UNITED STATES SECURITIES AND EXCHANGES COMMISSION
Washington D.C. 20549
Form 10-QSB
(Mark One)
[ X ] Quarterly Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarter ended September 30, 2001
Transition Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
For the transition period from _____ to _____
Commission file number 33-86242
ProtoSource Corporation
(exact name of registrant as specified in its charter)
California 77-0190772
(State of other jurisdiction of (IRS Employer
Incorporation of organization) Identification No.)
2300 Tulare St., Suite 210
Fresno, CA 93721
(address of principal executive offices, zip code)
Registrant's telephone number, including area code: (559) 490-8600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
There were 5,492,103 shares of the registrant's common stock, no par value
outstanding on September 30, 2001.
ProtoSource Corporation
Index
Page
----
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheet
at September 30, 2001 3
Condensed Consolidated Statements of Operations for the
three months ended September 30, 2001 and 2000 5
Condensed Consolidated Statements of Operations
for nine months ended September 30, 2001 and 2000 6
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2001 and 2000 7
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II. Other Information
Other Information 17
Signatures 17
When used in this report, the words "estimate," "project," "intend," "believe"
and "expect" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risk and uncertainties that could
cause actual results to differ materially, including competitive pressures, new
product introductions by the Company and its competitors and changes in the
rates of subscriber acquisition and retention. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. The Company undertakes no obligation to publicly release
updates or revisions to these statements.
2
ProtoSource Corporation
Condensed Consolidated Balance Sheet
September 30, 2001
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 36,921
Accounts receivable - trade, net of allowance
for doubtful accounts of $20,656 76,439
Prepaid expenses and other 63,818
-----------
Total current assets 177,178
-----------
Property and equipment, at cost:
Equipment 1,049,805
Furniture 148,219
Leasehold improvements 6,463
-----------
1,204,487
Less accumulated depreciation and amortization (1,063,831)
-----------
Net property and equipment 140,656
-----------
Other assets:
Goodwill, net of accumulated amortization of $286,605 442,129
Investment in corporation, net of impairment $1,675,484 226,000
Investment in Dauphin Technology, Inc. 720,477
Deposits 10,919
-----------
Total other assets 1,399,525
-----------
Total assets $ 1,717,359
===========
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
3
ProtoSource Corporation
Condensed Consolidated Balance Sheet
September 30, 2001
(Unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 273,658
Customer deposit 5,000
Accrued expenses 39,039
Deferred revenue 6,970
Current portion of long-term debt 17,033
------------
Total current liabilities 341,700
------------
Long-term debt, net of current portion above:
Obligations under capital leases 108,931
Less current portion above (17,033)
------------
Total long-term debt 91,898
------------
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, 5,492,103 shares
issued and outstanding 24,535,043
Additional paid in capital 221,325
Other compressive income (349,323)
Accumulated deficit (23,123,284)
------------
Total stockholders' equity 1,283,761
------------
Total liabilities and stockholders' equity $ 1,717,359
============
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
4
ProtoSource Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended September 30,
--------------------------------
2001 2000
---- ----
Net revenues $ 387,113 $ 404,228
----------- -----------
Operating expenses:
Cost of revenues 136,313 181,237
Sales and marketing 30,982 73,046
General and administrative 373,310 565,456
Depreciation and amortization 58,063 75,560
Impairment of investment -- 561,161
----------- -----------
Total operating expenses 598,668 1,456,460
----------- -----------
Operating loss (211,555) (1,052,232)
----------- -----------
Other income (expense):
Interest income 38 22,987
Interest expense (5,081) (492,060)
----------- -----------
Total other income (expense) (5,043) (469,073)
----------- -----------
Loss before provision for income taxes (216,598) (1,521,305)
Provision for income taxes -- --
----------- -----------
Net Loss From Continuing Operations (216,598) (1,521,305)
----------- -----------
Discontinued Operations:
Loss from discontinued operations 1,792 (365,794)
----------- -----------
Total Loss From Discontinued Operations 1,792 (365,794)
----------- -----------
Net Loss $ (214,806) $(1,887,099)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Basic:
Weighted Average Number of Common Shares Outstanding 5,492,103 2,741,686
Net Income (Loss) Per Share of Common Stock:
Continuing Operations $ (.04) $ (.55)
Discontinued Operations (--) (.14)
----------- -----------
Net Loss $ (.04) $ (.69)
=========== ===========
Diluted:
Weighted Average Number of Common Shares Outstanding 5,492,103 2,741,686
