QUARTERLY REPORT FOR SMALL BUSINESS ISSUERS SUBJECT TO THE 1934 ACT REPORTING
REQUIREMENTS
Form 10-QSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period ended March 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-25594
PROTOSOURCE CORPORATION
-----------------------
(Exact name of registrant as specified in its charter)
California 77-0190772
---------- ----------
(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
One Bethlehem Plaza, 4th Floor, Bethlehem, PA 18018
---------------------------------------------------
(Address of Principal Executive Offices, Zip code)
610-332-2893
------------
(Issuers' Telephone Number)
Check whether the issuer (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 8,114,829 shares of the registrant's common stock, no par value
outstanding as of March 31, 2004.
PROTOSOURCE CORPORATION
-----------------------
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2004
- ------------------------------------------------------------------------------------
INDEX
-----
Part I - Financial Information (unaudited):
Item 1. Condensed consolidated balance sheet -
March 31, 2004 3
Condensed consolidated statement of operations for the
three-month periods ended March 31, 2004 and 2003 4
Condensed consolidated statement of stockholders'
deficiency for the three-month period ended March 31, 2004 5
Condensed consolidated statement of cash flows for the
three-month periods ended March 31, 2004 and 2003 6 & 7
Notes to condensed consolidated financial statements
for the three month period ended March 31, 2004 8 to 13
Item 2. Management's discussion and analysis of
financial condition and results of operations 14 to 18
Part II - Other Information
Other Information 19
Signature 20
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 and
new product introductions by the Company and its competitors. 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
MARCH 31, 2004
(unaudited)
- ------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 58,682
Accounts receivable - trade, net of allowance 161,724
Employee advances 14,014
Amounts due from related party - P2i, Inc. 104,006
Notes receivable, current portion 63,156
Prepaid expenses and other 195,515
------------
Total current assets 597,097
------------
Property and equipment, at cost, net of
accumulated amortization of $343,493 188,020
------------
Other assets:
Note receivable, non-current portion - Brand X Networks, Inc. 195,127
Goodwill - Acquisition of P2i Newspaper 375,067
Debt issuance costs, net of accumulated amortization of $1,979,653 570,626
Investment in corporation 24,000
Deposits 8,263
------------
Total other assets 1,173,083
------------
Total assets $ 1,958,200
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Notes payable $ 2,275,000
Current portion of obligations under capital leases 43,255
Accounts payable 212,163
Accrued expenses 790,548
Due to related company 84,546
------------
Total current liabilities 3,405,512
------------
Obligations under capital leases, non-current portion 30,351
------------
Commitments and contingencies
Stockholders' deficiency:
Preferred stock, Series B, no par value; 5,000,000 shares
authorized, none issued and outstanding --
Preferred stock to be issued, no par value, 193,836 shares 416,179
Common stock, no par value; 10,000,000 shares
authorized, 8,114,829 shares issued and outstanding 25,835,960
Common stock to be issued, no par value; 4,801,500 shares 1,357,000
Additional paid-in capital 2,714,107
Accumulated deficit (31,800,909)
------------
Net stockholders' deficiency (1,477,663)
------------
Total liabilities and net stockholders' deficiency $ 1,958,200
============
See accompanying notes.
- - 3 -
PROTOSOURCE CORPORATION
-----------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
- ------------------------------------------------------------------------------------
THREE-MONTH
PERIOD ENDED
MARCH 31,
2004 2003
------------ ------------
Net revenues $ 329,558 $ --
------------ ------------
Operating expenses:
Cost of revenues 254,182 --
Sales & marketing 15,199 --
General and administrative 224,095 85,576
Depreciation and amortization 27,602 2,182
------------ ------------
Total operating expenses 521,078 87,758
------------ ------------
Operating loss (191,520) (87,758)
------------ ------------
Other income (charges)
Interest income -- 22,319
Other income 4,565 7,272
Interest expense (577,204) (415,910)
Investment banking fees (407,000) --
Loss on sale of marketable securities -- (65,942)
Other expense (1,752) --
------------ ------------
Net other charges (981,391) (452,261)
------------ ------------
Loss from continuing operations (1,172,911) (540,019)
Discontinued operations:
Gain on disposal - ISP 475,455 --
------------ ------------
Net loss ($ 697,456) ($ 540,019)
============ ============
Net loss per basic and diluted share of common stock:
Continuing operations ($ .04) ($ .07)
Discontinued operations .02 --
------------ ------------
Net loss ($ .02) ($ .07)
============ ============
Weighted average number of basic and diluted
common shares outstanding 31,035,717 7,580,975
============ ============
See accompanying notes.
- - 4 -
PROTOSOURCE CORPORATION
-----------------------
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2004
(unaudited)
- --------------------------------------------------------------------------------------------
Preferred Stock
To be issued Common Stock
--------------------------- ---------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
Balance, December 31, 2003 -- -- 8,114,829 $ 25,835,960
Issuance of preferred stock in
connection with acquisition 193,836 $ 416,179 -- --
Common stock to be issued in
connection with investment
banking fees for acquisition -- -- -- --
Common stock to be issued in
connection with financing -- -- -- --
Beneficial conversion feature of
convertible notes -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Total comprehensive (loss) -- -- -- --
Balance, March 31, 2004 193,836 $ 416,179 8,114,829 $ 25,835,960
============ ============ ============ ============
Table continues below.
