (Continued)
--------------------------------
Preferred Stock (Continued)
---------------------------
(iii) An aggregate of 15,000 shares of Series A Preferred Stock
will convert to common stock if the Company reports gross annual
revenues of at least $23,800,000 and annual after tax earnings of
at least $5,100,000 for the calendar year ending December 31,
1998, an additional 5,000 shares per year will convert to common
stock from 1999 to 2002, and 225,000 shares in 2003 if the
Company reports gross annual revenues of at least $23,800,000,
and annual after tax earnings of at least $5,100,000 for calendar
years 1999 through 2003.
The fair market value of the common stock issued upon conversion will be
charged to operations at that time. Any preferred shares not converted
during such period will be cancelled. If, prior to January 1, 1999 (i) the
Company consolidates with or merges into another corporation or entity (and
the Company is not the survivor) or if the Company sells or leases
substantially all of its assets and the Company's common stock has
appreciated an average of 10% per annum for each 12 month period following
the date of the Company's Prospectus (February 9, 1995) or (ii) any person,
entity or affiliated group or entities acquires 40% or more of the
Company's common stock in any 12 month period, then all preferred stock
will be automatically converted into common stock. While outstanding, the
preferred stock does not carry voting rights or dividend rights and has a
liquidation preference of $.01 per share.
In connection with the divestiture of three operating divisions (Note 2)
all of the outstanding shares of Series A Preferred Stock were cancelled on
December 31, 1996.
Common Stock and Warrants
-------------------------
The closing for the Company's IPO occurred on February 17, 1995. The
Company sold 46,000 units at $82.50 per unit and paid the Underwriter a 10%
commission and a 3% nonaccountable expense allowance which resulted in net
proceeds to the Company of $2,986,524. Each unit consists of one share of
the Company's common stock and one warrant to purchase an additional share
of common stock at $97.50 per share until February 9, 1998. The warrants
may be redeemed by the Company at any time, upon 30 days written notice to
the holders at a price of $.01 per warrant if the closing price of the
common stock is $112.50 or more for 30 consecutive days. The Company also
entered into a one year financial consulting contract with the Underwriter
for $36,000 which was paid in full in advance. In connection with the
offering, the Company issued the Underwriter, for $100, a warrant to
purchase 10% of the number of Units sold in the offering. The Warrant is
exercisable for a period of four years beginning February 9, 1996. The
Underwriter's Warrant is exercisable at a price of $99.00 per Unit. The
Units subject to the Underwriter's Warrant are identical to the Units sold
to the public.
7. Commitments and Contingencies
-----------------------------
In September 1994, the Company acquired, under a 20 year noncancellable
capital lease, an office building, including land and improvements. The
Company occupied approximately half of the space as its corporate office
facility and has sublet the remaining space to unrelated parties. The lease
requires initial annual minimum lease payments of $187,608, increasing
every five years to a maximum annual payment of $337,872 in 2009. Under the
lease, the Company has an option at any time through April 30, 1996, to
purchase the building and land for $1,700,000. Such amount increases to
$1,800,000 through April 30, 1997 and $1,900,000 through April 30, 1998.
After April 30, 1998, the option amount increases annually by the
F-15
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
7. Commitments and Contingencies (Continued)
----------------------------------------
percentage increase in the Consumer Price Index, as further described in
the lease. Upon exercise of the purchase option, all lease payments made by
the Company will be applied toward the down payment for the purchase price
based upon an amortized 20 year note with interest accrued at 9% per annum.
The Company also leases certain computer equipment and furniture and
fixtures under noncancellable capital leases. The Company leases other
facilities, certain vehicles and computer equipment under noncancellable
operating leases. The Company entered into a sublease for its office
building described above in connection with the divestiture of three
operating divisions. The sublease rentals to be received in the future are
approximately $168,000 and have been deducted from the future minimum lease
payments in the table below.
The following is a schedule of future minimum lease payments at December
31, 1996 under the Company's capital leases (together with the present
value of minimum lease payments) and operating leases that have initial or
remaining noncancellable lease terms in excess of one year:
Year Ending Capital Operating
December 31, Leases Leases Total
------------ ------ ------ -----
1997 $ 132,142 $ 57,074 $ 189,216
1998 235,146 53,242 288,388
1999 245,162 53,841 299,003
2000 266,169 54,918 321,087
2001 230,523 56,016 286,539
Later years 3,705,573 23,340 3,728,913
----------- --------- ----------
Total Minimum Lease
Payments 4,814,715 $298,431 $5,113,146
======== ==========
Less amount representing interest (2,962,632)
-----------
Present Value of Net Minimum
Lease Payments $ 1,852,083
===========
Rent expense amounted to approximately $120,100 and $133,600 for the years
ended December 31, 1996 and 1995, respectively.
