AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 7, 2000
REGISTRATION NO. 333-45778
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
PROTOSOURCE CORPORATION
(Exact name of small business issuer as specified in its charter)
California 7373 77-0190772
(State or other jurisdiction of (Primary and industrial (I.R.S. Employer
incorporation or organization) classification code number) Identification No.)
-------------------------------------------
2300 Tulare Street, Suite 210
Fresno, CA 93721
(559) 486-8600
(Address, including zip code, and telephone number, including area
code, of Registrant's principal executive offices)
-------------------------------------------
William Conis, President
2300 Tulare Street, Suite 210
Fresno, CA 93721
(559) 486-8600
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------------------
Copies to:
Gregory Sichenzia, Esq. Charles Snow, Esq.
Sichenzia, Ross & Friedman, LLP Snow Becker Krauss P.C.
135 West 50th Street, 20th Floor 605 Third Avenue
New York, New York 10020 New York, New York 10158
(212) 664-1200 (212) 455-0300
------------------------------------------
Approximate date of proposed sale to public:
As soon as practicable after this registration statement becomes effective.
------------------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
--------------------------
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=========================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER SECURITY PRICE FEE
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units, consisting of two shares of 690,000 $15.00(1)(2) $10,350,000.00 $2,733
Common Stock, no par value and one Units
Warrant
---------------------------------------------------------------------------------------------------------
Common Stock underlying the Units(3) 1,380,000 --- --- ---
Shares
---------------------------------------------------------------------------------------------------------
Warrants underlying the Units 690,000 --- --- ---
Warrants
---------------------------------------------------------------------------------------------------------
Common Stock underlying Warrants 690,000 $8.20 $5,658,000.00 $1,494
included in the Unit(4) Shares
---------------------------------------------------------------------------------------------------------
Underwriters' Warrants 60,000 $.00017 $10 ---
Warrants
---------------------------------------------------------------------------------------------------------
Units underlying Underwriters' 60,000 $18.00(6) $1,080,000.00 $286
Warrants consisting of two shares Units(5)
of Common Stock and one Warrant
---------------------------------------------------------------------------------------------------------
Common Stock underlying Units 120,000 --- --- ---
contained in Underwriters' Warrants Shares
---------------------------------------------------------------------------------------------------------
Warrants underlying the Units 60,000 --- --- ---
underlying Underwriter's Warrants Warrants
---------------------------------------------------------------------------------------------------------
Common Stock, no par value, 60,000 $8.20(1) $492,000.00 $130
underlying Warrants included in Shares
Underwriters' Warrants
---------------------------------------------------------------------------------------------------------
Common Stock, no par value, 22,500 $6.00(8) $135,000.00 $36
underlying options(7) Shares
---------------------------------------------------------------------------------------------------------
Common Stock, no par value(9) 21,000 $6.00 $126,000.00 $34
Shares
---------------------------------------------------------------------------------------------------------
Common Stock, no par value, 200,000 $6.00 $1,200,000.00 $317
underlying options(10) Shares
---------------------------------------------------------------------------------------------------------
Common Stock, no par value, 30,000 $6.00 $180,000.00 $48
underlying options(11) Shares
---------------------------------------------------------------------------------------------------------
Common Stock, no par value(13) 1,303,072 $6.00(8) $7,621,992 $2,065
Shares
---------------------------------------------------------------------------------------------------------
Common Stock, no par value(14) 74,870 $6.00(8) $449,220.00 $119
Shares
=========================================================================================================
TOTAL $27,292,222 $7,890.00
=========================================================================================================
</TABLE>
ii
<PAGE>
1. Based upon an offering price in the range of $12-$15 per Unit.
2. Assumes a price of $7.45 per share and $0.10 per common stock purchase
warrant.
3. Includes the underwriter's over-allotment of 180,000 shares of common
stock.
4. Includes the underwriter's over-allotment of 90,000 common stock purchase
warrants.
5. Pursuant to Rule 416 of the Securities Act of 1933, as amended, the number
of shares issuable upon exercise of the Underwriters' Warrants is subject
to adjustment with anti-dilution provisions of such warrants.
7. Based upon 120% of the Units public offering price.
8. Shares issuable upon exercise of options issued as severance to Raymond
Meyers, former Chief Executive Officer.
9. Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended.
10. Shares issuable to Continental Capital & Equity Corporation for marketing
services.
11. Shares issuable upon exercise of Warrants issuable to Continental Capital &
Equity Corporation for marketing services.
12. Shares issued to investors in connection with the Bridge Financing of
$1,500,000.
13. Shares issued in connection with the acquisition of Suncoast Automation,
Inc.
14. Shares issued in connection with the acquisition of MicroNet Technologies,
Inc.
--------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
IMPORTANT EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one to be
used in connection with a firm-commitment underwritten public offering through
Kashner Davidson Securities Corporation, and one to be used in connection with
the sale of common stock by the selling stockholders of Protosource. The two
prospectuses are identical in all respects except for the front and back cover
pages; the "Use of Proceeds" section; the section entitled "Underwriting" in the
prospectus relating to the underwritten offering, which is replaced by a section
entitled "Plan of Distribution" in the prospectus relating to the selling
stockholder offering; and references to our public offering, which are
prospective in the prospectus relating the underwritten offering and
retrospective in the prospectus relating to the to the selling stockholder
offering.
iii
<PAGE>
PROTOSOURCE CORPORATION
Cross Reference Sheet
Form SB-2 Item Number and Caption Captions In Prospectus
--------------------------------- ----------------------
1. Front of Registration Statement and Cover Page
Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover Cover Page, Inside Cover Page,
Pages of Prospectus Outside Back Page
3. Summary Information and Risk Factors Prospectus Summary, Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Cover Page, Risk Factors
6. Dilution Dilution
7. Selling Securityholders Not Applicable
8. Plan of Distribution Not Applicable
9. Legal Proceedings Business
10. Directors, Executive Officers, Management, Security Ownership of
Promoters and Control Persons Management and Certain Beneficial
Owners
11. Security Ownership of Certain Security Ownership of Management
Beneficial Owners and Management and Certain Beneficial Owners
12. Description of Securities Description of Capital Stock
13. Interest of Named Experts and Counsel Legal Matters, Experts
14. Disclosure of Commission Position on Management
Indemnification for Securities Act
Liabilities
15. Organization Within Last Five Years Not Applicable
16. Description of Business Prospectus Summary, Business
17. Management's Discussion and Analysis Management's Discussion and
or Plan of Operation Analysis of Financial Condition and
Results of Operations
18. Description of Property Business
19. Certain Relationships and Related Not Applicable
Transactions
20. Market for Common Equity and Related Front Cover Page, Description of
Shareholder Matters Capital Stock
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Not Applicable
Accounts on Accounting and Financial
Disclosure
iv
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
Prospectus Subject To Completion
--------------------------------
PROTOSOURCE CORPORATION
600,000 units
We are offering 600,000 units, each unit consisting of two shares of our
common stock with no par value and one class B common stock purchase warrant,
which entitles the holder to purchase one share of our common stock at an
exercise price of $___ per share at anytime within a five year period from the
date on this prospectus. The anticipated price range for one unit is between
$12.00 and $15.00.
Concurrent with the offer and sale of units described in this prospectus,
our selling stockholders are offering shares of our common stock for sale in a
non-underwritten offering by a separate prospectus. We and the selling
stockholders will sell a combined total of 1,416,418 shares of our common stock.
Our common stock trades on the Nasdaq SmallCap Market under the symbol PSCO
and our class A common stock purchase warrants trade under the symbol PSCOW. Our
class B common stock purchase warrants will trade under the symbol PSCOZ. The
units will not be a traded security. On November __, 2000, the reported last
sale price of our common stock on the Nasdaq SmallCap Market was $____ per
share.
------------------
Your investment in our securities involves a high degree of risk. Before
investing in our securities, you should consider carefully the risks described
under "Risk Factors" beginning on page 6.
------------------
--------------------------------------------------------------------------------
The offering Per unit Total
--------------------------------------------------------------------------------
Public offering price
Underwriting discounts
Proceeds to ProtoSource Corporation
--------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is complete or accurate. Any representation to the contrary is a
criminal offense.
KASHNER DAVIDSON SECURITIES CORPORATION
<PAGE>
PROSPECTUS SUMMARY
ProtoSource Corporation
Our Business............... ProtoSource Corporation is made up of two
divisions, psnw.com and Suncoast Automation, Inc.