Common Stock
to be Issued Additional
--------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 2,737,500 $ 700,000 $ 2,464,107 ($31,103,453) ($ 2,103,386)
Issuance of preferred stock in
connection with acquisition -- -- -- -- 416,179
Common stock to be issued in
connection with investment
banking fees for acquisition 814,000 407,000 -- -- --
Common stock to be issued in
connection with financing 1,250,000 250,000 -- -- 250,000
Beneficial conversion feature of
convertible notes -- -- 250,000 -- 250,000
Net loss -- -- -- (697,456) (697,456)
------------ ------------ ------------ ------------ ------------
Total comprehensive (loss) -- -- -- -- --
Balance, March 31, 2004 $ 4,801,500 $ 1,357,000 $ 2,714,107 ($31,800,909) ($ 1,477,663)
============ ============ ============ ============ ============
See accompanying notes.
- - 5 -
PROTOSOURCE CORPORATION
-----------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
- ------------------------------------------------------------------------------------------
THREE-MONTH PERIOD
ENDED
MARCH 31,
2004 2003
--------- ---------
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net loss ($697,456) ($540,019)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Gain on disposal - ISP (475,455) --
Depreciation and amortization 27,602 2,182
Loss on sale of marketable securities -- 65,942
Amortization of debt issuance costs 259,502 281,711
Amortization of beneficial conversion
feature of notes payable 250,000 100,000
Investment banking fees to be paid by
issuance of common stock 407,000 --
Changes in operating assets and liabilities:
Accounts receivable 1,434 (22,319)
Prepaid expenses and other assets (1,835) --
Accounts payable (61,355) 31,462
Accrued expenses 102,052 27,242
--------- ---------
Net cash (used in) operating activities (188,511) (53,799)
--------- ---------
Cash flows from investing activities:
Cash obtained from acquisition of P2i Newspaper 56,775 --
Purchase of property and equipment (275) --
Increase in notes receivable -- (50,713)
Employee receivable (13,889) --
Proceeds from sale of marketable securities -- 7,051
--------- ---------
Net cash provided by (used in) investing activities 42,611 (43,662)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings 250,000 100,000
Payments on notes payable -- (5,210)
Payments on obligations under capital leases (9,504) --
Net change in amount due related company (50,872) --
Debt issuance costs incurred (32,500) --
--------- ---------
Net cash provided by financing activities 157,124 94,790
--------- ---------
Net increase (decrease) in cash 11,224 (2,671)
Cash at beginning of period 47,458 2,671
--------- ---------
Cash at end of period $ 58,682 $ --
========= =========
CONTINUED ON NEXT PAGE
See accompanying notes.
- - 6 -
PROTOSOURCE CORPORATION
-----------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
(unaudited)
- ---------------------------------------------------------------------------------------
THREE-MONTH PERIOD
ENDED
MARCH 31,
2004 2003
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 67,778 $ 34,199
--------- ---------
Income taxes $ -- $ --
--------- ---------
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of common stock in connection with financing $ 250,000 $ 100,000
Issuance of preferred stock in connection with acquisition 416,179 --
Unrealized (gain) loss on marketable securities -- (62,069)
Sale of ISP Division in exchange for note receivable and credit
for future services 475,455 --
See accompanying notes.
- - 7 -
PROTOSOURCE CORPORATION
-----------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2004
(unaudited)
- --------------------------------------------------------------------------------
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of operations - 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.
Until May 1, 2002, the Company was an Internet service provider (ISP). The
Company provided dial-up Internet access, web hosting services and web
development services. The Company entered into an agreement on May 1, 2002
to sell substantially all of the assets pertaining to the ISP to Brand X
Networks, Inc. (see Note 2). Effective January 1, 2004, the Company
acquired P2i Newspaper, Inc. (see Note 5). P2i Newspaper, Inc. is
principally engaged in the conversion of text and graphics from print to
interactive Web content. Its clients include newspaper groups located in
the United States and the United Kingdom. P2i Newspaper is headquartered in
Bethlehem, Pennsylvania and has a west coast sales office in California and
a data conversion center located in Kuala Lumpur, Malaysia.
Basis of presentation - The accompanying unaudited condensed consolidated
financial statements of the Company are prepared in conformity 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, 2004 are not necessarily indicative of the results expected
for the full fiscal year or for any future period. 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, 2003 previously filed with the Securities and Exchange
Commission. The accompanying condensed consolidated financial statements
have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or the amount and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flows to meet its obligations on a timely basis, to obtain
additional financing as may be required, and to generate revenues to a
level where the Company becomes profitable. Additionally, the Company has
experienced extreme cash liquidity shortfalls from operations.
The Company's continued existence is dependent upon its ability to achieve
its operating plan. Management's plans include the following:
o Obtaining additional working capital through the sale of common stock
or debt securities.
o The ability of P2i Newspaper to successfully implement its strategic
plan as follows:
P2i Newspaper's long-term business strategy is to focus on the
processing of print content into web content using technologically
sophisticated, database-driven, services and solutions across multiple
business-to-business verticals. The combination of on-target sales
strategies, low labor costs, a well-educated labor pool fluent in
English, and sophisticated technologies make P2i Newspaper highly
competitive. The Company intends leveraging these competitive
advantages in other markets over the next five years.