Leased equipment under capital leases as of December 31, 1996 is as
follows:
Building $1,348,824
Land 411,176
Equipment 276,441
Less accumulated amortization (252,939)
----------
Net Property and Equipment Under Capital Leases $1,783,502
==========
F-16
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
8. Stock Based Compensation Plans
------------------------------
The Company adopted Financial Accounting Standard No. 123, "Accounting for
Stock- Based Compensation" (SFAS 123) during the year ended December 31,
1996. In accordance with the provision of SFAS 123, the Company applies APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans other than for
options granted to non-employees. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for awards
under these plans consistent with the methodology prescribed by SFAS 123,
the Company's net income and earnings per share would be reduced to the
following pro forma amounts:
1996 1995
---- ----
Net Loss:
As reported $(1,409,800) $(1,816,285)
Pro forma (1,412,843) (1,816,285)
Net Loss Per Share of Common Stock:
As reported $ (7.74) $ (22.04)
Pro forma $ (7.76) $ (22.04)
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense
over the vesting period and additional options may be granted in future
years. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following assumptions
for the year ended December 31, 1996:
1996
----
Risk free interest rate 5.97%
Expected life 3.5 years
Expected volatility 129.3%
Expected dividend yield 0%
The Company did not grant any stock options in 1995.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in subjective input assumptions can materially
affect the fair value estimates, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its employee stock based compensation plans.
9. Related Party Transactions
---------------------------
The Company has entered into transactions with its officers and directors,
as follows.
The Company had a note receivable from its former President of $35,000 at
December 31, 1995. Interest is payable monthly at 9% per annum and the note
is due in April 1997. The note is secured by 3,333 shares of the Company's
common stock which are owned by the Company's former President. The note
receivable and accrued interest were sold in connection with the
divestiture of three operating divisions (Note 2).
F-17
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
9. Related Party Transactions (Continued)
--------------------------------------
On November 1, 1994, all of the Company's shareholders agreed in writing
with each other and with the Company to contribute pro rata from their
shareholdings up to a total of 13,334 shares of common stock to be used by
the Company (at any time until December 31, 1999) for acquisitions of other
companies or lines of business. The Company in its sole discretion may call
for such contributions at any time and from time to time for these
purposes. The Company will not issue any additional equity securities for
purposes of acquisition of other companies or product lines until all
13,334 shares have been contributed. The shareholders did not receive any
compensation or other form of remuneration for their agreement to
contribute the shares and will have no interest in any of the companies or
product lines which may be acquired. The shareholders agreed to provide the
13,334 shares at the request of the Underwriter of the Company's IPO, in
order to reduce any dilution to existing shareholders if the Company
elected to use common stock for acquisition purposes. In 1995, the
Company's shareholders contributed 334 shares in connection with the
acquisition of ValleyNet Communications (Note 5).
The Company incurred expenses in connection with desktop publishing
services provided by a Corporation controlled by the wife of the Company's
former Chief Executive Officer of $7,800 for the year ended December 31,
1995.
In connection with the divestiture of three divisions (Note 2) the Company
received a note receivable of $770,850 from SSC which is controlled by the
former management of the Company. The note bears interest at 10% per annum
and is payable in monthly principal and interest installments of $10,187
through 2006. The note is collateralized by substantially all assets of SSC
and is guaranteed by the former management of the Company.
The Company issued 36,667 warrants to its Chief Executive Officer in
connection with his employment agreement in November 1996. The warrants
vest as to 13,333 warrants in December 1997, 13,334 in December 1998 and
10,000 in December 1999. The warrants are exercisable at $3.75 per share at
anytime through December 2001.
10. Concentration of Credit Risk and Major Customers
------------------------------------------------
The Company provides credit, in the normal course of business, to a large
number of companies in the Internet services industry. The Company's
accounts receivable are due from customers located primarily in central
California. The Company performs periodic credit evaluations of its
customers' financial condition and generally requires no collateral. The
Company maintains reserves for potential credit losses, and such losses
have not exceeded management's expectations.