Our psnw.com division is an Internet Service
Provider based in Fresno, California. Earlier this
year, the division refocused its strategy away
from dial-up access into three new services: (1)
high-speed Internet access reselling ADSL/SDSL;
(2) web design, development and hosting for small
and medium-sized businesses; and (3) outsourced
technical support for other ISPs.
We recently acquired Suncoast Automation, Inc., a
Delaware corporation. Suncoast is the second of
our two operating divisions. It provides
interactive cable TV systems to the vacation
ownership or timeshare industry. The interactive
system allows the resort guest to interface with
the set-top box via a remote keyboard to access
basic and premium TV programming, the Internet,
games and the resort's property management system.
As a result of the recent acquisition, we expect
to concentrate our efforts and resources on
providing interactive cable TV systems and
high-speed Internet access via cable, to the
timeshare industry.
Our Products............... Through our psnw.com division, we offer Internet
access to residential customers through dial-up
and ADSL connections and to business customers via
SDSL and private lines. We also offer Web design,
development, and hosting services. Through
Suncoast we provide basic cable TV, premium
channel packages and high-speed Internet access to
the timeshare industry.
Our Customers.............. psnw.com currently has over 6,000 dial-up
customers, over 200 customers for web hosting,
over 10 customers for web design and development,
and over 60 for ADSL/SDSL. Additionally, we
provide technical support for over 6,500 dial-up
customers for 9 other ISP's.
Suncoast Automation currently has two resort
owners for its cable TV systems - Sunterra
Communications Corp. and Bluegreen Resorts
Management, Inc. These two customers have
contracted with us for 2,794 units across 10
resorts. Currently, over 80% of Suncoast's
revenues come from Sunterra Communications Corp.,
as Bluegreen has not been installed.
Our Industry............... According to Dataquest, the worldwide help desk
market is growing at over 25% per year. According
to Telechoice, the DSL market is expected to grow
from 500,000 subscribers 1999, to over 9.5 million
by 2003.According to Zona Research, the market for
outsourced web development services will grow from
$4B in 1998 to over $15.8B in 2002. According to a
survey sponsored by the American Resort Developers
Association, there are over 1,600 timeshare
resorts in the US today. Their study indicates "a
consistent growth of sales volume of between 14%
and 17% annually over the last decade."
2
<PAGE>
Our Strategy............... Our strategy is to operate as two divisions: 1)
psnw.com, which will focus on Internet access, web
design/development/hosting and outsourced
technical support primarily to business customers;
and 2) Suncoast Automation, which will provide
cable TV and high-speed Internet access to the
timeshare industry.
Our Principal Offices...... Our principal executive offices are located at
2300 Tulare Street, Suite 210, Fresno, CA 93721
and our telephone number is (559) 486-8600. We are
a California corporation.
3
<PAGE>
The Offering
------------
Common stock outstanding prior to
this offering..................... 3,470,586 shares of common stock
Securities offered directly by us
in this offering.................. 600,000 units consisting of two shares of
our common stock with no par value and one
class B common stock purchase warrant.
Securities offered by the selling
stockholders in a concurrent
non-underwritten offering......... 816,418 shares of common stock
Common stock to be outstanding
after this offering............... 4,670,586 shares of common stock. In
calculating the number of shares, we
included the shares being offered by the
selling stockholders in a concurrent
non-underwritten offering by a separate
prospectus
Use of proceeds................... We intend to use the net proceeds of this
offering for business expansion of Suncoast
Automation, working capital purposes and to
repay certain indebtedness.
Trading symbols................... Our common stock trades on the Nasdaq
SmallCap Market under the symbol PSCO and
our class A common stock purchase warrants
trade under the symbol PSCOW. Our class B
common stock purchase warrants will trade
under the symbol PSCOZ. The units will not
be a traded security.
The number of shares of common stock to be outstanding immediately after
this offering excludes:
o 1,137,000 shares of common stock issuable upon the exercise of
1,137,000 class A common stock purchase warrants
o 600,000 shares of common stock issuable upon the exercise of 600,000
class B common stock purchase warrants.
o 90,000 shares of common stock subject to the underwriter's
over-allotment option
o 674,833 shares of common stock issuable upon the exercise of
additional warrants and options
o 135,167 shares of common stock issuable upon the exercise of options
issued in connection with our 1994 Stock Option Plan
o 100,000 shares of common stock issuable upon the exercise of options
issued in connection with our 1999 Stock Option Plan
4
<PAGE>
Summary Selected Financial Data and Proforma Financial Data
-----------------------------------------------------------
The summary financial data set forth below has been derived from our
audited and unaudited financial statements included in this prospectus.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
----------------------------------------- --------------------------
2000 (1) 2000 1999 1999 1998
-------- ---- ---- ---- ----
(proforma) (unaudited)
Statement of Operations Data:
-----------------------------
<S> <C> <C> <C> <C> <C>
Revenues ......................... $ 853,398 $ 751,145 $ 522,687 $ 1,125,225 $ 882,651
Operating expenses ............... 2,882,327 1,849,827 1,033,817 2,566,218 2,068,145
Operating loss ................... (2,028,929) (1,098,682) (511,130) (1,440,993) (1,185,494)
Total other income (expense) ..... (70,303) (21,466) 149,909 147,353 (510,735)
Income (loss) before income taxes (2,099,232) (1,120,148) (361,221) (1,293,640) (1,696,229)
Income taxes ..................... -- -- -- -- --
Net income (loss) ................ (2,099,232) (1,120,148) (361,221) (1,293,640) (1,696,229)
Basic and diluted income (loss)
Per share ................ $ (0.64) $ (0.56) $ (0.20) $ (0.72) $ (1.24)
Basic and diluted weighted average
Number of common shares
outstanding .............. 3,305,453 2,002,381 1,776,697 1,789,453 1,365,484
</TABLE>
June 30, 2000
June 30, 2000 (1) June 30, 2000 as Adjusted (2)
----------------- ------------- ---------------
(proforma) (unaudited)
Balance Sheet Data:
-------------------
Cash and cash equivalents $ 1,063,105 $ 935,454 $ 6,160,454
Working capital (deficit) (1,236,675) (81,582) 6,643,418
Total assets 14,254,943 5,662,731 10,852,731
Long-term debt 26,920 26,920 26,920
Stockholders' equity 11,739,111 4,002,121 10,692,121
(1) Proforma shows the effect of the acquisition of Suncoast Automation, Inc.
See the proforma unaudited financial statements and accompanying notes for
a further explanation.
(2) As adjusted to give effect to the receipt and application of the estimated
net proceeds of this offering without giving effect to the exercise of
class A or class B warrants, the underwriters' warrants or other
outstanding warrants or stock options.
5
<PAGE>
RISK FACTORS
Investing in our securities will provide you with an equity ownership
interest in Protosource. As one of our shareholders, your investment will be
subject to risks inherent in our business. If any of the following risks
actually occur, our business could be harmed. In that event, the trading price
of our shares might decline, and you could lose all or part of your investment.
You should carefully consider the following factors as well as other information
contained in this prospectus before deciding to invest in shares of our
securities. Additional risks that are not currently known to us or that we deem
immaterial may also harm us and the value of your investment. An investment in
our securities involves a high degree of risk
Risks Related To Our Business And Industry
------------------------------------------
We have a history of operating losses and we expect these losses to continue.
We have experienced significant losses. We expect to continue to incur
significant losses for the foreseeable future. We incurred net losses of
approximately $1,696,229 and $1,293,640 for the years ended December 31, 1998
and 1999, respectively, and $1,120,148 for the six months ended June 30, 2000.
We expect our expenses to increase as we expand our business. We cannot assure
you that our revenues will increase as a result of our increased spending. If
revenues grow more slowly than we anticipate, or if operating expenses exceed
our expectations, we may not become profitable. Even if we become profitable, we
may not be able to sustain our profitability.
We have experienced significant growth in a short period of time and may have
trouble integrating acquired businesses and managing our expansion.