Net Income (Loss) Per Share of Common Stock:
Continuing Operations $ (.04) $ (.55)
Discontinued Operations (--) (.14)
----------- -----------
Net Loss $ (.04) $ (.69)
=========== ===========
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
5
ProtoSource Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
Nine months ended September 30,
-------------------------------
2001 2000
---- ----
Net revenues $ 1,173,596 $ 1,155,373
----------- -----------
Operating expenses:
Cost of revenues 513,770 521,302
Sales and marketing 131,622 247,313
General and administrative 1,164,711 1,396,324
Depreciation and amortization 171,721 226,682
Impairment of investment 404,000 561,161
----------- -----------
Total operating expenses 2,385,824 2,952,782
----------- -----------
Operating loss (1,212,228) (1,797,409)
----------- -----------
Other income (expense):
Interest income 4,013 38,503
Interest expense (883,170) (882,547)
----------- -----------
Total other income (expense) (879,157) (844,044)
----------- -----------
Loss before provision for income taxes (2,091,385) (2,641,453)
Provision for income taxes -- --
----------- -----------
Net Loss From Continuing Operations (2,091,385) (2,641,453)
----------- -----------
Discontinued Operations:
Loss from discontinued operations (982,306) (365,794)
Loss on disposal (6,786,621) --
----------- -----------
Total Loss From Discontinued Operations (7,768,927) (365,794)
----------- -----------
Net Loss $(9,860,312) $(3,007,247)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Basic:
Weighted Average Number of Common Shares Outstanding 4,711,905 2,250,615
Net Income (Loss) Per Share of Common Stock:
Continuing Operations $ (.44) $ (1.17)
Discontinued Operations (1.65) (.17)
----------- -----------
Net Loss $ (2.09) $ (1.34)
=========== ===========
Diluted:
Weighted Average Number of Common Shares Outstanding 4,711,905 2,250,615
Net Income (Loss) Per Share of Common Stock:
Continuing Operations $ (.44) $ (1.17)
Discontinued Operations (1.65) (.17)
----------- -----------
Net Loss $ (2.09) $ (1.34)
=========== ===========
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
6
ProtoSource Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
-------------------------------
2001 2000
---- ----
Cash flows from operating activities:
Net loss (9,860,312) $(3,007,247)
Adjustments to reconcile net loss to net cash
(used) by operating activities:
Depreciation and amortization 1,667,604 1,163,159
Loss on sale of assets 6,786,821 --
Impairment of investment 404,000 561,161
Provision for bad debts (19,344) --
Issuance of common stock for services 35,670 --
Changes in operating assets and liabilities:
Accounts receivable 64,052 (34,658)
Inventories 216,150 (9,794)
Prepaid expenses and other assets 64,156 169,790
Accounts payable (419,574) 189,263
Customer deposits 5,000 --
Accrued expenses (199,781) 3,402
Deferred revenue (25,840) 32,492
----------- -----------
Net cash (used) by operating activities (1,281,398) (932,432)
----------- -----------
Cash flows from investing activities:
Cash received from acquisition -- 35,290
Purchase of property and equipment (68,142) (41,305)
Increase in note receivable (100) --
Deposits 3,683 (3,241)
Employee receivable 9,815 5,000
Cost of sale of Suncoast Automation (10,237) --
Investment in corporation -- (101,484)
Loan to corporation -- (500,000)
Acquisition Costs (270,342)
----------- -----------
Net cash (used) by investing activities (64,981) (876,082)
----------- -----------
Cash flows from financing activities:
Proceeds from borrowing 295,317 1,541,028
Payments on notes payable (1,920,597) (53,951)
Offering costs incurred (666,653) (125,557)
Debt issuance costs incurred (22,750) (222,500)
Issuance of common stock 3,600,000 232,958
----------- -----------
Net cash provided by financing activities 1,285,317 1,371,978
----------- -----------
Net increase in cash and cash equivalents (61,062) (436,536)
Cash and cash equivalents at beginning of period 97,983 677,319
----------- -----------
Cash and cash equivalents at end of period $ 36,921 $ 240,783
=========== ===========
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
7
ProtoSource Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30,
-------------------------------
2001 2000
---- ----
Supplemental Disclosure of Cash Flow information:
Cash paid during the period for:
Interest $ 33,900 $ 40,372
Income taxes -- --
Supplemental Disclosure of Noncash
Investing and Financing Activities:
Issuance of common stock in connection
with financing $ 277,683 $ --
Issuance of common stock for services 289,490 --
Return of common stock for adjustment of
acquisition cost -- 26,497
Issuance of common stock for acquisition
of corporation -- 7,736,990
Issuance of common stock in connection with
financing -- 1,500,000
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
8
ProtoSource Corporation
Notes to Condensed Consolidated 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 nine months ended September 30, 2001 are not necessarily indicative of
results of operations that may be expected for the year ending December 31,
2001. 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, 2000 previously filed with the Securities
and Exchange Commission.