11. Sale of Software
----------------
In December 1995, the Company entered into an agreement to sell its
"Classic" Software to a Canadian Limited Partnership (the "Partnership")
for a promissory note in the amount of $8,080,000. The Partnership acquired
all of the Company's interest in the Classic Software defined as follows;
all existing and future updates, upgrades additions, improvements and
enhancements and any new versions of the software. The Partnership is
selling limited partnership units in Canada and the promissory note will be
replaced by cash and promissory notes as the units are sold. If all units
are sold, the Company would receive $1,333,200 cash at closing (less
expenses), $1,333,200 cash on March 21, 1996 (less expenses) and notes
receivable from the limited partners of $5,413,600. The notes bear interest
F-18
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
11. Sale of Software (Continued)
---------------------------
at 8.5% per annum and are due December 27, 2005 with interest payable
annually. The Partnership closed on December 28, 1995 selling units
representing 18.81% of the purchase price of the software and the Company
received $188,000, net of expenses, and received the second payment of
$188,000 in March 1996. A second partnership was formed in 1996 in Canada
to sell units to acquire the remaining 81.19% of the Software. The Company
received approximately $150,000, net of expenses, on December 31, 1996 for
the sale of software to the second partnership. The $150,000 was paid to
the Company that acquired the software development division pursuant to the
terms of the Divestiture Agreement.
The Company also entered into a Distribution Agreement with the
Partnership, whereby the Company was appointed as the exclusive distributor
of the Classic Software throughout the world for a term of twenty years.
Under the terms of the Distribution Agreement the Company will purchase
copies of the Classic Software for resale to third parties. Until December
31, 2000, the Company shall pay the following prices for each copy of the
Software purchased from the Partnership:
(a) until the Company has purchased $475,000 of copies in each year,
100% of the price the Company invoices to its customers for each copy
of the Software; plus
Percentage of Sales
-------------------
Until Below Over
December 31, Sales Benchmark Benchmark Benchmark
------------ --------------- --------- ---------
1997 $ 8,850,000 5% .1%
1998 10,275,000 4 .1
1999 15,150,000 3 .1
2000 34,000,000 5 .1
Later Years -0- 6 6
Prior to the repayment of the Promissory Notes, payments to the Partnership
for Software will be applied by the Partnership as follows:
i) first, the Partnership shall pay to the Company on behalf of each
Limited Partner, an amount equal to the interest then payable in
respect of the Promissory Note issued by such Limited Partner;
ii) second, the balance remaining allocable to each Limited Partner
will be paid (A) 55% to the Limited Partner and (B) 45% to the
Company for repayment of the principal amount then outstanding on
the Limited Partner's Promissory Note.
The Partnership has also entered into an Option Agreement with the Company
whereby the Company may purchase the Software from the Partnership upon
certain triggering events. Upon the occurrence of such triggering events
the Company, at its sole option, may purchase the software from the
Partnership for a purchase price based upon the following.
The purchase price payable by the Company for the Software shall be equal
to the fair market value of the Software on the Exercise Date as determined
by a qualified arm's length appraiser agreed to by the parties, provided
that, if as a result of a Triggering Event, securities are issued by the
F-19
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
11. Sale of Software (Continued)
---------------------------
Company, or to the Company or its shareholders, the purchase price shall be
satisfied by the transfer by the Company to the Partnership of that number
of securities having a fair market value equal to the lesser of the
purchase price and 22.0% of the securities issued or received, as the case
may be, on a fully diluted basis. The Company agrees to jointly elect under
applicable taxing statutes, with the Partnership to complete the
transaction on a tax deferred basis, with respect to the issuance of
securities to the Partnership by allowing the Partnership to transfer the
Software to a Canadian subsidiary of the Company on a tax deferred basis.
In the event that sales revenue earned by the Partnership in any year under
the terms of the Distribution Agreement are less than $475,000 in any
calendar year prior to the Exercise Date, the percentage of the securities
to be transferred by the Company to the Partnership shall be increased by
1% for each 10% shortfall to a maximum of 5% in any calendar year, provided
that the option of the Partnership to acquire such additional shares shall
not be exercisable by the Partnership until the promissory notes issued by
limited partners to the Company have been paid in full and until such time,
such additional options may be repurchased by the Company for a price equal
to 150% of the cash shortfalls for which the options were issued.
