UNITED STATES SECURITIES AND EXCHANGE 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 June 30, 1999 or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from _____ to _____
Commission file number 33-86242
ProtoSource Corporation
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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, California 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 August 10, 1999.
ProtoSource Corporation
Index
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Page
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Part I Financial Information
Item 1. Financial Statements
Condensed Balance Sheet at June 30, 1999 3
Condensed Statements of Operations
for the three months ended June 30, 1999 and 1998 5
Condensed Statements of Operations
for the six months ended June 30, 1999 and 1998 6
Condensed Statements of Cash Flows
for the six months ended June 30, 1999 and 1998 7
Notes to Condensed Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information
Other Information 13
Signatures 13
When used in this report, the words "estimate," "project," "intend," "believe"
and "expect" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risk and uncertainties that could
cause actual results to differ materially, including competitive pressures, new
product introductions by the Company and its competitors and changes in the
rates of subscriber acquisition and retention. Readers are cautioned not to
place undue reliance on these forward-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
June 30, 1999
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,530,059
Accounts receivable:
Trade net of allowance for
doubtful accounts of $7,500 102,473
Prepaid Expenses and other 117,603
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Total current assets 1,750,135
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Property and equipment, at cost:
Equipment 944,776
Furniture 147,533
Leasehold improvements 6,463
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1,098,772
Less accumulated depreciation and amortization (747,852)
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Net property and equipment 350,920
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Other assets:
Goodwill, net of accumulated amortization of $5,050 16,195
Investment in Corporation 1,800,000
Note receivable, net of allowance for
uncollectibility of $168,000 --
Deposits 15,420
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Total other assets 1,831,615
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Total assets $ 3,932,670
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See accompanying notes
3
ProtoSource Corporation
Condensed Balance Sheet
June 30, 1999
(Unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 14,151
Accrued expenses:
Payroll taxes and wages 63,317
Other 43,179
Deferred revenue 9,752
Current portion of long-term debt 70,448
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Total current liabilities 200,847
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Long-term debt, net of current portion above:
Obligations under capital leases 123,296
Less current portion above (70,448)
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Total long-term debt 52,848
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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 (7,124,355)
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Total stockholders' equity 3,678,975
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Total liabilities and stockholders' equity $ 3,932,670
============
See accompanying notes
4
ProtoSource Corporation
Condensed Statements of Operations
(Unaudited)
Three months ended June 30,
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1999 1998
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Net revenues $ 244,866 $ 204,415
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Operating expenses:
Cost of revenues 88,299 66,319
Sales and marketing 97,330 34,602
General and Administrative 365,487 266,623
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Total operating expenses 551,116 367,544
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Operating loss (306,250) (163,129)
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Other income (expense):
Interest Income 19,295 27,402
Interest Expense (4,413) (429,482)
Other Income, net -- 27,739
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Total other income (expense) 14,882 (374,341)
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Loss from operations before provision (291,368) (537,470)
for income taxes
Provision for income taxes -- --
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Net Loss $ (291,368) $ (537,470)
===========================
Net Income (Loss) Per Share of Common Stock:
Basic $ (.16) $ (.43)
Diluted $ (.16) $ (.43)
Weighted Average Number of Common Shares
Outstanding:
Basic 1,772,188 1,240,087
Diluted 1,772,188 1,240,087
See accompanying notes
5
ProtoSource Corporation
Condensed Statements of Operations
(Unaudited)
Six months ended June 30,
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1999 1998
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Net revenues $ 522,687 $ 414,558
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Operating expenses:
Cost of revenues 168,495 135,066
Sales and marketing 144,907 64,203
General and Administrative 720,415 548,304
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Total operating expenses 1,033,817 747,573
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Operating loss (511,130) (333,015)
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Other income (expense):
Interest Income 60,528 27,417
Interest Expense (15,619) (687,998)
Other Income, net 105,000 73,479