Since November 1999, we have completed two acquisitions. Acquisitions may
involve numerous risks, including difficulty in integrating operations,
technologies, systems, and products and services of acquired companies,
diversion of management's attention and disruption of operations, increased
expenses and working capital requirements, entering markets in which we have
limited or no prior experience and where competitors in such markets have
stronger market positions and the potential loss of key employees and customers
of acquired companies. In addition, acquisitions may involve financial risks,
such as the potential liabilities of the acquired businesses, the dilutive
effect of the issuance of additional equity securities, the incurrence of
additional debt, the financial impact of transaction expenses and the
amortization of goodwill and other intangible assets involved in any
transactions that are accounted for using the purchase method of accounting, and
possible adverse tax and accounting effects.
We have a limited history of owning and operating our acquired businesses on a
consolidated basis, which could result in ineffective management of these
businesses.
There can be no assurance that we will be able to meet performance
expectations or successfully integrate our acquired businesses on a timely basis
without disrupting the quality and reliability of service to our customers or
diverting management resources. Our rapid growth has placed and will continue to
place a significant strain on management, our financial resources, and on our
information, operating and financial systems. If we are unable to manage this
growth effectively, it may have an adverse effect on our business, financial
condition and results of operations.
6
<PAGE>
Our recent acquisition of Suncoast may have an adverse effect on our earnings.
We recently acquired Suncoast Automation, Inc. Suncoast is one of our two
operating divisions and provides interactive cable TV systems to the timeshare
industry. If we are unable to effectively integrate Suncoast's business into our
existing business, it may have an adverse effect on our earnings or revenue
growth.
Because Suncoast has a limited operating history, we cannot assure that we can
successfully execute our business strategy.
We are relying heavily on the prospects of Suncoast for our future revenue
growth. In the year ended December 31, 1999, Suncoast had total revenues of only
$164,535, and in the six months ended June 30, 2000 total revenues of $102,253.
Our expectations for growth may not be realized unless Suncoast is able to
obtain substantial additional long-term contacts with timeshare resorts. If we
are unable to successfully execute our business strategy, we would likely not
achieve anticipated levels of revenue growth. In this event, we would be unable
to achieve profitability.
All of Suncoast's revenue comes from two customers; if Suncoast loses either of
these customers, our revenue could decline significantly.
At present, approximately 80% of Suncoast's business is from a single
account, Sunterra Communications Corp. and the 20% balance is derived from one
other account. If Suncoast loses either of these customers, we could experience
a significant reduction in our revenue. Also, the insolvency of these customers
could decrease revenue. As many of our costs and operating expenses are
relatively fixed, a reduction in net revenue can decrease our profit margins and
adversely affect our business, financial condition and results of operations.
Our growth strategy may not be successful.
Our growth strategy for our Suncoast division is largely dependent upon
selling long-term contracts to the owners/operators of timeshare resort
properties. We may not be successful, however, in convincing these owners of the
advantages of our technology. In addition, our psnw.com division may encounter
substantial competition from other cable operators, ISPs and telecommunications
providers that are seeking to protect or expand their customer base. Most of
these competitors have larger customer bases and greater financial resources.
Our inability to acquire these contracts on favorable terms in the future could
have an adverse effect on our business, financial condition, and results of
operations.
Our efforts to concentrate our psnw.com business in commercial accounts may be
unsuccessful resulting in significant financial losses.
Because acquisition of monthly residential accounts has required excessive
marketing costs in relation to revenue expectations, we have elected to cease
advertising and other marketing expenses directed towards that business. As a
consequence, we are concentrating our efforts to obtain commercial accounts,
which we believe can be profitable. If we are unable to obtain a sufficient
number of commercial accounts or that business is not profitable as we project,
our business, financial conditions and results of operations.
7
<PAGE>
If we are unable to respond to rapidly changing technology and process
development, we may not be able to compete effectively.
Rapidly changing technology and continuing process development characterize
the market for our products and services. The future success of our business
will depend in large part upon our ability to maintain and enhance our
technological capabilities, to develop and market products and services that
meet changing customer needs, and to successfully anticipate or respond to
technological changes on a cost-effective and timely basis. In addition, the
Internet industry could in the future encounter competition from new or revised
technologies that render existing technology less competitive or obsolete or
that reduce the demand for our services. There can be no assurance that we will
effectively respond to the technological requirements of the changing market. To
the extent we determine that new technologies and equipment are required to
remain competitive, the development, acquisition and implementation of such
technologies and equipment may require us to make significant capital
investments. There can be no assurance that capital will be available for these
purposes in the future or that investments in new technologies will result in
commercially viable technological processes.
Our business will suffer if we are unable to attract and retain key personnel
and skilled employees.
We depend on the services of our key senior executives, including William
Conis, James Sette, Mark Blanchard, and Theodore Triantafilu. Our business also
depends on our ability to continue to recruit, train and retain skilled
employees, particularly executive management, engineering and sales personnel.
Recruiting personnel in our industry is highly competitive. In addition, our
ability to successfully integrate acquired companies depends in part on our
ability to retain key management and existing employees at the time of the
acquisition. There can be no assurance that we will be able to retain our
executive officers and key personnel or attract additional qualified management
in the future.
Our future indebtedness could adversely affect our financial health and severely
limit our ability to plan for or respond to changes in our business.
We plan to incur indebtedness from time to time to finance acquisitions or
capital expenditures or for other purposes. This debt could have adverse
consequences for our business, including:
o We will be more vulnerable to adverse general economic conditions;
o We will be required to dedicate a substantial portion of our cash flow
from operations to repayment of debt, limiting the availability of
cash for other purposes;
o We may have difficulty obtaining additional financing in the future
for working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes;
o We may have limited flexibility in planning for, or reacting to,
changes in our business and industry;
0 We could be limited by financial and other restrictive covenants in
our credit arrangements in our borrowing of additional funds; and
o We may fail to comply with the covenants under which we borrowed our
indebtedness, which could result in an event of default. If an event
of default occurs and is not cured or waived, it could result in all
amounts outstanding, together with accrued interest, becoming
immediately due and payable. If we were unable to repay such amounts,
the lenders could proceed against any collateral granted to them to
secure that indebtedness.
8
<PAGE>
If Internet usage does not continue to grow, we may not be able to continue our
business plan resulting in a curtailment or cessation of operations.
Widespread use of the Internet is a relatively recent phenomenon. Our
future success depends on continued growth in the use of the Internet and the
continued development of the Internet as a viable commercial medium. We cannot
be certain that Internet usage will continue to grow at or above its historical
rates or that extensive Internet content will continue to be developed or be
accessible at no or nominal cost to users. If Internet use does not continue to
grow or users do not accept our products and services, our business could be
adversely affected and as a result the price of our common stock may decline.
State and federal government regulation could require us to change our business.
We provide Internet access and cable TV, in part, using telecommunications
services provided by carriers that are subject to the jurisdiction of state and
federal regulators. Due to the increasing popularity and use of the Internet,
state and federal regulators may adopt additional laws and regulations relating
to content, user privacy, pricing, copyright infringements and other matters. We
cannot predict the impact, if any, that future regulation or regulatory changes
may have on our business.
We face risks of claims from third parties for intellectual property
infringement and other matters that could adversely affect our business.
Our services operate in part by making Internet content and cable TV
programming available to our users. This creates the potential for claims to be
made against us, either directly or through contractual indemnification
provisions with third parties. Claims might, for example, be made for
defamation, negligence, copyright, trademark or patent infringement, personal
injury, invasion of privacy or upon other legal theories. Any claims could
result in costly litigation and be time consuming to defend, divert management's
attention and resources, cause delays in releasing new or upgraded existing
services or require us to enter into royalty or licensing agreements. Royalty or
licensing agreements, if required, may not be available on acceptable terms, if
at all.
Litigation regarding intellectual property rights is common in the Internet
and software industries. We expect that Internet technologies and software
products and services may be increasingly subject to third-party infringement
claims as the number of competitors in our industry segment grows and the
functionality of products in different industry segments overlaps.
There can be no assurance that our services do not infringe the
intellectual property rights of third parties. A successful claim of
infringement against us and our failure or inability to license the infringed or
similar technology could adversely affect our business, financial condition and
results of operations.
9
<PAGE>
We may incur liabilities for the activities of users of our service resulting in
unanticipated expenses.
The law relating to the liability of providers of online services for
activities of their users is currently unsettled and could damage our business.
