UNITED STATES SECURITIES AND EXCHANGES COMMISSION
Washington D.C. 20549
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Form 10-QSB
(Mark One)
[ X ] Quarterly Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1999 or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from _____ to _____
Commission file number 33-86242
ProtoSource Corporation
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(exact name of registrant as specified in its charter)
California 77-0190772
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(State of other jurisdiction of (IRS Employer
Incorporation of organization) Identification No.)
2800 28th Street, Suite 170
Santa Monica, CA 90405
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(address of principal executive offices, zip code)
Registrant's telephone number, including area code: (310) 314-9801
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Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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There are 1,772,188 shares of the registrant's common stock, no par value
outstanding on May 12, 1999.
ProtoSource Corporation
Index
Page
Part I Financial Information
Item 1. Financial Statements
Condensed Balance Sheet
at March 31,1999 3
Condensed Statements of Operations
for the three months ended March 31,1999 and 1998 5
Condensed Statements of Cash Flows
for the three months ended March 31,1999 and 1998 6
Notes to Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
Part II. Other Information
Other Information 11
Signatures 11
When used in this report, the words "estimate," "project," "intend," "believe"
and "expect" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risk and uncertainties that could
cause actual results to differ materially, including competitive pressures, new
product introductions by the Company and its competitors and changes in the
rates of subscriber acquisition and retention. Readers are cautioned not to
place undue reliance on these forward-lookin statements, which speak only as of
the date hereof. The Company undertakes no obligation to publicly release
updates or revisions to these statements.
ProtoSource Corporation
Condensed Balance Sheet
March 31, 1999
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 3,520,096
Accounts receivable - trade net of allowance
for doubtful accounts of $7,500 95,367
Prepaid expenses and other 69,060
Current portion of note receivable 105,000
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Total current assets 3,789,523
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Property and equipment, at cost:
Equipment 944,776
Furniture 122,083
Leasehold improvements 2,956
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1,069,815
Less accumulated depreciation and amortization (701,697)
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Net property and equipment 368,118
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Other assets:
Goodwill, net of accumulated amortization of $4,945 16,300
Note receivable, net of allowance for uncollectibility
of $168,000 --
Deposits 15,420
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Total other assets 31,720
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Total assets $ 4,189,361
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See accompanying notes
3
ProtoSource Corporation
Condensed Balance Sheet
March 31, 1999
(Unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 44,552
Accrued expenses:
Payroll taxes and wages 33,706
Deferred revenue 6,267
Current portion of long-term debt 70,448
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Total current liabilities 154,973
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Long-term debt, net of current portion above:
Obligations under capital leases 134,493
Less current portion above (70,448)
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Total long-term debt 64,045
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Commitments and contingencies --
Stockholders' equity:
Preferred stock, no par value;
5,000,000 shares authorized, --
None issued and outstanding
Common stock, no par value; 10,000,000 shares
authorized, 1,772,188 shares issued and outstanding 10,792,672
Additional paid in capital 10,658
Accumulated deficit (6,832,987)
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Total stockholders' equity 3,970,343
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Total liabilities and stockholders' equity $ 4,189,361
============
See accompanying notes
4
ProtoSource Corporation
Condensed Statements of Operations
(unaudited)
Three months ended March 31,
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1999 1998
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Net revenues $ 277,821 $ 210,143
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Operating expenses:
Cost of revenues 80,196 68,747
Sales and marketing 47,577 29,601
General and Administrative 354,928 281,681
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Total operating expenses 482,701 380,029
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Operating loss (204,880) (169,886)
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Other income (expense):
Interest Income 41,233 15
Interest Expense (11,206) (258,516)
Other Income, net 105,000 45,740
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Total other income (expense) 135,027 (212,761)
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Loss from operations before provision (69,853) (382,647)
for income taxes
Provision for income taxes -- --
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Net Loss $ (69,853) $ (382,647)
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Net Income (Loss) Per Share of Common Stock:
Basic $ (.04) $ (.58)
Diluted $ (.04) $ (.58)
Weighted Average Number of Common Shares
Outstanding:
Basic 1,781,255 665,333
Diluted 1,781,255 665,333