Per Share Information
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share", which specifies the method of computation, presentation
and disclosure for earnings per share. SFAS No. 128 requires the presentation of
two earnings per share amounts, basic and diluted.
Basic earnings per share is calculated using the weighted average number of
common shares outstanding. Diluted earnings per share is computed on the basis
of the weighted average number of common shares outstanding plus the dilutive
effect of outstanding stock options using the "treasury stock" method.
The basic and diluted earnings per share are the same since the Company had a
net loss for all periods presented and the inclusion of stock options and other
incremental shares would be antidilutive. Options and warrants to purchase
3,048,378 and 2,021,595 shares of common stock at September 30, 2001 and 2000,
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.
Suncoast Acquisition
On August 22, 2000 the Company acquired all the outstanding common stock of
Suncoast in exchange for 1,303,072 shares of the Company's common stock. In
addition, the Company agreed to deposit 1,000,000 shares of its common stock
with an Escrow Agent. Over the 27 months following the effective date of the
Company's public offering, Suncoast's shareholders may earn some or all of these
shares based upon meeting the following criteria: 500,000 shares will be
released when Suncoast installs 19,000 subscribers/rooms and achieves $1,300,000
in cumulative cash flow. The balance of the shares will be released in 10%
increments for each additional increment of 1,900 subscribers/rooms and $190,000
in cumulative cash flow added.
9
In January 2001, Nasdaq informed the Company that as a result of the Suncoast
transaction, it violated a Nasdaq marketplace rule, which requires shareholder
approval for the issuance of 20% or more of an issuer's securities in connection
with an acquisition of assets or securities of another company. In order to
remain in compliance with Nasdaq continued listing requirements, Suncoast's
shareholders agreed to return to the Company 866,988 shares out of the 1,303,072
shares of common stock issued to them in order to reduce the issuance of the
Company's common stock in this acquisition to under 20% and maintain the
Company's listing on the Nasdaq Small Cap Market.
Effective January 16, 2001, the Company entered into an amendment to the stock
exchange agreement with the former Suncoast shareholders which provides the
following:
o The former Suncoast shareholders agreed to return an aggregate of
866,988 shares of the Company's common stock.
o The 866,988 shares of common stock will be reissued to the former
shareholders of Suncoast in the event shareholder approval is
obtained. The shareholder vote is currently scheduled for May 1, 2001.
o The Suncoast acquisition agreement was further modified to provide
that no additional shares of common stock will be issued to the former
Suncoast shareholders, unless and until the Company's shareholders
approve the issuance. The agreement also states that no other
compensation of any kind or nature will be issued to the former
Suncoast shareholders at any time in the event the Company fails to
receive shareholder approval for the issuance. The agreement
specifically states that even if the Company is eventually delisted
from Nasdaq, no further compensation will be issued to the former
Suncoast shareholders.
At the May 1, 2001 shareholders meeting the 866,988 shares were approved to be
reissued to the former shareholders of Suncoast.
Sale of Suncoast Division
Effective July 1, 2001, the Company sold substantially all of the assets of
Suncoast Automation Inc., its wholly-owned subsidiary, to Dauphin Technology,
Inc, through Suncoast Acquisition Corp., an Illinois corporation, for 766,058
shares of Dauphin Technology common stock valued at stock at $1.1 million based
on the closing bid price of $1.47 per share on June 29, 2001.
The Company recorded a loss of approximately $6,786,621 on the sale of the
Suncoast Automation assets. The results of Protosource's operations for all
periods presented have been restated for the discontinued Suncoast Automation
operations.