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Total other income (expense) 149,909 (587,102)
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Loss from operations before provision (361,221) (920,117)
for income taxes
Provision for income taxes -- --
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Net Loss $ (361,221) $ (920,117)
===========================
Net Income (Loss) Per Share of Common Stock:
Basic $ (.20) $ (.96)
Diluted $ (.20) $ (.96)
Weighted Average Number of Common Shares
Outstanding:
Basic 1,776,697 954,245
Diluted 1,776,697 954,245
See accompanying notes
6
ProtoSource Corporation
Condensed Statements of Cash Flows
(Unaudited)
Six months ended June 30,
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1999 1998
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Cash flows from operating activities:
Net loss $ (361,221) $ (920,117)
Adjustments to reconcile net loss to
net cash provided (used) by
operating activities:
Depreciation and amortization 92,520 643,005
Bad debt recovery (105,000) --
Gain on termination of capital lease -- (24,315)
Loss on re-negotiation of note receivable -- 16,279
Changes in operating assets:
Accounts receivable (48,374) (3,570)
Deposits and other assets (20,941) 1
Accounts payable (107,567) 6,747
Accrued liabilities 45,899 (41,814)
Deferred revenues (3,995) --
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Net cash (used) by operating activities (508,679) (323,784)
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Cash flows from investing activities:
Purchases of property and equipment (28,957) (46,202)
Increase in notes receivable -- (79,029)
Receipt of principal on notes receivable 105,000 169,021
Payment for termination of capital lease -- (150,000)
Investment in corporation (1,800,000) --
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Net cash provided (used) by investing activities (1,723,957) (106,210)
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Cash flows from financing activities:
Issuance of common stock -- 6,537,750
Payments on notes payable and capital lease obligations (31,667) (770,213)
Offering costs incurred -- (1,071,915)
Purchase of common stock (91,522) --
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Net cash provided by financing activities (123,189) 4,695,622
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Net increase (decrease) in cash and cash equivalents (2,355,825) 4,265,628
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 $ 1,530,059 $ 4,363,776
==================================
See accompanying notes
7
ProtoSource Corporation
Condensed Statements of Cash Flows
(continued)
(Unaudited)
Six months ended June 30,
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1999 1998
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Supplemental Disclosure of Cash Flow
information cash paid during the period for:
Interest $15,619 $204,440
Income taxes -- --
See accompanying notes
8
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 six months ended June 30, 1999 are not necessarily indicative of results
of operations that may be expected for the year ending December 31, 1999. It is
recommended that this financial information be read with the complete financial
statements included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1998 previously filed with the Securities and Exchange
Commission.
Per Share Information
As of December 31, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share", which specifies the method of
computation, presentation and disclosure for earnings per share. SFAS No. 128
requires the presentation of two earnings per share amounts, basic and diluted.
Basic earnings per share is calculated using the average number of common shares
outstanding. Diluted earnings per share is computed on the basis of the average
number of common shares outstanding plus the dilutive effect of outstanding
stock options using the "treasury stock" method.
The basic and diluted earnings per share are the same since the Company had a
net loss for 1998 and 1997 and the inclusion of stock options and other
incremental shares would be anti-dilutive. Options and warrants to purchase
1,669,833 and 1,618,584 shares of common stock at June 30, 1999 and 1998
respectively were not included in the computation of diluted earnings per share
because the Company had a net loss and their effect would be anti-dilutive.
9
Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months Ended June 30, 1999 vs. Three Months Ended June 30, 1998
Net Revenues. For the three months ended June 30, 1999, net revenues were
$244,866 versus $204,415 in the same period of the prior year. The rise in net
revenue of 19.79% is primarily attributed to increased marketing efforts
resulting in the growth of Internet subscribers and continued growth in web
development revenue. The Company believes that revenues will continue to
increase as additional products and services are introduced to large affinity
based groups.
Operating Expenses. For the three months ended June 30, 1999, total
operating expenses were $551,116 versus $367,544 in the same period of the prior
year. This increase of $183,572 is primarily attributed to increased sales and
marketing expenses of $62,728, expenses of $38,543 associated with the filing of
three corporate stock registration statements, June 1999 Annual Shareholder
meeting expenses of $15,948, and higher payroll and insurance expenses. The
Company believes that overall operating expenses will increase as revenues
increase.
Operating Loss. The Company's operating loss for the three months ended
June 30, 1999, was $306,250 versus $163,129 in 1998. The increase in operating
loss was primarily attributed to increased operating expenses, as noted above.
Management believes that operating results will continue to improve as revenues
increase.