We do not carry insurance that will indemnify us for all liability for
activities of our users. Our advertisers' Websites may contain text, images or
information that could infringe third-party copyrights, trademarks or other
intellectual property rights. We cannot assure you that we will successfully
avoid civil or criminal liability for unlawful activities carried out by users
of our service. The imposition upon us of potential liability for unlawful
activities of users of our service could require us to implement measures to
reduce our exposure to such liability, which may require us, among other things,
to spend substantial resources or to discontinue certain service offerings. Any
costs incurred as a result of such liability or asserted liability could damage
our business.
Risks Related To This Offering and Our Common Stock
---------------------------------------------------
Sales of our shares by the selling stockholders in a concurrent offering may
depress our stock price.
Concurrent with the offer and sale of shares of our common stock described
in this prospectus, our selling stockholders may offer, from time to time,
816,418 shares of our common stock for sale in a non-underwritten offering by a
separate prospectus. Sale of a substantial number of shares of our common stock
in the public market by our selling stockholders concurrently with this offering
could depress the market price of our common stock and could impair our ability
to raise capital through the sale of additional equity securities. Based on
shares outstanding as of November 1, 2000, upon completion of this offering we
will have outstanding 4,670,586 shares of common stock, assuming no exercise of
the underwriters' over-allotment option. Of these shares, the shares of common
stock sold in this offering and the concurrent selling stockholders offering
will be freely tradable, without restriction, in the public market. The
concurrent selling of a substantial number of shares by the selling stockholders
within a relatively short period of time could have the effect of depressing the
market price of our common stock and could impair our ability to raise capital
through the sale of additional equity securities.
The exercise of our outstanding warrants and options may depress our stock price
Not including the 600,000 class B warrants to be issued in connection with
this offering, we currently have 2,047,000 warrants and options to purchase
shares of our common stock. The exercise of warrants and/or options by a
substantial number of holders within a relatively short period of time could
have the effect of depressing the market price of our common stock and could
impair our ability to raise capital through the sale of additional equity
securities.
The issuance of 1,000,000 shares to be earned in connection with our acquisition
of Suncoast may dilute your investment in our common stock
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.
In addition, we will deposit 1,000,000 shares of our common stock with an escrow
agent. Over the 27 months following the effective date of this 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.
The issuance of these earn-out shares may have the effect of further diluting
the proportionate equity interest and voting power of holders of our common
stock, including investors in this offering.
10
<PAGE>
We may experience variability in our operating results, which could negatively
impact the price of our shares.
Our annual and quarterly results have fluctuated in the past. The reasons
for these fluctuations may similarly affect us in the future. Prospective
investors should not rely on results of operations in any past period to
indicate what our results will be for any future period. Our operating results
may fluctuate in the future as a result of many factors, including:
o variations in the timing and volume of customer orders;
o introduction and market acceptance of our new products;
o changes in demand for our existing products;
o the accuracy of our forecasts of future requirements;
o changes in competitive and economic conditions generally or in our
markets; and
o the timing of, and the price we pay for, acquisitions and related
integration costs.
Any of these factors or a combination of these factors could have a
material adverse effect on our business, financial condition and results of
operations.
The public offering price is significantly higher than the book value of our
shares and you will experience immediate and substantial dilution in the value
of your investment.
The public offering price per share will significantly exceed the net
tangible book value per share. Accordingly, investors purchasing shares in this
offering will suffer immediate and substantial dilution of their investment of
$4.19 based on an assumed offering price of $13.50. Additional dilution will
occur upon the exercise of outstanding options. See "Dilution."
We may need additional capital that could dilute the ownership interest of
investors.
We require substantial working capital to fund our business. If we raise
additional funds through the issuance of equity, equity-related or convertible
debt securities, these securities may have rights, preferences or privileges
senior to those of the rights of holders of our common stock may experience
additional dilution. We cannot predict whether additional financing will be
available to us on favorable terms when required, or at all. Since our
inception, we have experienced negative cash flow from operations and expect to
experience significant negative cash flow from operations in the future. The
issuance of additional common stock by our management, may have the effect of
further diluting the proportionate equity interest and voting power of holders
of our common stock, including investors in this offering.
11
<PAGE>
Redemption of our class B warrants may cause an immdediate financial loss for
the warrant holders.
Our class B warrants are redeemable at a price of $0.10 provided that prior
notice of not less than 30 days is given to the warrant holders, the last sale
price of our common stock shall have been at least $________ per share for a
period not less than 20 consecutive days trading. Warrant holders have exercise
rights until the close of the business day preceding the date fixed for
redemption. Notice of redemption of the class A warrants could force the holders
to exercise the class B warrants at the current market price when they might
otherwise wish to hold them, or to accept the redemption price, which may be
substantially less than the market value of the class B warrants at the time of
redemption. For a complete description of the terms and conditions of redemption
of the class A warrants, see Description of Securities - class B warrants.
Our securities are thinly traded and the limited liquidity in our securities
could be adversely affected with resulting decreases in the price of our shares.
The trading market price of our common stock may decline below its current
price. Our common stock is currently very thinly traded on the Nasdaq SmallCap
Market. An active public market for our common stock may not develop or be
sustained during or after this offering. The additional shares made available
for sale in the market as a result of this offering may depress the price of our
common stock.
12
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $6,690,000
from our sale of the 600,000 units offered by us (approximately $7,747,050 if
the underwriter fully exercises its over-allotment option). This estimate is
based on an offering price of $13.50 per unit and is after deducting estimated
underwriting discounts and commissions, the underwriter's non-accountable
expense allowance and other estimated offering expenses payable by us. We expect
to use the net proceeds of this offering for the following purposes:
Amount Percentage
------ ----------
Repayment of the 10% promissory notes ................ $1,650,000 24.7%
Business expansion ................................... 2,500,000 37.4
Marketing ............................................ 750,000 11.2
Trade payables ....................................... 350,000 5.2
Suncoast liabilities ................................. 400,000 5.9
Working capital and general corporate purposes ....... 1,040,000 15.6
---------- -----
Total ............................................ $6,690,000 100%
========== =====
Repayment of the 10% promissory notes represents the repayment of the
principal amount $1,500,000 in promissory notes and $150,000 in interest. We
issued these promissory notes in connection with our March 31, 2000 bridge
financing. The promissory notes are due at the closing of this public offering
or one year from the date of issuance, whichever occurs first.
Business expansion represents the build-out of cable TV and high-speed
Internet access to fulfill signed contracts. Build-out costs are approximately
$1,000 per room, which includes equipment and installation. We currently have
two contracts to provide cable TV equipment in over 2,500 units across ten
resorts.
Marketing expenses include the following:
o four full-time personnel dedicated to sales to the timeshare
industry
o travel and entertainment expenses
o participation in trade shows and other sales events
Working Capital and general corporate purposes include the following:
o hiring additional personnel
o acquiring and enhancing our operating, support and management
systems
o financing future debt for equipment leases
o funding short-term losses
Working capital may also be applied to acquisitions, although we do not
have current plans, agreements or commitments for any acquisition. Any proceeds
from the exercise of the option we granted to the underwriters to purchase
additional shares of common stock from us will be added to working capital.
We will retain broad discretion in the allocation of the net proceeds of
this offering within the categories listed above. We may also use portions of
the net proceeds for other purposes. The amount actually expended and their uses
will depend on a number of factors, including the amount of our future revenues
and the other factors described under "Risk Factors."
We expect that the net proceeds from this offering, together with cash flow
from our operations, will be sufficient to fund our operations and capital
requirements for at least 12 months following the consummation of this offering.
We may be required to seek additional sources of capital sooner if:
o operating assumptions change or prove to be inaccurate; or
o we consummate any acquisitions of significant businesses or
assets.
Pending the uses described above, the net proceeds will be invested in a
money market account.
13
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock has traded on the Nasdaq SmallCap Market from February 9,
1995 until July 10, 1996 and May 15, 1998 until present and under the symbol
"PSCO". For the period from July 11, 1996 until May 14, 1998, our common stock
traded on the Bulletin Board under the symbol "PSCO". Our common stock purchase
warrants have traded on the Nasdaq SmallCap Market under the symbol "PSCOW"
since May 15, 1998. Prior to such time there was no public market for our common
stock. The following table sets forth for the periods indicated the high and low
sales price per share of our common stock and our common stock purchase warrants
as reported on the Nasdaq SmallCap Market.