Through 2004 and 2005, P2i Newspaper will focus on the following:
increase market share in the newspaper vertical and target government,
retail and manufacturing verticals.
- - 8 -
PROTOSOURCE CORPORATION
-----------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2004
(unaudited)
- --------------------------------------------------------------------------------
1. Nature of Operations and Summary of Significant Accounting Policies -
Continued
Newspaper
o In November, 2003, P2i Newspaper made the strategic decision to
withdraw from marketing directly to new newspaper accounts in the
United States, but instead to focus on building partnerships to build
sales. The Company recognized that the conversion of print content
into Internet was viewed by newspapers as an essential commodity, and
as such they were motivated by price as much as product functionality
and features.
o Through its partners and residual direct accounts, P2i Newspaper is
supplying or has access to over 1,600 U.S. newspapers: over 24% of the
U.S. market.
Government
o The UK government has mandated that all government publications must
also be available online within the near future. P2i Newspaper is
working closely to maximize this opportunity.
o P2i Newspaper's solution has been evaluated by the city of Stockport
in the UK and has passed the established Bobby AA standards.
Retail
o P2i Newspaper currently processes inserts for several retailers.
o In addition, the Company is in talks with retailer groups to provide
the ad and special section processing that will be incorporated into a
platform featuring newspaper content and retail inserts.
o The pricing for converting catalog and retail insert pages has fallen
dramatically over the past 18 months. P2i Newspaper believes it will
continue to fall and that the Company is perfectly positioned to
re-enter this market using a similar strategy to that used in the
newspaper space: partnerships.
Manufacturing
o P2i Newspaper solutions are applicable for any business with large
volumes of frequently updated print content that is appropriate for
Internet distributions.
o Manufacturing companies are generally putting all technical manuals
online in crude PDF format.
o The potential revenue opportunity is being quantified, but is believed
to be substantial.
If management cannot achieve the above objectives, the Company may find it
necessary to dispose of assets, or undertake other actions as may be
appropriate.
- - 9 -
PROTOSOURCE CORPORATION
-----------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2004
(unaudited)
- --------------------------------------------------------------------------------
1. Nature of Operations and Summary of Significant Accounting Policies -
Continued
Principles of consolidation - The consolidated financial statements include
the accounts of the Company and P2i Newspaper, Inc., its wholly-owned
subsidiary. All significant intercompany accounts and transactions have
been eliminated.
Revenue recognition - The Company recognizes service revenue when
persuasive evidence of an arrangement exists, services are performed, the
price of the transaction is fixed and determinable, and collectibility is
reasonably assured.
Stock-based compensation - The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," for its stock-based compensation plans. 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," and related
interpretations.
During each of the three-month periods ended March 31, 2004 and 2003, there
would have been no compensation expense based upon the fair value at the
grant date for awards under these plans consistent with the methodology
prescribed by SFAS No. 123.
Net (loss) per basic and diluted share of common stock - Basic loss per
share is calculated using the weighted average number of common shares
outstanding. Diluted loss per share is computed on the basis of the
weighted average number of common shares outstanding during the period
increased by the dilutive effect of outstanding stock options using the
"treasury stock" method.
The basic and diluted loss 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 anti-dilutive. Options and warrants to
purchase 2,197,500 and 3,542,500 shares of common stock at March 31, 2004
and 2003, respectively, were not included in the computation of diluted
earnings per share.
Reclassifications - Certain reclassifications have been made to the 2003
financial statement presentation for comparability with the 2004 financial
statements.
2. Recently Issued Accounting Standards
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46 or FIN 46, "Consolidation of Variable Interest
Entities", an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements". In October 2003, the FASB issued FASB
Staff Position FIN 46-6, "Effective Date of FASB Interpretation No. 46,
Consolidation of Variable Interest Entities," deferring the effective date
for applying the provisions of FIN 46 for public entities' interests in
variable interest entities or potential variable interest entities created
before February 1, 2003 for financial statements of interim or annual
periods that end after December 15, 2003. FIN 46 establishes accounting
guidance for consolidation of variable interest entities that function to
support the activities of the primary beneficiary. In December 2003, the
FASB issued FIN 46 (revised December 2003), "Consolidation of Variable
Interest Entities." This revised interpretation is effective for all
entities no later than the end of the first reporting period that ends
after March 15, 2004. The Company has no investment in or contractual
relationship or other business relationship with a variable interest entity
and therefore the adoption of this interpretation did not have any impact
on its consolidated financial position or results of operations. However,
if the Company enters into any such arrangement with a variable interest
entity in the future or any entity with which we have a relationship is
reconsidered, based on guidance in FIN 46, to be a variable interest
entity, the Company's consolidated financial position or results of
operations might be materially impacted.
- - 10 -
PROTOSOURCE CORPORATION
-----------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2004
(unaudited)
- --------------------------------------------------------------------------------
3. Sale of ISP Division
Effective May 1, 2002, the Company entered into an agreement to sell
substantially all of the assets of the ISP division to Brand X Networks,
Inc., a California Corporation, for $632,000. The assets have been held and
operated by Brand X Networks, Inc. for its purposes since May 1, 2002, at
which time the Company discontinued its ISP operations. On April 14, 2003,
the Company completed a fifth amendment to the purchase agreement with
Brand X pursuant to which the Company has agreed to accept an aggregate
payment of $632,000 for the ISP Division, less credits to Brand X of
$112,686. Of such amount, $200,000 shall be paid through the provision of
services to the Company from Brand X. The balance shall be paid at the rate
of approximately $5,171 per month, until completely paid.