See accompanying notes
5
ProtoSource Corporation
Condensed Statements of Cash Flows
(Unaudited)
Three months ended March 31,
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1999 1998
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Cash flows from operating activities:
Net loss $ (69,853) $ (382,647)
Adjustments to reconcile net loss
to net cash provided (used) by
operating activities:
Depreciation and amortization 46,260 227,335
Bad debt recovery (105,000) --
Changes in operating assets:
Accounts receivable (41,268) 3,010
Deposits and other assets 27,602 (11,499)
Accounts payable (77,166) 27,911
Accrued liabilities (26,891) 22,201
Deferred revenues (7,480) --
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Net cash (used) by
operating activities (253,796) (113,689)
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Cash flows from investing activities:
Purchases of property and equipment -- (32,006)
Receipt of principal on notes receivable -- 105,671
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Net cash provided by
investing activities -- 73,665
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Cash flows from financing activities:
Payments on notes payable and
capital lease obligations (20,470) (864)
Offering costs incurred -- (20,058)
Purchase of common stock (91,522) --
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Net cash provided (used)
by financing activities (111,992) (20,922)
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Net (decrease) in cash
and cash equivalents (365,788) (60,946)
Cash and cash equivalents
at beginning of period 3,885,884 98,148
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Cash and cash equivalents
at end of period $ 3,520,096 $ 37,202
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See accompanying notes
6
ProtoSource Corporation
Condensed Statements of Cash Flows
(Unaudited)
Three months ended March 31,
----------------------------
1999 1998
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Supplemental Disclosure of Cash Flow
information cash paid during the period for:
Interest $11,206 $66,516
Income taxes -- --
See accompanying ntoes
7
ProtoSource Corporation
Notes to Condensed Unaudited Financial Statements
Basis of Presentation
The accompanying financial information of the Company is prepared in accordance
with the rules prescribed for filing condensed interim financial statements and,
accordingly, does not include all disclosures that may be necessary for complete
financial statements prepared in accordance with generally accepted accounting
principles. The disclosures presented are sufficient, in management's opinion,
to make the interim information presented not misleading. All adjustments,
consisting of normal recurring adjustments, which are necessary so as to make
the interim information not misleading, have been made. Results of operations
for the three months ended March 31, 1999 are not necessarily indicative of
results of operations that may be expected for the year ending December 31,
1999. It is recommended that this financial information be read with the
complete financial statements included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998 previously filed with the Securities
and Exchange Commission.
Per Share Information
As of December 31, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share", which specifies the method of
computation, presentation and disclosure for earnings per share. SFAS No. 128
requires the presentation of two earnings per share amounts, basic and diluted.
Basic earnings per share is calculated using the average number of common shares
outstanding. Diluted earnings per share is computed on the basis of the average
number of common shares outstanding plus the dilutive effect of outstanding
stock options using the "treasury stock" method.
The basic and diluted earnings per share are the same since the Company had a
net loss for all periods presented and the inclusion of stock options and other
incremental shares would be antidilutive. Options and warrants to purchase
1,669,833 and 231,334 shares of common stock at March 31, 1999 and 1998,
respectively were not included in the computation of diluted earnings per share
because the Company had a net loss and their effect would be antidilutive.
8
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Three Months Ended March 31, 1999 vs. Three Months Ended March 31, 1998
Net Revenues. For three months ended March 31, 1999 net sales were $277,821
versus $210,143 in the same period of the prior year. The rise in revenues is
primarily attributed to increased marketing efforts resulting in the growth of
Internet subscribers, web development projects and fees earned from providing
technical support services to other Internet Service Providers. The Company
believes that revenues will continue to increase as marketing plans are executed
that focus on introducing the Company's products and services to large affinity
based groups.
Operating Expenses. For three months ended March 31, 1999, total operating
expenses were $482,701 versus $380,029 in the same period of the prior year.
This increase of $102,672 is primarily attributed to higher advertising,
marketing, legal, and insurance expenses. The Company believes that operating
expenses will increase as revenues increase.
Operating Loss. The Company's operating loss for the period ending March 31,
1999 totaled $204,880 versus $169,886 in 1998. This increase of $34,994 is due
to an increase in total operating expenses. Management believes that operating
results will improve as revenues increase.
Interest income. Net interest income totaled $30,027 for the period ending March
31, 1999 versus net interest expense of $258,501 in 1998. Interest income for
1999 of $41,233 was generated by investments made with the net proceeds of the
Company's May 1998 secondary stock offering.