--------------------------------------------------------------------------------
For the quarter ended: Common Stock Warrants
--------------------------------------------------------------------------------
High Low High Low
--------------------------------------------------------------------------------
March 31, 1998 $6.25 $5.25
June 30, 1998 $6.50 $5.38 $1.00 $0.75
September 30, 1998 $5.50 $5.38 $1.06 $0.63
December 31, 1998 $7.38 $5.38 $2.00 $0.66
--------------------------------------------------------------------------------
March 31, 1999 $8.31 $6.25 $3.00 $1.53
June 30, 1999 $9.25 $6.63 $3.75 $1.25
September 30, 1999 $7.63 $6.25 $2.19 $1.13
December 31, 1999 $7.44 $5.75 $2.00 $1.13
--------------------------------------------------------------------------------
March 31, 2000 $7.18 $5.75 $1.68 $1.12
June 30, 2000 $6.12 $4.25 $2.25 $0.87
September 30, 2000 $6.31 $5.37 $2.12 $1.37
--------------------------------------------------------------------------------
As of November 1, 2000, there were approximately 950 record and beneficial
owners.
DIVIDEND POLICY
We have not paid any cash dividends on our common stock and we currently
intend to retain any future earnings to fund the development and growth of our
business. Any future determination to pay dividends on our common stock will
depend upon our results of operations, financial condition and capital
requirements, applicable restrictions under any credit facilities or other
contractual arrangements and such other factors deemed relevant by our Board of
Directors.
14
<PAGE>
DILUTION
As of June 30, 2000, our net tangible book value was $1,926,415 or $0.89
per share of common stock. Net tangible book value per share is determined by
dividing a company's tangible net worth (total assets, net of intangible assets,
less total liabilities) by the number of outstanding common shares. Our pro
forma net tangible book value as of June 30, 2000 would have been approximately
$8,651,415 or $2.56 per share without taking into account any change in our net
tangible book value after June 30, 2000, other than to give effect to the sale
of 600,000 Units of securities at an assumed price of $13.50 per Unit, and after
deducting underwriting discounts and commissions, the Underwriters'
non-accountable expense allowance and other estimated offering expenses. This
represents an immediate increase in the net tangible book value of $1.67 per
share to existing shareholders and an immediate dilution of $4.19 per share to
new investors. The following table illustrates this per share dilution:
Assumed offering price per share underlying the Units....... $ 6.75
------
Net tangible book value per share as of June 30, 2000..... $0.89
Increase per share attributable to this offering.......... $ 1.67
------
Pro forma net tangible book value per share after
this offering............................................... $ 2.56
------
Dilution to new investors................................... $ 4.19 (62.1%)
==============
15
<PAGE>
CAPITALIZATION
The following table summarizes our capitalization as of June 30, 2000 and
as adjusted as of that date to reflect our sale of 600,000 Units and our
application of the estimated net proceeds without giving effect to the exercise
of the Warrants, the Overallotment Option, the Underwriters' Warrants, or other
outstanding warrants or options. The information in the table assumes a public
offering price of $13.50 per Unit. The information in the table should be read
in conjunction with the more detailed financial statements and notes thereto
presented elsewhere in this prospectus.
June 30, 2000
----------------------------
Actual As Adjusted
------------ ------------
Short-term debt ................................ $ 1,563,441 $ 63,441
------------ ------------
Long-term debt ................................. 26,920 26,920
------------ ------------
Stockholders' equity:
Preferred stock, no par, 5,000,000 shares
authorized, none issued or outstanding....... -- --
Common stock, no par value, 10,000,000
shares authorized, 2,175,395 shares issued
and outstanding; 3,375,395 shares issued
and outstanding, as adjusted ................ 13,150,885 19,840,885
Additional paid in capital .................. 28,158 28,158
Accumulated deficit ......................... (9,176,922) (9,176,922)
------------ ------------
Total stockholders' equity .................. 4,002,121 10,692,121
------------ ------------
Total capitalization ........................... $ 5,592,482 $ 10,782,482
============ ============
Additional Information About Financial Presentation
---------------------------------------------------
Options and Warrants. Unless this prospectus indicates otherwise, the
information presented in this prospectus assumes that neither the Underwriters'
over-allotment option nor the warrants to be granted to the Underwriters to
purchase an aggregate of 60,000 Units as compensation have been exercised.
16
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to our statements
of operations for the years ended December 31, 1999 and 1998 and with respect to
our balance sheet as of December 31, 1999 is derived from our audited financial
statements included elsewhere in this prospectus which have been audited by
Angell & Deering. The selected financial data with respect to the Company's
balance sheet as of June 30, 2000 is derived from unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments that we consider necessary for a
fair presentation of the financial position and results of operations for the
six months ended June 30, 2000 and 1999. Operating results for the six months
ended June 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. The financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
and notes thereto appearing elsewhere in the prospectus.
<TABLE>
Six Months Ended Year Ended
June 30, December 31,
----------------------------------------- --------------------------
2000 (1) 2000 1999 1999 1998
-------- ---- ---- ---- ----
(proforma) (unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
-----------------------------
Revenues ......................... $ 853,398 $ 751,145 $ 522,687 $ 1,125,225 $ 882,651
Operating expenses ............... 2,882,327 1,849,827 1,033,817 2,566,218 2,068,145
Operating loss ................... (2,028,929) (1,098,682) (511,130) (1,440,993) (1,185,494)
Total other income (expense) ..... (70,303) (21,466) 149,909 147,353 (510,735)
Income (loss) before income taxes (2,099,232) (1,120,148) (361,221) (1,293,640) (1,696,229)
Income taxes ..................... -- -- -- -- --
Net income (loss) ................ (2,099,232) (1,120,148) (361,221) (1,293,640) (1,696,229)
Basic and diluted income (loss)
Per share ................ $ (0.64) $ (0.56) $ (0.20) $ (0.72) $ (1.24)
Basic and diluted weighted average
Number of common shares
outstanding
3,305,453 2,002,381 1,776,697 1,789,453 1,365,484
December 31, June 30, June 30, June 30, 2000
1999 2000 (1) 2000 as Adjusted (2)
---- -------- ---- ---------------
(proforma) (unaudited)
Balance Sheet Data:
-------------------
Cash and cash equivalents $ 677,319 $ 1,063,105 $ 935,454 $ 6,160,454
Working capital (deficit) 554,668 (1,236,675) (81,582) 6,643,418
Total assets ............ 3,685,181 14,254,943 5,662,731 10,852,731
Long-term debt .......... 21,019 26,920 26,920 26,920
Stockholders' equity .... 3,400,308 11,739,111 4,002,121 10,692,121
</TABLE>
(1) Proforma shows the effect of the acquisition of Suncoast Automation, Inc.
See the proforma unaudited financial statements and accompanying notes for
a further explanation.
(2) As adjusted to give effect to the receipt and application of the estimated
net proceeds of the Offering without giving effect to the exercise of the
Warrants, the Underwriters' Warrants or other outstanding warrants or stock
options.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements contained in this prospectus are not purely historical
statements, but rather include what we believe are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. These include
statements about our expectations, beliefs, intentions or strategies for the
future, which are indicated by words or phrases such as "anticipate," "expect,"
"intend," "plan," "will," "we believe," "the company believes", "management
believes" and similar words or phrases. The forward-looking statements are based
on our current expectations and are subject to certain risks, uncertainties and
assumptions, including factors set forth in the following discussion and in the
discussions under "Risk Factors" and "Business." Our actual results could differ
materially from results anticipated in these forward-looking statements. All
forward-looking statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements.
Results Of Operations
---------------------
Six Months Ended June 30, 2000 vs. Six Months Ended June 30, 1999
Net Sales
For the six months ended June 30, 2000 net sales were $751,145 versus
$522,687 in the same period of the prior year. The increase in revenues is
attributed to acquisition of ISP accounts from MicroNet Services, Inc. We
believe that revenues will continue to increase as marketing plans are executed
that focus on increasing DSL, Web development and outsourcing technical support
for other ISPs and acquisitions by entering into agreements with or acquiring
other Internet related companies.