On January 1, 2004, the sale of the ISP business to Brand X closed. Under
the terms of that agreement a promissory note of $284,455 was executed by
Brand X to be paid in 55 equal monthly installments. This note is
collateralized by a pledge of shares in Brand X. In addition, ProtoSource
is entitled to appoint one person to the board of directors of Brand X for
the duration of the agreement.
4. Notes Payable
During the three months ended March 31, 2004, the Company issued $250,000
of promissory notes in exchange for amounts borrowed from individuals. The
notes mature in one year from date of issuance with interest payable at 10%
per annum and each with a conversion feature which permits the Holder to
convert the principal and accrued interest into the Company's common stock
at any time prior to the due date of the repayment of the note by the
Company. The conversion rate is generally the amount to be converted
divided by a predetermined price established at note issuance. An amount of
$250,000 has been recognized in 2004 as interest expense and additional
paid-in capital as the result of the beneficial conversion feature of these
notes.
Also in connection with the issuance of these notes, the Company issued
1,250,000 shares of common stock valued at $250,000. In addition, the
Company issued 500,000 warrants, to the underwriter which have a deminimis
value. These amounts are being amortized to interest expense on a monthly
basis over the one-year term of the notes.
5. Acquisition
On February 13, 2003, the Company announced an agreement and Plan of Merger
to acquire all of the outstanding capital stock of P2i Newspaper, Inc., a
Delaware corporation ("P2i Newspaper") and a wholly-owned subsidiary of
P2i, Inc., a Pennsylvania corporation ("P2i"), in exchange for the issuance
of up to 19,383,531 shares of ProtoSource common stock and satisfaction of
the existing P2i debt to the Company (the "Agreement").
The 19,383,531 shares will be reduced by the number of shares equal to the
total fees incurred to audit the financial statements of P2i or P2i
Newspaper, divided by $0.50 (the "Adjusted Shares"). The Adjusted Shares
shall be subject to a three-year lock-up, which may be released upon the
stock price and volume reaching established thresholds.
- - 11 -
PROTOSOURCE CORPORATION
-----------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2004
(unaudited)
- --------------------------------------------------------------------------------
5. Acquisition (continued)
On January 1, 2004, the Company, P2i Newspaper and P2i amended the terms of
the Agreement (the "Amendment"). Pursuant to the terms of the Amendment, in
exchange for all of the issued and outstanding shares of P2i Newspaper, the
Company issued 193,836 shares of series B preferred stock (the "Preferred
Stock"), which shares shall be reduced by the total fees incurred to audit
the financial statements of P2i or P2i Newspaper, divided by $50. Each
share of Preferred Stock is exchangeable for 100 shares of the Company's
common stock at any time after the Company increases its authorized number
of shares of common stock to 100,000,000 shares.
The acquisition was effective on January 1, 2004. The cost was as follows:
Market value of common stock to be issued $416,179
Fair market value of net assets of P2i Newspaper 41,112
--------
Goodwill $375,067
========
Management will test goodwill annually for impairment, beginning December
31, 2004.
As part of this transaction, the Company also acquired an additional
interest in P2i's new media business which will bring its total ownership
in P2i to 19.8%.
The Company loaned P2i $50,000 in 2001, $995,280 in 2002, and $597,023 in
2003. The loans to P2i are in the form of demand notes. The notes accrue
interest at the rate of 8% per annum. The notes receivable, together with
the related accrued interest, were written-off during the fourth quarter of
2003 as collection on these notes was deemed to be doubtful.
6. Proforma Financial Information
In connection with the acquisition of P2i Newspaper, proforma financial
statements of ProtoSource Corporation for the three-months ended March 31,
2003 as if the acquisition occurred on January 1, 2003 follows.
- - 12 -
PROTOSOURCE CORPORATION AND SUBSIDIARY
--------------------------------------
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
Historical Proforma
-------------------------------------------- -------------------------------------------
Adjustments
ProtoSource P2i Newspaper, Increase/
Corporation Inc., Total Notes (Decreases) Consolidated
------------ ------------ ------------ ------------ ------------ ------------
Net revenues $ -- $ 337,004 $ 337,004 $ 337,004
Cost of revenues -- 230,854 230,854 230,854
------------ ------------ ------------ ------------
Gross profit -- 106,150 106,150 106,150
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and
administrative 85,576 191,912 277,488 277,488
Research and development -- 14,304 14,304 14,304
Depreciation and amortization 2,182 33,941 36,123 36,123
------------ ------------ ------------ ------------
87,758 240,157 327,915 327,915
------------ ------------ ------------ ------------
Operating loss (87,758) (134,007) (221,765) (221,765)
------------ ------------ ------------ ------------
Other Income (charges):
Interest expense (415,910) (22,792) (438,702) (A) $ 22,319 (416,383)
Interest income 22,319 -- 22,319 (A) (22,319) --
Loss on sale of marketable
securities (65,942) -- (65,942) -- (65,942)
Other income 7,272 -- 7,272 -- 7,272
Other expenses -- (201) (201) -- (201)
------------ ------------ ------------ ------------ ------------
(452,261) (22,993) (475,254) -- (475,254)
------------ ------------ ------------ ------------ ------------
Net loss from continuing operations $ (540,019) $ (157,000) $ (697,019) $ -- $ (697,019)
============ ============ ============ ============ ============
Net loss per basic and diluted share
of common stock from continuing
operations $ (0.07) $ (0.03)
============ ============
Weighted average number of basis and
Diluted common shares outstanding 7,580,975 (B) 19,383,531 26,964,506
============ ============ ============
Notes:
(A) Represents elimination of interest income/expense associated with the intercompany note payable/receivable.