Other income. Net other income increased to $105,000 from $45,740 for the three
months ended March 31, 1999 and March 31, 1998, respectively. The 1999 total of
$105,000 was due to collection of a note receivable which was previously written
off as uncollectable.
9
Liquidity and Capital Resources
For the three months ended March 31,1999, the Company used $253,796 of cash for
operating activities. The Company has working capital of $3,634,550 at March 31,
1999. As of March 31, 1999, the Company had $3,520,096 in cash and cash
equivalents and total liabilities of $219,018.
Associated with the 1998 cancellation of the Shaw Avenue capital lease, the
Company agreed to purchase up to 30,224 shares of its common stock from the
landlord. The Company purchased 15,112 shares in September 1998 for $77,165
($5.11 per share). In February 1999, the Company purchased the remaining 15,112
shares for $91,522 ($6.06 per share). The Company subsequently retired the
30,224 shares to the corporate treasury.
10
Part II. Other Information
Item 5. Other Information
Systems issues associated with the Year 2000
As defined by the Company, Year 2000 compliance refers to applications and
systems which are capable of correct identification, manipulation and
calculation using dates outside the 1900-1999 year range. In this regard, the
Company recognizes the complexity and significance of the Year 2000 issue and
has created a project team comprised of internal personnel to identify products
and systems where the Year 2000 problem may exist and to renovate, replace or
retire those products or systems. The Company's Year 2000 compliance plan
consists of four phases: inventory, assessment, correction and testing. The
Company is currently concluding the assessment phase.
Correction will consist of upgrading, replacing or repairing hardware and
software as appropriate. Testing and validation of systems will begin
immediately as components are brought into compliance.
Presently, the Company believes that the cost of addressing Year 2000 issues is
not material to its future business, operating results or financial position.
However, the Company cannot predict whether third parties' inability to meet
their critical completion dates will adversely impact the Company's September
30, 1999 target date. Further, in the event that any of the Company's
significant suppliers do not successfully and timely achieve Year 2000
compliance, the Company's expectations that it will be able to upgrade its
systems to address the Year 200 issue and its expectation regarding associated
costs are forward-looking statements, and, as such, subject to a number of risks
and uncertainties.
Stock Purchase of Infosis Corp.
On April 30, 1999, the Company entered into strategic alliances with and has
purchased 11.3%, on a non-diluted basis, of the outstanding common stock of
Infosis Corp. ("Infosis"), a privately held company. The Company paid an
aggregate of $1.8 million for 600,000 shares of Infosis Common Stock. The $1.8
million payment represents 51.1% of the Company's available cash. As described
below, 30,000 of the purchased shares were paid to Andrew, Alexander, Wise and
Company, Incorporated ("AAWC"). After payment of the 30,000 shares of Infosis
Common Stock to AAWC, the Company owns 570,000 shares of Infosis Common Stock or
10.7%, on a non-diluted basis.
Infosis provides comprehensive Internet based electronic publishing software
solutions for newspapers, catalogs, magazines and a variety of specialty print
publications. Infosis's domestic client base includes The Christian Science
Monitor, The Boston Herald, and The Houston Chronicle. Infosis's international
client base includes The British Broadcasting Company, The Daily Mail and
General Trust, and Lloyds of London Press.
Pursuant to the strategic alliances, the Company will enter into a licensing
agreement with Infosis whereby the Company can market software produced by
Infosis. Infosis has also agreed to employ the Company as its preferential
Internet Service Provider. The Company and Infosis have also agreed to aid each
other in sales and marketing efforts. The Company will also have one designee on
Infosis's Board of Directors.
Pursuant to a Consulting Agreement dated May 13, 1998, between AAWC and the
Company, AAWC is entitled to additional compensation upon finding and assisting
in completing business opportunities for the Company. AAWC has been responsible
for introducing, negotiating and consummating the Company's agreement with
Infosis. As additional compensation, AAWC received 5% of the aggregate amount of
Common Stock of Infosis purchased by the Company, which equals 30,000 shares of
Common Stock.
Item 6. Exhibits and Reports on form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ProtoSource Corporation,
May 12, 1999 /s/ Raymond J. Meyers
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Raymond J. Meyers
Chief Executive Officer
11