Since the Company is responsible for maintaining, upgrading and developing
future revisions of the Software, the transaction has not been accounted
for as a sale by the Company. In addition, the notes receivable have not
been recorded by the Company as a result of their long-term nature and they
are primarily expected to be repaid as the Company sells software to third
parties and makes payments to the Partnership pursuant to terms of the
Distribution Agreement. Therefore, repayment prior to 2005 will only occur
out of revenue generated by the Company. This transaction has been
accounted for by the Company on a cost recovery basis and the cash received
from the Partnership will reduce the capitalized software costs and revenue
will be recognized when the capitalized software costs have been reduced to
zero since the Company has, in essence, retained substantially all rights
of ownership.
The software and all rights to the above agreements were sold by the
Company in connection with the divestiture of the software development
division (Note 2).
12. Subsequent Events
------------------
Reverse Stock Split
-------------------
On March 26, 1997, the Company filed a Proxy Statement for a special
meeting of stockholders to be held April 25, 1997 to vote on a proposed
reverse stock split of the Company's common stock on the basis of two
shares for each three shares outstanding. The Company's stockholders
approved the reverse stock split on April 25, 1997 and accordingly, all
share amounts and earnings per share amounts have been retroactively
restated to give effect to the reverse stock split.
13. Subsequent Events (Unaudited)
----------------------------
Warrants (Unaudited)
--------------------
In June 1997, the Underwriter returned 106,667 warrants to the Company
without consideration.
F-20
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
13. Subsequent Events (Unaudited) (Continued)
----------------------------------------
Bridge Loans (Unaudited)
------------------------
In June through August 1997, the Company borrowed $750,000 from a group of
nine lenders (the "1997 Bridge Loan"). As additional compensation for the
1997 Bridge Loan, the Company issued an aggregate of 150,000 shares of
common stock to the lenders, one share for each $5 loaned to the Company.
The Bridge Loan bears interest at 12% per annum and is payable on the
earlier of the closing of a public or private offering of securities by the
Company for at least $1,000,000 or fifteen months from the date of the
Bridge Loan.
The Company paid the Private Placement Agent a sales commission of 10% of
the proceeds of the Bridge Loans and a 3% nonaccountable expense allowance.
Proposed Public Stock Offering (Unaudited)
------------------------------------------
The Company has executed a letter of intent with an Underwriter to offer
900,000 units of the Company's securities, each unit consisting of one
share of the Company's common stock and one redeemable common stock
purchase warrant. The offering price per unit will be the average bid price
of the common stock in the over-the-counter market for the common stock on
the day prior to the Offering. Each warrant is exercisable to purchase one
share of common stock at the public offering price of the Units for a
period of five years from the effective date of the Company's Registration
Statement and may be redeemed by the Company. The Company will also grant
the Underwriter an option to purchase an additional 135,000 units 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 $100, to purchase up to 90,000 units which shall be
exercisable at a price per unit equal to 120% of the public offering price
of the Units. The Underwriter's warrant is exercisable for a period of four
years beginning one year from the effective date of the Registration
Statement. The units subject to the Underwriter's warrant will be identical
to the units sold to the public. The Company has also agreed upon
completion of the Offering to retain the Underwriter as a financial
consultant for a period of 36 months at a monthly fee of $5,000 (a total of
$180,000) payable in full upon completion of the Offering. There can be
assurance that the Offering will be successfully completed.
F-21
- --------------------------------------------------------------------------------
No dealer, salesman or other person
has been authorized to give any
information or to make any
representations other than contained in
this Prospectus in connection with the
Offering described herein, and if given
or made, such information or
representations must not be relied upon
as having been authorized by the
Company. This Prospectus does not
constitute an offer to sell, or the
solicitation of an offer to buy, the
securities offered hereby to any person
in any state or other jurisdiction in 900,000 Units
which such offer or solicitation is
unlawful. Neither the delivery of this
Prospectus nor any sale hereunder shall,
under any circumstances, create any
implication that there has been no
change in the affairs of the Company
since the date hereof.