(B) Represents estimated number of shares of ProtoSource common shares to be issued and exchanged for P2i Newspaper, Inc.
- - 13 -
PROTOSOURCE CORPORATION
-----------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(unaudited)
- --------------------------------------------------------------------------------
Certain statements in this section and elsewhere in this quarterly report on
Form 10-QSB are forward-looking in nature and relate to the Company's plans,
objectives, estimates and goals. Words such as "expects," "anticipates,"
"intends," "plans," "projects," "forecasts," "believes," and "estimates," and
variations of such words and similar expressions, identify such forward-looking
statements. Such statements are made pursuant to the safe harbor provisions of
the private securities litigation reform act of 1995 and speak only as of the
date of this report. The statements are based on current expectations, are
inherently uncertain, are subject to risks and uncertainties and should be
viewed with caution. Actual results and experience may differ materially from
those expressed or implied by the forward-looking statements as a result of many
factors, including, without limitation, those set forth under "Description of
Business" in the Company's most recent Annual Report on Form 10-KSB. The Company
makes no commitment to update any forward-looking statement or to disclose any
facts, events, or circumstances after the date hereof that may affect the
accuracy of any forward-looking statement.
Results of Operations
- ---------------------
Three Months ended March 31, 2004 vs. Three Months ended March 31, 2003
Net revenues - For the three months ended March 31, 2004, net revenues were
$329,558. All revenues of Company are attributed to the operations of P2i
Newspaper, Inc. acquired January 1, 2004. For the three months ended March 31,
2003, revenues were $0. Under the terms of a conditional agreement entered on
May 1, 2002, the ISP and Web development assets of the Company have been
operated by Brand X Networks since that date. The Company had no operating
assets generating revenue subsequent to this agreement. This condition continued
throughout all of 2003 until the acquisition of P2i Newspaper on January 1,
2004.
Operating expenses - For the three months ended March 31, 2004, operating
expenses totaled $521,078 versus $87,758 in 2003. The Company's general and
administrative expenses increased by $138,519, principally the result of the P2i
Newspaper acquisition.
Interest expense - Interest expense totaled $577,204 for the three-month period
ended March 31, 2004 versus $415,910 in the same period in 2003. The increase in
interest expense is a result of the convertible notes obtained during 2003 and
2004 to fund the operations of the Company and P2i Newspaper, pending and post
merger. A significant component of interest expense includes amortization of
debt issuance costs in each year.
Other (charges) - Other charges included investment banking fees relating to the
acquisition of P2i Newspaper of $407,000 in 2004 and losses on the sale of
marketable securities (Dauphin Technology, Inc. common stock) of $65,942 in
2003.
Discontinued operations - Effective May 1, 2002, the Company entered into an
agreement to sell substantially all of the assets of the ISP division to Brand X
Networks, Inc., a California Corporation, for $632,000. The assets have been
held and operated by Brand X Networks, Inc. for its purposes since May 1, 2002,
at which time the Company discontinued its ISP operations. On April 14, 2003,
the Company completed a fifth amendment to the purchase agreement with Brand X
pursuant to which the Company has agreed to accept an aggregate payment of
$632,000 for the ISP Division, less credits to Brand X of $112,686. Of such
amount, $200,000 shall be paid through the provision of services to the Company
from Brand X. The balance shall be paid at the rate of approximately $5,171 per
month, until completely paid.
On January 1, 2004, the sale of the ISP business to Brand X closed. Under the
terms of that agreement a promissory note of $284,455 was executed by Brand X to
be paid in 55 equal monthly installments. This note is collateralized by a
pledge of shares in Brand X. In addition, ProtoSource is entitled to appoint one
person to the board of directors of Brand X for the duration of the agreement.
The assets sold and liabilities assumed with respect to this sale were removed
from Company's books and a $475,455 gain on disposal of the ISP was recorded
during the quarter ended March 31, 2004.
- - 14 -
PROTOSOURCE CORPORATION
-----------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
(unaudited)
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
For the three months ended March 31, 2004, the Company used cash of $188,511
from operating activities, and generated net cash of $42,611 in investing
activities and $157,124 from financing activities. We had negative working
capital of $2,808,415 at March 31, 2004. As of March 31, 2004, we had $58,682 in
cash and $3,435,863 of total liabilities.
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. ("AAWC"), 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 was 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 its CEO and CFO. 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 its 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 owned 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 in Infosis.
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 P2i was set at approximately $8.7 million. Based on
this new information, we recorded an additional impairment charge of $404,000 as
of June 30, 2001, to write down this investment to fair value. The impairment
charge was recorded as the difference between the previous value of this
investment ($630,000) and the newly established value ($226,000). Further
impairment charges of $81,000 and $121,000 were recorded in 2003 and 2002
respectively.