10
Summary of operating results of Three Months Ended Nine Months Ended
Discontinued operation: September 30, September 30,
------------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
Net Sales $ -- $ 32,447 $ 120,624 $ 32,447
Cost of sales 451 40,201 83,118 40,201
----------- ----------- ----------- -----------
Gross profit (451) (7,754) 37,506 (7,754)
Operating expenses (2,294) 356,989 1,018,137 356,989
----------- ----------- ----------- -----------
Income (loss) from operations 1,843 (364,743) (980,631) (364,743)
Other income (expense) (51) (1,051) (1,675) (1,051)
----------- ----------- ----------- -----------
Net income (loss) $ 1,792 $ (365,794) $ (982,306) $ (365,794)
=========== =========== =========== ===========
11
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Three Months ended September 30, 2001 vs. Three Months ended September 30, 2000
Net Revenues. For the three months ended September 30, 2001 net sales from
continuing operations were $387,113 versus $404,228 in the same period of the
prior year. The decrease in revenues is attributed to a decrease in our dial-up
Internet access business partially offset by an increase in our outsourced
technical support revenues. The Company believes that revenues will continue to
remain relatively flat as marketing activities have been curtailed in order to
conserve operating funds.
Operating Expenses. For the three months ended September 30, 2001 operating
expenses from continuing operations were $598,668 versus $1,456,460 in the same
period of the prior year. Last year's figure for this period, included an
impairment expense of $561,161 in our investment in P2i, Inc. The balance of the
decrease of $296,631 is attributed to lower network line and salary costs. The
Company believes that operating expenses will continue to decline as further
cost-cutting measures are put into effect.
Operating Loss. The Company's operating loss for the period ending
September 30, 2001 totaled $211,555 versus $1,052,232 in 2000. The decrease of
$840,677 is due to overall lower total operating expenses and the impairment
expense of our P2i investment included in last year's period. The Company
believes that operating losses will continue to decline as operating expenses
are further reduced.
Interest Income. Net interest income totaled $(5,043) for the period ending
September 30, 2001 versus net interest income of $(469,073) in 2000. The
decrease in interest expense is a result of the elimination of the bridge loans.
Discontinued Operations. The Company sold the assets of its Suncoast
Automation subsidiary effective July 1, 2001. In connection with this sale, we
incurred a gain (loss) from discontinued operations of $1,792 and $(365,794) for
the three months ended September 30, 2001 and 2000, respectively.
12
Management's Discussion and Analysis of Financial Condition and Results of
Operations (cont'd)
Results of Operations
Nine Months Ended September 30, 2001 vs. Nine Months Ended September 30, 2000
Net Revenues. For the nine months ended September 30, 2001 net sales from
continuing operations were $1,173,596 versus $1,155,373 in the same period of
the prior year. The increase in revenues is attributed to an increase in our
outsourced technical support and web design/development revenues offset by a
decrease in our dial-up Internet access business. The Company believes that
revenues will continue to remain relatively flat as marketing activities have
been curtailed in order to conserve operating funds.
Operating Expenses. For the nine months ended September 30, 2001 operating
expenses from continuing operations were $2,385,824 versus $2,952,782 in the
same period of the prior year. This decrease of $566,958 is primarily attributed
to the reduction in our sales and marketing expenditures, reduction in overall
personnel costs and the impairment expense of our investment in P2i recorded in
each period. The Company believes that operating expenses will continue to
decline as further cost-cutting measures are put into effect.
Operating Loss. The Company's operating loss for the period ending
September 30, 2001 totaled $1,212,228 versus $1,797,409 in 2000. This decrease
of $585,181 is due to a decrease in overall operating expenses as described
above. The Company believes that operating losses will continue to decline as
operating expenses are further reduced.
Interest Income. Net interest income totaled $(879,157) for the period
ending September 30, 2001 versus net interest income of $(844,044) in 2000. The
increase in interest expense is the result of lower interest income in the
amount of $34,490 received on funds on hand during 2000 versus 2001.
Discontinued Operations. The Company sold the assets of its Suncoast
Automation subsidiary effective July 1, 2001. In connection with this sale (see
Liquidity and Capital Resources), we incurred a loss from discontinued
operations of $982,306 and $365,794 for the nine months ended September 30, 2001
and 2000, respectively. We also incurred a $6,786,621 loss on disposal of the
assets for the nine months ended September 30, 2001.