Operating Expenses
For the six months ended June 30, 2000, total operating expenses were
$1,849,827 versus $1,033,817 in the same period of the prior year. This increase
of $816,010 is primarily attributed to higher cost of network lines, salary and
amortization. The increase in amortization costs of approximately $431,296 is
attributed to amortization of debt issuance costs from the short-term loan
consummated during the second quarter and amortization of the goodwill from the
MicroNet acquisition in late 1999. The increase in cost of revenues is a result
of an increase in network lines expense of approximately $171,570, which is
primarily due to network upgrades and increased network usage. The increase in
salary costs of approximately $138,452 is attributed to the hiring of three
personnel previously employed by MicroNet Services, Inc. and raises to key
employees. We believe that operating expenses will increase as revenues increase
but will decrease as a percentage of revenues.
Operating Loss
Our operating loss for the period ending June 30, 2000 totaled $1,098,682
versus $511,130 in 1999. This increase of $587,552 is due to an increase in
total operating expenses. Management believes that operating results will
improve as revenues increase and operating expenses decrease as a percentage of
revenues.
18
<PAGE>
Interest Income (Expense)
Net interest income totaled ($21,466) for the period ending June 30, 2000
versus net interest income of $44,909 in 1999. The increase in interest expense
is a result of interest expense associated with the short-term loans completed
in May 2000.
Other Income
Net other income for the six months ended June 30, 2000 was $0 versus
$105,000 for the same period in 1999. The 1999 total of $105,000 was due to
collection of a note receivable, which was previously written off as
uncollectable.
Year Ended December 31, 1999 vs. Year Ended December 31, 1998
Net Sales
For calendar year 1999, Internet services revenues were $1,125,225 versus
$882,651 in calendar 1998, an increase of 27.5%. The increase in revenue is
primarily due to an increase in the Internet access subscriber base from the
November 1, 1999 acquisition of MicroNet Services Inc., approximately $85,224,
and internal marketing activities, approximately $116,433, and web design and
development projects, approximately $40,917. Management believes revenues will
continue to increase as we (i) develop and implement marketing programs focusing
on increasing name brand recognition and differentiation of service offerings
(i.e., Internet access, web site development and electronic commerce), and (ii)
by entering into agreements with or acquiring other Internet related companies.
Operating Expenses
1999 operating expenses totaled $2,566,218 versus $2,068,145 in 1998. This
increase of $498,073 is primarily attributed to higher network lines, salary,
legal, insurance and advertising costs. The increase to network lines expense of
$152,855 is attributed to the upgrade of network backbone capacity and the
expansion of the dial-in Internet serving area. The increase in employee salary
and payroll tax expense from 1998 to 1999 totaled $211,203. This increase is
attributed to the hiring of additional senior management and operations staff.
We incurred approximately $30,000 of legal fees associated with SEC registration
and reporting requirements. Management believes that operating expenses will
increase as revenues increase but will decrease as a percentage of revenues.
Operating Loss
Our 1999 operating loss totaled $1,440,993 versus $1,185,494 in 1998. This
increase in operating loss of $255,499 is primarily attributed to higher
operating expenses as noted above and lower than expected Internet access
revenue growth. Management believes that operating results will improve as
revenues increase and operating expenses decrease as a percentage of revenues.
Interest Income (Expense)
Net interest income (expense) for 1999 totaled $75,103 versus ($577,261) in
1998. Interest expense was reduced from $705,021 in 1998 to $16,763 in 1999
primarily due to the debt issuance costs and associated interest total of
$561,059 included in the 1998 expense total. Interest income for 1999 totaled
$91,866 versus $127,760 in 1998 and is attributed to investments made with the
net proceeds of our May 1998 secondary stock offering.
19
<PAGE>
Other Income
Net other income decreased from $73,479 in 1998 to $72,250 in 1999. Net
other income for 1999 is comprised of $105,000 from the collection of a note
receivable that was previously written off as uncollectable and the write off of
a $32,750 note receivable deemed uncollectable.
Liquidity And Capital Resources
-------------------------------
For the year ended December 31, 1998, we used cash of $798,167 for
operating activities. We had a working capital of $3,769,731 at December 31,
1998. This surplus is primarily attributed to the May 1998 sale of 1,137,000
units of our securities (one share of common stock and one warrant to purchase
one share of common stock) at $5.75. As of December 31, 1998, we had $3,885,884
in cash and cash equivalents and $351,025 of total liabilities.
Capital expenditures relating primarily to the purchase of computer
equipment, furniture, fixtures and other assets amounted to $54,082 and $77,552
for the years ended December 31, 1998 and 1997, respectively. The capital
investment is mainly in computer equipment to sustain the future growth of our
company.
We acquired computer equipment under capital leases totaling $80,515 for
its Internet operations during the year ended December 31, 1998. The computer
equipment acquired allows us to meet the requirements of our customers.
In connection with the cancellation of the Shaw Avenue capital lease, we
agreed to purchase 15,112 shares of its common stock from the landlord. The
stock was purchased in September 1998 for $77,165 ($5.11 per share) and was
subsequently retired to the corporate treasury.
For the year ended December 31, 1999, we used cash of $1,078,513 for
operating activities. We had working capital of $554,668 at December 31, 1999.
As of December 31, 1999, we had $677,319 in cash and cash equivalents and
$284,873 of total liabilities.
Capital expenditures relating primarily to the purchase of computer
equipment, furniture, fixtures and other assets amounted to $63,793 and $54,082
for the years ended December 31, 1999 and 1998, respectively. The capital
investment is mainly in computer equipment to sustain the future growth of our
company.
On April 30, 1999, we entered into strategic alliances with and purchased
12.7%, on a non-diluted basis, of the outstanding common stock of Infosis Corp.,
a privately held corporation. We paid an aggregate of $1.8 million for 600,000
shares of Infosis 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 finders fee. After
payment of the 30,000 shares of Infosis common stock to AAWC, we owned 570,000
shares of Infosis common stock.
In January 2000, Infosis 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 to 690,000 shares.
20
<PAGE>
In July 2000, we purchased an $84,177 convertible promissory note from
Infosis in connection with a bridge financing.
In September 2000, Protosource acquired an aggregate of $329,686 principal
amount of Infosis convertible promissory notes at $0.05 on the dollar for a
total acquisition price of $16,484.30. These convertible promissory notes were
then converted into 329,686 shares of preferred stock of Infosis. Concurrently
with the acquisition of the Infosis promissory notes by Protosource, Infosis
merged into P2i, Inc. As a result of this merger, Protosource now has a 4.5%
interest in P2i, Inc.
On October 28, 1999, we consummated the acquisition of substantially all of
the assets of MicroNet Services, Inc., a Connecticut corporation, in exchange
for the issuance of 74,870 shares of ProtoSource common stock and $132,500 in
cash consideration. The transaction was completed in accordance with the terms
of the asset purchase agreement, dated October 28, 1999, and effective as of
November 1, 1999, between Protosource and the shareholders of MicroNet.
For the six months ended June 30, 2000, we used $687,182 of cash for
operating activities. We had a working capital deficit of $81,582 at June 30,
2000, which is a decrease of $636,250 from December 31, 1999. As of June 30,
2000, we had $935,454 in cash and cash equivalents and total liabilities of
$1,660,610.
We executed a letter of intent with an underwriter to offer 600,000 units
of our securities at approximately $13.50 per unit on a firm commitment basis.
We will also grant the underwriter an option to purchase an additional 90,000
units from us to cover over-allotments for a period of forty-five days from the
effective date of the registration statement.
Andrew, Alexander, Wise & Co., Inc. acted as placement agent for $1,500,000
of bridge financing. 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 will be due
at the closing of the above public offering or one year from the date of
issuance, whichever occurs first. Andrew, Alexander, Wise & Co., Inc. was paid a
10% commission and a 3% non-accountable expense allowance and was issued
warrants to purchase up to 10% of the common stock issuable as part of the units
at an exercise price equal to 120% of the closing price of the common stock on
the day prior to closing.
In connection with this bridge financing, we incurred debt issuance costs
of approximately $1,722,500. The debt issuance costs will be amortized over the
one term of the loan.
Our notes receivable as of June 30, 2000 increased substantially due to a
$500,000 loan we made to Suncoast Automation, Inc. of Oldsmar, Florida, prior to
completing the acquisition on August 22, 2000.
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.
In addition, we will deposit 1,000,000 shares of our common stock with an escrow
agent. Over the twenty-seven months following the effective date of this
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 1900 subscribers/rooms and $190,000 in cumulative cash
flow added.
As a result of the acquisition of Suncoast, cash necessary to fund our
operations will increase approximately $80,000 per month to a total of
approximately $200,000 per month. It is anticipated that planned savings due to
a reduction in network line costs and personnel could reduce the cash needs.