- - 15 -
PROTOSOURCE CORPORATION
-----------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
(unaudited)
- --------------------------------------------------------------------------------
Liquidity and Capital Resources - Continued
- -------------------------------------------
On December 5, 2001, the Company received notification from Nasdaq that the
Company no longer satisfied the minimum requirements for continued listing on
the Nasdaq Small Cap Market. The Company applied for an exception to the Nasdaq
listing requirements, which was granted on March 12, 2002. A temporary exemption
was given until April 22, 2002. It was conditioned on the Company filing a proxy
statement with the Securities and Exchange Commission by March 15, 2002, which
provides our shareholders the opportunity to approve the acquisition of P2i, as
well as certain other conditions. Due to a delay in the receipt of audited
financials for P2i, the Company was unable to meet the deadline. Subsequently,
the Company's securities were delisted from Nasdaq. The Company's securities now
trade on the OTC Bulletin Board.
On December 14, 2001, after exploring numerous alternatives, the Company entered
into a term sheet to acquire P2i for 22,768,412 shares of our common stock.
In March 2002, the Company entered into an agreement with AAWC to act as
placement agent for the sale of convertible notes aggregating at least $300,000.
The notes are secured by certain assets of the Company and accrue interest at
10% per annum. P2i has agreed to pay all the costs and obligations incurred with
this financing. The funding was completed during March 2002 and AAWC was paid a
10% commission and a 3% non-accountable expense allowance.
On May 1, 2002, the Company entered into a conditional agreement to sell the
assets of the Fresno-based ISP business to Brand X Networks. Brand X Networks is
a privately held California-based company whose principal shareholders were
former employees of the Company. The Company agreed to lay off the remaining
employees based in Fresno on April 30th. Most terminated employees were hired by
Brand X. Additionally, Brand X has assumed financial and operational
responsibility for the ISP business. On April 14, 2003, the Company completed a
fifth amendment to the purchase agreement with Brand X pursuant to which the
Company has agreed to accept an aggregate payment of $632,000 for the ISP
Division, less credits to Brand X of $112,686, and the transaction closed on
January 1, 2004. Of such amount, $200,000 shall be paid through the provision of
services to the Company from Brand X. The balance shall be paid at the rate of
approximately $5,171 per month, until completely paid.
In July 2002, the Company executed its merger agreement with P2i. Concurrently,
the Company's CEO, Mr. William Conis, resigned his position as both CEO and
Director. Mr. Peter Wardle, CEO of P2i and a ProtoSource Director, became CEO of
the Company.
On September 17, 2002, the Board of Directors approved a revised term sheet
restructuring the P2i acquisition, and on January 1, 2004, this transaction
closed. Under the new terms, ProtoSource acquired the Newspaper portion of P2i,
Inc.'s business through the acquisition of specific assets which include the
entire newspaper related customer base, technology, intellectual property and
P2i's production company located just south of Kuala Lumpur, Malaysia. In
addition, key P2i employees transitioned with the business. These assets and the
key employees have been transferred to P2i Newspaper, Inc. a wholly-owned
subsidiary of P2i formed specifically for this purpose. The acquisition of P2i
Newspaper, Inc. by ProtoSource has been accounted for by the purchase method of
accounting as a reverse acquisition. For accounting purposes, P2i Newspaper,
Inc. is considered to be the acquirer and ProtoSource is the acquiree.
- - 16 -
PROTOSOURCE CORPORATION
-----------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
(unaudited)
- --------------------------------------------------------------------------------
Liquidity and Capital Resource - Continued
- ------------------------------------------
The number of shares of restricted common stock to be issued to P2i has
subsequently been revised to 19,383,531 shares (after conversion of the
preferred stock issued as merger consideration) which will result in an
ownership of approximately 37% by the stockholders of P2i, on a fully diluted
basis assuming conversion of certain bridge loans into common stock, the balance
being held by the current stockholders of ProtoSource. After the acquisition of
P2i Newspaper, the Board of Directors of ProtoSource consists of seven members.
One member has been appointed by the investment banker, AAWC. (This appointment
must be approved by P2i but can't be unreasonably withheld.) Messrs. Wardle and
Butera will be on the Board and they shall appoint the two independent members
plus one other as long as they hold 25% or more of P2i New Media, Inc. (see
below), collectively, and P2i New Media, Inc. owns 25% or more of ProtoSource.
In the event that P2i's ownership drops below 25% but is not less than 10%, P2i
shall appoint one board member. In the event that P2i's ownership drops below
10%, P2i shall not have the right to appoint any board member. ProtoSource and
P2i both used the same investment banker to represent them in the transaction
and each will pay the investment banker a fee based on the value of the
transaction using a pre-set formula. The investment banking fees to be paid are
$406,844 by ProtoSource and $413,422 by P2i. The amounts paid to the investment
banker will be paid through the issuance of common stock, which is restricted
for a three-year period, based on an agreed-upon value of $.50 per share at the
time of signing the term sheet, or 813,688 shares for ProtoSource and 826,844
shares for P2i. The shares to be issued for P2i's investment banking fees will
be subtracted from the shares to be issued to the P2i stockholders for the
acquisition. P2i's remaining catalog and new media business will stay with P2i.
However, ProtoSource will increase its ownership in P2i from the current 2.18%
(506,225 shares) to 19.8%. The consideration to be paid is the forgiveness of
P2i debt to ProtoSource.