13
Liquidity and Capital Resources
For the nine months ended September 30, 2001, the Company used $1,281,398 of
cash for operating activities. The Company has working capital of $(164,522) at
September 30, 2001 which is an increase of $2,115,917 from December 31, 2000. As
of September 30, 2001, the Company had $36,921 in cash and cash equivalents and
total liabilities of $433,598.
On April 30, 1999, we entered into a strategic alliance with Infosis Corp., a
privately held corporation and purchased 12.7%, on a non-diluted basis, of its
outstanding common stock. We paid an aggregate of $1.8 million for 600,000
shares of Infosis Corp. common stock. At the time of the purchase, the $1.8
million payment represented 51.1% of our available cash. 30,000 of the purchased
shares were paid to Andrew, Alexander, Wise & Co., Inc., as a finder's fee.
After payment of the 30,000 shares of Infosis common stock to AAWC, we owned
570,000 shares of Infosis Corp. common stock. There were no affiliate or related
party relationships with Infosis prior to this investment. The strategic
alliance pertained to joint marketing and development activities whereby
ProtoSource would become the web design and development arm of Infosis Corp. As
part of the investment, William Conis, then a Director of ProtoSource, was
appointed to the Board of Directors of Infosis Corp. in June 1999. In June 1999,
the Board of Directors of Infosis Corp. replaced the CEO and CFO of the company.
The new management team changed the direction of Infosis Corp. and did not
follow through on the alliance with ProtoSource.
In January 2000, Infosis Corp. issued Protosource 120,000 shares of its common
stock as an adjustment to reflect a lower offering price per share in a
concluded private placement of their common stock, which brought Protosource's
holdings of Infosis Corp. to 690,000 shares. The additional shares issued were
the result of the anti-dilution provision which was part of the original
investment in Infosis Corp. The receipt of the additional shares from the
anti-dilution provision did not result in a change in the cost basis of
ProtoSource's original investment in Infosis Corp.
In July 2000, we purchased an $84,177 convertible promissory note from Infosis
Corp. in connection with a bridge financing.
In September 2000, Protosource acquired an aggregate of $329,686 principal
amount of Infosis Corp. convertible promissory notes at $0.05 on the dollar for
a total acquisition price of $16,484. These convertible promissory notes were
then converted into 329,686 shares of preferred stock of Infosis Corp.
Concurrent with the acquisition of the Infosis Corp. promissory notes by
Protosource, Infosis Corp. merged into P2i, Inc., a privately held corporation.
ProtoSource's investment in Infosis Corp. was increased by the amount that it
paid for the promissory notes which were then converted into preferred stock of
Infosis Corp. As a result of this merger, ProtoSource now owns 506,225 shares of
common stock or approximately 4% of P2i, Inc. As a result of a lack of interest
in the strategic alliance by Infosis and the merger between Infosis and P2i,
Inc., our original investment into Infosis, which merged into P2i, Inc., has
turned into a passive investment. P2i, Inc. is a privately held company and
there can be no assurances that we will realize the full value of this
investment if we need to dispose of these assets. In addition, after further
review of this investment, although no formal appraisal or valuation report was
prepared, as of December 31, 2000, we recorded an impairment expense of
$1,271,484 to write down this investment to its estimated market value. The
impairment expense was recorded as the difference between $630,000 and the total
amount of our investment into Infosis.
14
On July 17, 2001, P2i acquired all the assets of Twenty Twenty Design &
Marketing, Inc. of New York City. As a result of this acquisition, our holdings
in P2i were diluted to approximately 2.6% of the resulting entity. Additionally,
the post-merger valuation of the company was set at approximately $8.7 million.
Based on this new information, we have recorded an additional impairment expense
of $404,000 as of June 30, 2001, to write down this investment to this value.
The impairment expense was recorded as the difference between the previous value
of this investment ($630,000) and the newly established value ($226,000).
Andrew, Alexander, Wise & Co., Inc. acted as placement agent for $1,500,000 of
bridge financing completed in May 2000. The short-term financing was in the form
of units containing promissory notes with interest at 10%. In addition, each
$25,000 unit consisted of 4,000 shares of our common stock. The promissory notes
were due and paid at the closing of our February 2001 public offering. Andrew,
Alexander, Wise & Co., Inc. was paid a 10% commission and a 3% non-accountable
expense allowance. In connection with this bridge financing, we incurred debt
issuance costs of approximately $1,722,500. The unamortized debt issuance costs
were expensed as interest when the loans were repaid in February 2001.