Also, a portion of the capital raised by this offering will be used to install
set-top boxes in approximately 2,500 rooms already contracted. Installation of
these boxes will result in an immediate revenue increase of between $10 and $40
per room. The sale of the dial-up portion of the business is being explored. For
a period of several months after such a sale, the cash needs will increase
approximately $25,000 per month until the combination of cost saving measures
and increases in revenue offset it. Our receivables from the Suncoast division
are from two customers. Loss of any one of these two customers could adversely
impact our financial condition and results of operations.
21
<PAGE>
BUSINESS
Overview
We operate two divisions:
o Suncoast Automation, a provider of cable TV and high-speed
Internet access to the timeshare industry, with primary offices
in Oldsmar, Florida. We acquired Suncoast in August 2000; and
o psnw.com, a full-service Internet service provider with primary
offices in Fresno, California. Psnw.com has refocused its
strategy to concentrate on providing three types of services to
business customers:
1. reselling high-speed Internet access via ADSL/SDSL;
2. Web design, development and hosting services; and
3. outsourced technical support for other ISPs.
We were incorporated on July 1, 1988, pursuant to the laws of the State of
California under the name SHR Corporation, doing business as Software Solutions
Company.
Our common stock currently trades on the Nasdaq SmallCap Market under the
trading symbol "PSCO" and our class A common stock purchase warrants trade under
the symbol "PSCOW." Our class B common stock purchase warrants will trade under
the symbol PSCOZ.
Suncoast Automation
-------------------
Overview
Suncoast Automation, is the division of ProtoSource that operates as a
private cable operator. Suncoast builds, upgrades and maintains cable TV systems
as well as managing programming for the timeshare industry. Suncoast has
developed an interactive system that delivers basic cable TV, premium channel
packages and high-speed Internet access to this market segment.
Suncoast's History
Suncoast started business in June 1998 as Suncoast Home Automation, Inc. A
group of cable TV veterans saw the opportunity for a Web-enabled, interactive
cable TV system that combined many of the features of traditional cable TV
services with high-speed Internet access. The result was the development of a
system comprised of proprietary software, server-based LAN technology and the
best available state-of-the-art cable TV equipment. Using a remote keyboard and
the set-top box, the system allows the user to interact with the server to
access available features such as a variety of premium channel packages,
Internet access, video games, advertising and anything else that can be
server-based or web-enabled. With the use of private funding in 1999, the
company chose to target the timeshare industry with its system. The system has
been recently enhanced so that it interfaces directly into the resort owner's
property management system, allowing the delivery of additional services such as
express checkout and concierge-type services.
22
<PAGE>
The timeshare industry was chosen primarily for the following reason:
Timeshare resorts have a unique customer base that results in each unit having
four different tenants per month based on a typical one week stay. Suncoast and
its partner, the resort operator, can resell these services up to four times per
month. Thus, a 250 unit resort enjoys up to 1,000 potential monthly customers
for premium programming, Internet access, and other services. Fees paid by
guests for premium channels and Internet access are shared between Suncoast and
the resort owner.
Suncoast signed its first contract in May of 1999 with Sunterra
Communications Corporation. This contract was for three resorts, one resort with
152 Units in St. Croix, and two resorts in St. Maarten one for 141 Units and the
other for 220 Units. Suncoast installed a basic cable TV system in the St.
Maarten resorts in June and July of 1999. In September of 1999 Suncoast signed
two additional contracts with Sunterra Communications Corp that included three
additional resorts. The first contract was for two resorts in Virginia, one with
431 units and one with 130 units. The second was for one resort in Arizona with
130 units. Suncoast is currently billing approximately $12 per unit per month
for these resorts. In January of 2000, Suncoast installed a basic cable system
in St Croix and began billing $16 per unit per month for basic cable TV. All
contracts call for an increase for basic cable TV to over $21 per unit per month
once Suncoast's interactive system is installed. Funds from this offering will
be used to upgrade these units in their entirety.
In September of 2000, Suncoast signed an agreement with Bluegreen Resorts
Management, Inc. of Boca Raton, Florida for four resorts with 978 units.
Suncoast is proceeding with plans to prepare for their installation. Funds from
this offering will be used to install interactive cable TV systems in these
resorts.
All resort contracts average over $21 per unit per month for basic cable TV
service after interactive equipment is installed. Once interactive systems have
been installed in all units currently contracted (approximately 2,700), monthly
revenues will exceed $56,000 per month for basic cable TV service. We are
projecting a take rate of 25% for premium services and thus anticipate an
additional revenue stream of $20 per unit per month, or $54,000 per month when
all units are installed. Thus, if this buy rate proves out, Suncoast's total
monthly revenues will exceed $110,000 per month, over six times current levels.
Revenues generated by Internet access, video games, advertising and other
services could add significantly to this revenue stream.
In August of 2000, Suncoast installed 65 set top boxes, a server, and
proprietary software to provide interactive services to the guests of the 141
unit resort in St. Maarten (many of the rooms at this resort are under
renovation; set-top boxes will be installed in the balance of the rooms when
renovations are completed.) Immediately, as per the contract terms, revenues
increased to $22 per unit per month for basic cable TV. October was the first
full month with the interactive system installed. Initial response from guests
has been positive. There were approximately 65 units for possible occupancy. Out
of these 65 units in the month of October, Suncoast experienced 86 sales of the
three available premium programming options, Internet access is not available at
a reasonable price in St. Maarten, therefore it is not currently available as an
option. This represents a 33% buy rate by unit not factoring in the percentage
of occupancy. Suncoast averaged $23.46 per unit for premium services.
23
<PAGE>
Industry and Competition
1996 is the last year for which statistics are available as to the size of
the timeshare industry. At that time, according to an RCI Consulting, Inc.
study, there were 1,566 resorts in the US with an average of 155 units per
resort for a total universe of just over 241,000 units. According to the
American Resort Developers Association (ARDA), The State of the US Vacation
Ownership Industry: the 1999 Report, sales volume growth has been consistently
between 14% and 17% annually over the last decade. According to this same
report, there are more than two million timeshare owners in the US. Using these
figures, and assuming average ownership of just one week, the total number of
units at the end of 2000 could exceed 400,000.
No specific studies or reports are available on the state of cable TV
within the timeshare industry. Thus our conclusions about the opportunity in
this industry are based on our own observations from face-to-face meetings with
over twenty-five resort owners. As a result, some of the conclusions that we
have come to are the following:
o Resort operators view providing cable TV as an expense. Some rent
video tapes as a way to generate income. None we have spoken to offer
premium packaged cable TV services or high-speed Internet access,
other than what might be available to a guest who wishes to dial up to
their own ISP.
o Resort owners with multiple resorts in different geographic locations,
use the local franchise cable provider available in the geography
specific to each resort. Thus, there is generally no consistency as to
what the guest will find in a given resort from the same owner.
o The timeshare industry is as competitive as any other segment of the
hospitality industry. With many resorts concentrated in Florida,
California and recently, Las Vegas, amenities can become a significant
differentiator.
o Resort owners are interested in generating additional profits. Our
marketing challenge is to prove that Suncoast's interactive cable TV
system can generate more profits for the owner than other
alternatives.
o Resort owners are looking to private cable operators to update and
install the latest systems with additional capabilities such as high
speed Internet access. Private cable operators are the hospitality
industry's alternative to the local franchise cable companies. As a
private cable operator, we believe that Suncoast is the first to
combine state of the art engineering, custom developed software and
hardware technology, in a way which provides a comprehensive channel
lineup of video programming and high-speed Internet access.
o The large franchise cable companies have traditionally shown little
interest in the timeshare resort niche. We believe this is because
this market has many small properties spread throughout North America
while franchise operators are primarily interested in the economics of
building out specific geographic areas.
o An example of a company operating primarily in the hotel segment of
the hospitality industry is LodgeNet. The LodgeNet's Video On Command
product offering is structured as an overlay on top of the basic cable
services provided by private cable operators and franchise cable
companies and is targeted at hotels with shorter stays. Video On
Command is geared towards expensive impulse purchases and offers the
property owner limited additional revenue.