During 2002, the Company entered into an agreement with AAWC to act as a
placement agent for the sale of convertible notes aggregating $1,300,000. The
notes are secured by stock in P2i Newspaper, Inc. and accrue interest at 10% per
annum. The Company pays the cost and obligations of the first $200,000 incurred
with this financing and P2i Newspaper, Inc. has agreed to pay all remaining
costs and obligations. Through December 31, 2003, $1,225,000 in funding had been
completed. AAWC was paid a 10% commission and a 3% non-accountable expense.
Substantially all of the proceeds from these notes have been loaned to P2i
Newspaper, Inc. The loans are in the form of demand notes which accrue interest
at 8% per annum.
During the twelve-month period ended December 31, 2003, the Company entered into
certain agreements with AAWC to act as a placement agent for the sale of
convertible notes aggregating $700,000. The notes are secured by stock in P2i
and accrue interest at 10% per annum. P2i has agreed to pay the related costs
and obligations. Through December 31, 2003, $600,000 in funding had been
completed; an additional $100,000 was completed during January 2004. AAWC was
paid a 10% commission and a 3% non-accountable expense. Substantially all of the
proceeds from these notes have been loaned to P2i. The loans are in the form of
demand notes which accrue interest at 8% per annum.
During May 2003, the Company entered into an agreement with Carl R. Butera for
the sale of a convertible note aggregating $200,000. The note is secured by
stock in P2i Newspaper, Inc. and accrues interest at 10% per annum.
Substantially all of the proceeds from this note have been loaned to P2i
Newspaper, Inc. The loan is in the form of a demand note which accrues interest
at 8% per annum.
During the three-month period ended March 31, 2004, the Company entered into
certain agreements with AAWC to act as a placement agent for the sale of
convertible notes aggregating $500,000. The notes are secured by stock in P2i
and accrue interest at 10% per annum. Through March 31, 2004, $250,000 in
funding had been completed; an additional $150,000 was completed through April
30, 2004. AAWC was paid a 10% commission and a 3% non-accountable expense.
Substantially all of the proceeds from these notes have been used to fund the
operations of P2i Newspaper. The loans are in the form of demand notes that
accrue interest at 8% per annum.
- - 17 -
PROTOSOURCE CORPORATION
-----------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
(unaudited)
- --------------------------------------------------------------------------------
On July 1, 2001 an agreement was entered into with Dauphin Technology, Inc.
where Dauphin Technology, Inc. is to pay the two leases guaranteed by
ProtoSource for leased equipment located at Suncoast Automation's locations.
Payments are currently in default. The Company sold the assets of Suncoast
Automation, Inc. to Dauphin Technology, Inc. on July 1, 2001.
Critical Accounting Policies and Estimates
- ------------------------------------------
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue and expenses and related
disclosure of contingent assets and liabilities. The significant accounting
policies which we believe are the most critical to aid in fully understanding
and evaluating our reported financial results include the following:
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (and superceded in 2001 by
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"),
the Company recorded impairment charges in 2001 of $328,543 to write-down
goodwill to zero and $81,000 and $121,000 to reduce the carrying value of its
investment in P2i in 2003 and 2002, respectively.
In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company
maintains a valuation allowance of $6,270,000 as of March 31, 2004 on deferred
tax assets relating to its net operating losses which the Company has not
determined to be more likely than not realizable.
Through December 31, 2003, the Company has advanced $1,642,303 to P2i, a company
whose Chief Executive Officer serves in the same capacity at ProtoSource
Corporation. This was used to help fund P2i Newspaper, Inc.'s operations from
the date the first term sheet was executed on December 17, 2001 to the closing
of the transaction on January 1, 2004. Effective December 31, 2003, amounts due
from P2i, Inc. have been written off.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
goodwill is not amortized, rather, management tests goodwill annually for
impairment in the 4th quarter.
The Company considers notes and accounts receivable to fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made
Item 3. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures. An evaluation was performed
under the supervision and with the participation of our management, including
the chief executive officer, or CEO, who is also the acting chief financial
officer, or CFO, of the effectiveness of the design and operation of our
disclosure procedures. Based on management's evaluation as of as of the end of
the period covered by this Annual Report, our principal executive officer and
acting principal financial officer has concluded that our disclosure controls
and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") were sufficiently
effective to ensure that the information required to be disclosed by us in the
reports that we file under the Exchange Act is gathered, analyzed and disclosed
with adequate timeliness, accuracy and completeness.
Changes in internal controls. There have been no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referred to above, nor were
there any significant deficiencies or material weaknesses in our internal
controls. Accordingly, no corrective actions were required or undertaken.
- - 18 -
PROTOSOURCE CORPORATION
-----------------------
OTHER INFORMATION
(unaudited)
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
From time to time the Company is subject to litigation incidental to its
business. The Company is not currently a party to any material legal proceedings
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the three-month period ended March 31, 2004, the Company issued
promissory notes totaling $250,000 to various individuals. Each note has a
one-year maturity, carries interest at 10% per annum, and includes a conversion
feature which permits the holder to convert this principal and accrued interest
into the Company's common stock any time prior to the due date of the note. The
conversion rate had been contractually set at $0.10 per share for the first
$100,000 and $0.06667 for the next $150,000.