Interest income (expense). Net interest income totaled $14,882 for the
three months ended June 30, 1999, versus net interest expense of $402,080 in
1998. Interest income for the three months ended June 30, 1999, of $19,295 was
primarily due to investments made with the net proceeds of the Company's May
1998 secondary stock offering.
Other income. Net other income decreased to $0 for the three months ended
June 30, 1999, from $27,739 for the same period in 1998. The decrease in 1999 of
other income is due to the elimination of rental income associated with the June
1998 cancellation of the Company's Shaw Avenue property capital lease.
10
Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Six Months Ended June 30, 1999 vs. Six Months Ended June 30, 1998
Net Revenues. For the six months ended June 30, 1999, net revenues were
$522,687 versus $414,558 in the same period of the prior year representing an
increase of 26.08%. The Company increased marketing efforts in the six month
period which resulted in the growth of Internet subscribers and web development
revenue. The Company believes that revenues will continue to increase as
additional products and services are introduced to large affinity based groups
and as a result of acquisitions of other Internet Service Providers or other
computer-oriented companies.
Operating Expenses. For the six months ended June 30, 1999, total operating
expenses were $1,033,817 versus $747,573 in the same period of the prior year.
This increase of $286,244 is primarily attributed to increased sales and
marketing expenses of $80,704, expenses of $38,543 associated with the filing of
three corporate stock registration statements, June 1999 Annual Shareholder
Meeting expenses of $15,948, and higher payroll and insurance expenses. The
Company believes that overall operating expenses will increase as revenues
increase.
Operating Loss. The Company's operating loss for the six months ended June
30, 1999, was $511,130 versus $333,015 in 1998. The increase in operating loss
was primarily attributed to increased operating expenses, as noted above.
Management believes that operating results will continue to improve as revenues
increase.
Interest income (expense). Net interest income totaled $44,909 for the six
months ended June 30, 1999, versus net interest expense of $660,581 for the same
period in 1998. Interest income for the six months ended June 30, 1999, of
$60,528 was primarily due to investments made with the net proceeds of the
Company's May 1998 secondary stock offering.
Other income. Net other income increased to $105,000 for the six months
ended June 30, 1999, from $73,479 in the same period of 1998. The 1999 six month
total of $105,000 was due to a collection of a note receivable which was
previously written off as uncollectable.
11
Liquidity and Capital Resources
For the six months ended June 30, 1999, the Company used $508,679 of cash for
operating activities primarily as a result of a net loss for the period. The
Company has a working capital surplus of $1,549,288 at June 30, 1999. As of June
30, 1999, the Company had $1,530,059 in cash and cash equivalents and $200,847
of current liabilities.
Capital expenditures relating primarily to the purchase of computer equipment,
furniture and fixtures, and software amounted to $28,957 for the six months
ended June 30, 1999. The capital investment is mainly in computer equipment to
sustain future growth of the Company.
12
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held at 10:30 a.m. on Tuesday, June 29,
1999, at the Company's location in Fresno, California. The purpose of the
meeting was to elect three directors of the Company and to transact such other
business as may properly come before the meeting. The following directors were
nominated and subsequently elected at the meeting: Raymond J. Meyers (1,651,898
votes for and 7,344 votes withheld), Andrew Stathopoulos (1,651,898 votes for
and 7,344 votes withheld), William Conis (1,651,924 votes for and 7,370 votes
withheld).
Item 5. Other Information
Systems issues associated with the Year 2000
As defined by the Company, Year 2000 compliance refers to applications and
systems which are capable of correct identification, manipulation and
calculation using dates outside the 1900-1999 year range. In this regard, the
Company recognizes the complexity and significance of the Year 2000 issue and
has created a project team comprised of internal personnel to identify products
and systems where the Year 2000 problem may exist and to renovate, replace or
retire those products or systems. The Company's Year 2000 compliance plan
consists of four phases: inventory, assessment, correction and testing. The
Company is currently concluding the correction phase.
Correction will consist of upgrading, replacing or repairing hardware and
software as appropriate. Testing and validation of systems will begin
immediately as components are brought into compliance.
Presently, the Company believes that the cost of addressing Year 2000 issues is
not material to its future business, operating results or financial position.
However, the Company cannot predict whether third parties' inability to meet
their critical completion dates will adversely impact the Company'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.
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,
August 10, 1999 /s/ Raymond J. Meyers
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Raymond J. Meyers
Chief Executive Officer
13