On August 22, 2000, we acquired all the outstanding common stock of Suncoast
Automation, Inc. in exchange for 1,303,072 shares of our common stock. Although
we did not obtain an independent appraisal of the fair market value of Suncoast,
we based our valuation on the cable television industry standard at that time of
$5,000 per subscriber. On May 17, we entered into a Term Sheet to sell the
assets of Suncoast Automation to Dauphin Technology, Inc. (DNTK.OB), an Illinois
corporation. The sale was concluded effective July 1, 2001. As a result of the
sale, we received 766,058 shares of Dauphin common stock of which 38,303 were
paid to our investment banker, Andrew, Alexander, Wise and Company. Dauphin also
agreed to assume $140,269 in Suncoast liabilities. In conjunction with the sale,
we negotiated approximately $362,498 of Suncoast-related liabilities for 268,466
shares of our common stock and approximately $3,300 in cash. The write-down in
connection with this sale was recorded in the second quarter. The Dauphin
Technology stock we received was registered effective September 22, 2001 The
Company began liquidation of a portion of the securities in October 2001.
Proceeds from the sale of securities will be used to fund the Company's
operations
In December 2000, Andrew, Alexander, Wise & Co., Inc. acted as placement agent
for a $175,000 bridge financing. The short-term financing was in the form of a
unit containing promissory notes with interest at 10%. In addition, the unit
consisted of 50,050 shares of our common stock. The promissory notes were due
and paid at the closing of the February 2001 public offering. Andrew, Alexander,
Wise & Co., Inc. was paid a 10% commission and a 3% non-accountable expense
allowance. In connection with this bridge financing, we incurred debt issuance
costs of approximately $197,750. The debt issuance costs were expensed as
interest when the loan was repaid in February 2001.
In January 2001, Andrew, Alexander, Wise & Co., Inc. acted as placement agent
for a $175,000 bridge financing. The short-term financing was in the form of a
unit containing promissory notes with interest at 10%. In addition, the unit
consisted of 50,050 shares of our common stock. The promissory notes were due
and paid at the closing of the February 2001 public offering. Andrew, Alexander,
Wise & Co., Inc. was paid a 10% commission and a 3% non-accountable expense. In
connection with this bridge financing, we incurred debt issuance costs of
approximately $197,750. The debt issuance costs were expensed as interest when
the loan was repaid in February 2001.
15
In February 2001, the Company sold 800,000 units of securities at $4.50 per unit
(the "February 2001 public offering"). Each unit consisted of two shares of
Common Stock and one redeemable Common Stock purchase warrant exercisable at
$2.92 per share until February 14, 2006. The proceeds of this offering were
significantly lower than had been expected. As a result, the bulk of the funds
from the offering were used to repay the bridge loans incurred in 2000 and early
2001 as well as past due trade payables. The remaining capital was used to fund
the operations of the Company. Thus, the Company is unable to fund the build-out
of the cable TV contracts of the Suncoast division. Thus, the sale of Suncoast
was actively sought.
On May 1, 2001, the Company signed a Term Sheet to acquire Agence 21
("a21"). a21, a development stage company, expects to offer professional
photographers a unique package that encompasses a full range of marketing,
business and editorial services for digital and analog images. The closing of
the transaction is contingent on shareholder approval as well as raising
sufficient capital to fund the combined companies. With our own Internet
expertise, we will be able to support a21 with customized solutions for
photographers and agencies, without depending on the infrastructure of others.
As of October 31, 2001, a21 has received two term sheets for funding
totaling $1.5 million. We are in the process of renegotiating our term sheet
with a21 in order to assess the viability of continuing with the acquisition.
Simultaneously, we are exploring several other alternatives to fuel our future
growth.
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Part II. Other Information
Item 5. Exhibits and Reports on Form 8-K
The Company filed a Form 8-K dated July 16, 2001 for the sale of the assets
of Suncoast Automation, Inc. in exchange for the issuance of 766,058 shares of
Dauphin Technology, Inc. common stock. The sale was consummated effective July
1, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ProtoSource Corporation,
November 05, 2001 /s/ William Conis
-----------------
William Conis,
Chief Executive Officer/
Principal Accounting Officer
17