Also in connection with the issuance of these notes, the Company issued to the
note holders 1,250,000 shares of common stock valued at $250,000, and 500,000
warrants to the placement agent which had a deminimis value.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 5. OTHER INFORMATION.
In July 2002, the Company executed its merger agreement with P2i. Concurrently,
the Company's CEO, Mr. William Conis, resigned his position as both CEO and
Director. Mr. Peter Wardle, CEO of P2i and a ProtoSource Director, became CEO of
the Company.
On September 17, 2002, the Board of Directors approved a revised term sheet
restructuring the P2i acquisition, and on January 1, 2004, this transaction
closed. Under the new terms, ProtoSource acquired the Newspaper portion of P2i,
Inc.'s business through the acquisition of specific assets which include the
entire newspaper related customer base, technology, intellectual property and
P2i's production company located just south of Kuala Lumpur, Malaysia. In
addition, key P2i employees transitioned with the business. These assets and the
key employees have been transferred to P2i Newspaper, Inc. a wholly-owned
subsidiary of P2i formed specifically for this purpose. The acquisition of P2i
Newspaper, Inc. by ProtoSource has been accounted for by the purchase method of
accounting as a reverse acquisition. For accounting purposes, P2i Newspaper,
Inc. is considered to be the acquirer and ProtoSource is the acquiree.
The number of shares of restricted common stock to be issued to P2i has
subsequently been revised to 19,383,531 shares (after conversion of the
preferred stock issued as merger consideration) which will result in an
ownership of approximately 37% by the stockholders of P2i, on a fully diluted
basis assuming conversion of certain bridge loans into common stock, the balance
being held by the current stockholders of ProtoSource. After the acquisition of
P2i Newspaper, the Board of Directors of ProtoSource consists of seven members.
One member has been appointed by the investment banker, AAWC. (This appointment
must be approved by P2i but can't be unreasonably withheld.) Messrs. Wardle and
Butera will be on the Board and they shall appoint the two independent members
plus one other as long as they hold 25% or more of P2i New Media, Inc. (see
below), collectively, and P2i New Media, Inc. owns 25% or more of ProtoSource.
In the event that P2i's ownership drops below 25% but is not less than 10%, P2i
- - 19 -
PROTOSOURCE CORPORATION
-----------------------
OTHER INFORMATION
(unaudited)
- --------------------------------------------------------------------------------
shall appoint one board member. In the event that P2i's ownership drops below
10%, P2i shall not have the right to appoint any board member. ProtoSource and
P2i both used the same investment banker to represent them in the transaction
and each will pay the investment banker a fee based on the value of the
transaction using a pre-set formula. The investment banking fees to be paid are
$406,844 by ProtoSource and $413,422 by P2i. The amounts paid to the investment
banker will be paid through the issuance of common stock, which is restricted
for a three-year period, based on an agreed-upon value of $.50 per share at the
time of signing the term sheet, or 813,688 shares for ProtoSource and 826,844
shares for P2i. The shares to be issued for P2i's investment banking fees will
be subtracted from the shares to be issued to the P2i stockholders for the
acquisition. P2i's remaining catalog and new media business will stay with P2i.
However, ProtoSource will increase its ownership in P2i from the current 2.18%
(506,225 shares) to 19.8%. The consideration to be paid is the forgiveness of
P2i debt to ProtoSource.
On May 1, 2002, the Company entered into a conditional agreement to sell the
assets of the Fresno-based ISP business to Brand X Networks. Brand X Networks is
a privately held California-based company whose principal shareholders were
former employees of the Company. The Company agreed to lay off the remaining
employees based in Fresno on April 30th. Most terminated employees were hired by
Brand X. Additionally, Brand X has assumed financial and operational
responsibility for the ISP business. On April 14, 2003, the Company completed a
fifth amendment to the purchase agreement with Brand X pursuant to which the
Company has agreed to accept an aggregate payment of $632,000 for the ISP
Division, less credits to Brand X of $112,686, and the transaction closed on
January 1, 2004. Of such amount, $200,000 shall be paid through the provision of
services to the Company from Brand X. The balance shall be paid at the rate of
approximately $5,171 per month, until completely paid.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibits are filed with this report:
Exhibit 10.1 Agreement and Plan of Merger, dated as of February 13, 2003, by
and among ProtoSource Corporation, ProtoSource Acquisition LLC,
P2i, Inc. and P2i Newspaper, Inc. (filed as an exhibit to the
registrant's Form 8-K, dated as of February 13, 2003)
Exhibit 10.2 Amendment No. 1 to Agreement and Plan of Merger, dated as of
January 1, 2004, by and among ProtoSource Corporation,
ProtoSource Acquisition LLC, P2i, Inc. and P2i Newspaper, Inc.
(filed as an exhibit to the registrant's Form 8-K, dated as of
February 13, 2003, as amended on January 15, 2004)
Exhibit 31.1 - Certification of CEO and CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.1 - Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K.
During the quarterly period ended March 31, 2004, the Company filed two
amended reports on Form 8-K, relating to the completion of the acquisition
of P2i, Inc.
- - 20 -
PROTOSOURCE CORPORATION
-----------------------
SIGNATURE
- --------------------------------------------------------------------------------
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
PROTOSOURCE CORPORATION
/s/ Peter Wardle
----------------
Peter Wardle,
Chief Executive Officer/
Chief Financial Officer
Date: June 24, 2004
- - 21 -