PROTOSOURCE CORPORATION
------------
TABLE OF CONTENTS
Page
---- ---------------
Available Information................ 3
Prospectus Summary................... 4 PROSPECTUS
The Company ......................... 7
Risk Factors......................... 9 ---------------
Capitalization....................... 17
Price Range of Common Stock.......... 18
Use of Proceeds...................... 18
Selected Financial Data.............. 19 Andrew, Alexander, Wise &
Management's Discussion and Company, Inc.
Analysis of Financial Condition
and Results of Operations.......... 20
Business............................. 23 __________, 1997
Management........................... 30
Principal Stockholders............... 34
Certain Transactions................. 35
Description of Securities............ 36
Underwriting......................... 40
Legal Matters........................ 43
Experts.............................. 43
Financial Statements.................F-1
Until __________, 1997 (25 days
after the date of this Prospectus), all
dealers effecting transactions in the
registered securities, whether or not
participating in this distribution, may
be required to deliver a Prospectus.
This is in addition to the obligation of
dealers to deliver a Prospectus when
acting as underwriters and with respect
to their unsold allotments or
subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. Indemnification of Directors and Officers.
- ---------------------------------------------------
Section 5 of the Registrant's Restated Articles of Incorporation provide
that liability of directors for monetary damage is eliminated to the fullest
extent possible with California law. Section 6 provides for indemnification of
all of the Registrant's agents (including officers and directors) subject only
to limits imposed by California law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to officers, directors or persons
controlling the Company, the Company has been advised that, in the opinion of
the Securities and Exchange Commission, Washington, D.C. 20549, such
indemnification is against public policy as expressed in such Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by an officer, director or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
officer, director or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in such Act and will be governed by the final adjudication
of such issue.
ITEM 25. Other Expenses of Issuance and Distribution.(1)
- --------------------------------------------------------
SEC Registration Fee............................... $ 4,124
NASD Filing Fee.................................... 1,861
Blue Sky Legal and Filing Fees..................... 15,000
Printing Expenses.................................. 30,000
Legal Fees and Expenses............................ 60,000
Accounting Fees.................................... 45,000
NASDAQ Application Fee............................. 10,000
Transfer Agent Fees................................ 3,000
Miscellaneous Expenses............................. 31,015
------
TOTAL.............................................. $200,000 (1)
(1) All expenses, except the SEC and NASD registration fees, are estimated.
Does not include the Underwriter's commission of $_______, nonaccountable
expense allowance of $_______, and consulting fee of $180,000.
II-1
ITEM 26. Recent Sales of Unregistered Securities
- ------------------------------------------------
During the last three years, the Registrant sold the following shares of
its securities which were not registered under the Securities Act of 1933, as
amended.
(i) In September 1996, the Registrant issued 26,667 shares of its Common
Stock to the following individuals as additional consideration for a loan to the
Registrant in the amount of $200,000.
Name Number of Shares
---- ----------------
John Benedetto 6,667
James Ippolito 3,333
Anaka Prakash 6,667
Larry Pensa 3,333
Isaac Paschalidis 6,667
(ii) In October 1996, the Registrant sold an aggregate of 400,000 shares of
its Common Stock to the following individuals for $3.75 per share.
Name Number of Shares
---- ----------------
John Benedetto 40,000
Brian A. Brewer 6,667
James Ippolito 20,000
Raymond King 6,667
Jack Ko and Wendy Ko 13,333
Anaka Prakash 40,000
Isaac Paschalidis 53,333
Larry Pensa 20,000
Francis Sajeski and Barbara Sajeski 6,667
Jerry Silberman 6,667
Rao-Qi Zhang 6,667
George P. Argerakis 13,333
Robert Cavallaro 6,667
Ding Chu Fuh Chen 6,667
Murray Frank 6,667
Donald Gross 13,333
Gloria Ippolito 40,000
Chris Meshouris 6,667
James Meshouris 6,667
Matthew Mulhern and Mary Mulhern 26,667
Michael Pizite 20,000
Bernard Schwartz and Barbara Schwartz 6,667
George Stripas and Matthew Ianello 6,666
II-2
Kuei-Chi Tsai 6,666
Saul Unter 6,666
Osweld Valenti, Jack Valenti and Barbara Davis 6,666
(iii) Between June and September 1997, the Registrant issued an aggregate
of 150,000 shares of Common Stock in connection with a bridge loan financing of
$750,000 at the rate of one share of Common Stock for each $5.00 of bridge loan.
The following individuals received the number of shares set forth opposite their
names:
Names Number of Shares
----- ----------------
World Spirit, Inc. 50,000
Francis E. Sajeski 5,000
Anaka Prakash 30,000
James Ippolito 20,000
Saul Unter 5,000
Bernard Schwartz and Barbara Schwartz 5,000
Isaac Paschalidis 20,000
John Benedetto 15,000
With respect to the sales made, the Registrant relied on Section 4(2) of
the Securities Act of 1933, as amended (the "1933 Act"), and/or Regulation D,
Rule 506. No advertising or general solicitation was employed in offering the
securities. The securities were offered to a limited number of individuals and
the transfer thereof was appropriately restricted by the Registrant. All
stockholders were accredited investors as that term is defined under Regulation
D under the 1933 Act who were capable of analyzing the merits and risks of their
investment and who acknowledged in writing that they were acquiring the
securities for investment and not with a view toward distribution or resale and
that they understood the speculative nature of their investment.
ITEM 27. Exhibits.
- ------------------
Exhibit No. Title
----------- -----
1.05 Form of Underwriting Agreement
1.06 Form of Underwriter's Warrant Agreement
1.07 Form of Warrant Agreement
1.08 Financial Advisory and Investment Banking Agreement
2.01 Restated Articles of Incorporation of the Registrant(1)
II-3
2.02 Bylaws of the Registrant(1)
5.05 Opinion of Gary A. Agron, regarding legality of the Common
Stock and Warrants (includes Consent)
10.01 1995 Incentive Stock Option Plan (1)
10.02 Capitalized Lease Agreement (1)
10.12 Divestiture Agreement (2)
10.13 Selling Agreement with AAWC (2)
10.14 Warrant Agreement with AAWC (2)
10.15 Lock-up Agreement (2)
10.16 Registration Rights Agreement (2)
10.17 Employment Agreement with Mr. Meyers
10.18 Bridge Loan Agreement
23.10 Consent of Angell & Deering
23.11 Consent of Gary A. Agron (See 5.05, above)
27.01 Financial Data Schedule
- ---------
(1) Incorporated by reference to the Registrant's Registration Statement on Form
SB-2 declared effective by the Commission on February 9, 1995, file number
33-86242.
(2) Incorporated by reference by the Registrant's Registration Statement on Form
SB-2 declared effective by the Commission on May 14, 1997, file Number
333-20543.
ITEM 28. Undertakings.
- ----------------------
The Registrant hereby undertakes:
(a) That insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant, the Registrant has been advised that in the opinion
II-4
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(b) That subject to the terms and conditions of Section 13(a) of the
Securities Exchange Act of 1934, it will file with the Securities and Exchange
Commission such supplementary and periodic information, documents and reports as
may be prescribed by any rule or regulation of the Commission heretofore or
hereafter duly adopted pursuant to authority conferred in that section.
(c) That any post-effective amendment filed will comply with the applicable
forms, rules and regulations of the Commission in effect at the time such
post-effective amendment is filed.
(d) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(e) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(f) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
Offering.
(g) To provide to the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriter to permit prompt delivery to each
purchaser.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Fresno, California, on November 18, 1997
PROTOSOURCE CORPORATION
By: /s/ Raymond J. Meyers
---------------------------------------
Raymond J. Meyers
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Raymond J. Meyers Chief Executive Officer November 18, 1997
- --------------------------
Raymond J. Meyers Chief Financial Officer,
(Principal Accounting Officer),
and Director
/s/ David A. Appell Director November 18, 1997
- --------------------------
David A. Appell
/s/ Dickon Pownall-Gray Director November 18, 1997
- --------------------------
Dickon Pownall-Gray
II-6
EXHIBIT INDEX
Exhibit No. Title
----------- -----
1.05 Form of Underwriting Agreement
1.06 Form of Underwriter's Warrant Agreement
1.07 Form of Warrant Agreement
1.08 Financial Advisory and Investment Banking Agreement
5.05 Opinion of Gary A. Agron, regarding legality of
the Common Stock and Warrants (includes Consent)
10.17 Employment Agreement with Mr. Meyers
10.18 Bridge Loan Agreement
23.10 Consent of Angell & Deering
23.11 Consent of Gary A. Agron (See 5.05, above)
27.01 Financial Data Schedule
II-7