24
<PAGE>
Generally, both private cable operators and franchise cable companies
insist on ownership of the systems they build. Suncoast provides a feature-rich
package and a contractual structure that makes the property owner a future
partner in the cable system. To our knowledge, Suncoast is the first cable
company offering to upgrade and service a property owner's multiple locations
and to transfer ownership of the system to the property owner at the end of the
initial contract term. Typical contracts are for 7 to 12 years and are renewable
for additional 7 year terms.
Suncoast's Current Business
Sunterra Communications Corp., a wholly owned subsidiary of Sunterra
Corporation has signed contracts with Suncoast for 6 resorts representing 1,816
units. The contracts call for the "exclusive cable development and programming
services" for an initial term of 7 years for these 6 resorts. Sunterra
Communications Corp. has also signed a Letter of Intent for additional projects
to be installed totaling over 7,800 units to be completed over the next 2 years.
Sunterra Corporation has filed for protection under Chapter 11 of the Federal
Bankruptcy laws. However, SCC is not included in this filing and does not pose a
receivables problem to our company. On September 25, 2000, Bluegreen Resorts
Management, Inc., a wholly owned subsidiary of Bluegreen Corporation, signed a
substantially similar contract with Suncoast for 4 resorts representing 978
total units. In addition, under an annual contract with Walt Disney World Co.,
Suncoast provides cable leakage index testing on an exclusive basis and
supplements in house-staff and contract employees for design and repair of the
cable TV distribution system for Walt Disney World in Orlando, Florida.
Direct Sales to Property Owners
Our sales model is based on direct sales to the owners of timeshare
resorts. A dedicated sales staff of four personnel will focus their efforts on
those owners that have multiple resorts. Initial sales efforts will be limited
to the US and Caribbean. At this time, we have only signed contracts with two
resort owners. However, we believe that the advantages offered property owners
are compelling and thus additional contracts will be signed as we ramp up our
sales effort and install the resorts that have been contracted. The benefits
offered to resort owners are as follows:
Cable TV service is converted from an expense item to a source of revenue
from:
- the sale of premium channel packages to guests;
- high-speed Internet access;
- video games;
- e-commerce purchases made by guests using the cable system; and
- ad insertion and static ads.
Enhanced marketing tools:
- Practical access to guest preference data for individualized customer
service (e.g., interest in golf or special needs);
- Ability to analyze aggregate customer preference data for insight and
early identification of trends; and
- Ability to promote additional resort sales and services using two
dedicated resort specific cable channels controlled from the home
office of the resort owner.
25
<PAGE>
More centralized control:
- Provides a consistent image across all properties run under a specific
brand;
- Simplifies administrative operations by dealing with a single cable
vendor; and
- Allows access to each resort from the corporate office interface.
Property owner, rather than cable services provider, selects programming
options.
Checkout and room charges are delivered to the guest through the TV easing
front desk congestion.
Cable system, excluding proprietary software and servers, is eventually
owned by property owner, not the cable services provider.
Suncoast offers a resort owner, with properties spread throughout North
America, a state of the art entertainment and communications system. This system
will have a standardized interface as well as centralized billing and accounting
controls, since it interfaces directly into the resort owner's property
management system. The property owner deals with a single vendor for all
properties and will eventually own the system, while Suncoast will retain
programming control through industry standard long-term contracts. The property
owner supplies the simple day-to-day maintenance requirements of the system and
contracts with Suncoast for specific project-based billable maintenance.
Currently, nearly all timeshare resorts we have spoken to, only offer basic
cable TV programming. Suncoast's system, gives the resort owner the ability to
offer tiered premium programming which could yield significant additional
revenue. Additionally, Internet access, video games and advertising can be
leveraged in a similar manner. The national average percentage of residential
cable customers that upgrade to premium channels for an additional cost is 71%,
according to a Paul Kagan and Associates study. This average spans all income
brackets of the general population. Considering that the timeshare resort
industry enjoys a demographic base of customers that are in the top
twenty-percentile income bracket (according to RCI Consulting, Inc, in 1998, the
average median income of a timeshare owner was $71,000), it is possible that a
substantial percent of resort guests will select premium channels during their
stay. According to the NTIA, 60.9% of households earning $50,000 to $74,999 and
77.7% of households earning above $75,000, have Internet access at home today.
Profile of Typical Suncoast Agreement
Suncoast invests capital to upgrade the cable TV hardware and software in
the resort.;
The resort commits to pay Suncoast a monthly fee for a basic level of cable
TV programming for an initial 7-12 year period. Generally, this fee is double
the cable industry average. Suncoast will recover its initial capital investment
in less than 5 years;
Additional revenues generated by premium channels, Internet access, video
games and advertising will be shared with the resort owner yielding a minimum of
50% gross margin to Suncoast; and
At the end of the initial contract term, ownership of the cable television
system is transferred to the resort owner but Suncoast retains exclusive cable
TV programming rights for an additional 7 year term.
26
<PAGE>
psnw.com
--------
The Internet
The Internet is a global collection of thousands of interconnected computer
networks that link computers around the world and enable commercial
organizations, educational institutions, governmental agencies and individuals
to communicate electronically, access and share information and conduct
commerce. Unlike other public and private telecommunications networks that are
managed by businesses, governmental agencies or other entities, the Internet is
a cooperative interconnection of many such public and private networks. The
networks that comprise the Internet are connected in a variety of ways,
including the public-switched telephone network and dedicated high-speed leased
lines. Open communications on the Internet are enabled by TCP/IP, the common
Internet communications protocol, which facilitates communication across the
Internet regardless of the hardware and software used.
Recent technological advances, combined with cultural changes and evolving
business practices, have led to the integration of the Internet into the daily
activities of individuals and the operations and strategies of commercial
organizations. Use of the Internet by individuals and relatively small
businesses and other organizations has been accelerated by dramatic increases in
cost-effective processing power and data storage capabilities in personal
computers, as well as widespread availability of multimedia, fax/modem, and
networking capabilities to the home computing market. According to an NTIA
study, Falling Through the Net series, share of households with Internet access
soared 58% rising from 26.2% in December 1998 to 41.5% in August 2000. The same
study also notes that there were 116.5 million Americans online at some location
in August 2000. The study went on to point out that "If growth continues at that
rate, more than half of all Americans will be using the Internet by the middle
of 2001." And according to the Gartner Group, "By 2004, 29 million US households
will be broadband enabled."
Accessing The Internet.
Internet access services are the means by which ISPs interconnect business
and consumer users to the Internet's resources. Access services vary from
dial-up modem access for individuals and small businesses to high speed
dedicated transmission lines for broadband access by large organizations. An ISP
provides Internet access either by developing a proprietary network
infrastructure or by purchasing access service from a wholesale access vendor,
or through a combination of both. The rapid development and growth of the
Internet have resulted in a highly competitive and fragmented industry
consisting of a few large national and regional ISPs and a substantial number of
local ISPs with small subscriber bases. The industry has experienced pricing
pressure of late due to the number of free access companies that have emerged.
Using a revenue model based on advertising, these companies have lost tens of
millions of dollars but have siphoned customers away from traditional ISPs.
Coupled with the growing demand for high-speed access, the ISP industry is
undergoing substantial consolidation. Thus for most ISPs, future success depends
on their ability to refocus their business model.
Growth In Electronic Commerce
For most businesses, the Internet has created a new communication and sales
channel that enables companies to interact with large numbers of geographically
dispersed consumers and businesses. In the last several years, many companies
have emerged that focus solely on the Internet as the preferred medium for
selling products or delivering services directly to purchasers, bypassing
traditional wholesale and retail channels. Furthermore, traditional businesses
are implementing sophisticated web sites to effect electronic commerce
initiatives that offer competitive advantages. These businesses are deploying an
expanding variety of Internet-enabled applications, ranging from web site
marketing and recruiting programs to on-line customer interaction systems and
integrated purchase order and "just-in-time" inventory solutions for key
customers and suppliers. These capabilities require increasingly complex web
sites and support operations. In addition, advances in on-line security and
27
<PAGE>
payment mechanisms are alleviating concerns associated with conducting
transactions in an open-platform environment, thus prompting more consumers and
businesses to use the Internet in conjunction with purchases and more businesses
to offer a greater breadth of electronic commerce services. According to the
Gartner Group, "the North American Internet retailing market is on pace to
surpass $29.3 billion in 2000, an increase of 75 percent over 1999 revenue."
Outsourcing Of Internet Operations
As the Web increasingly becomes synonymous with electronic commerce,
businesses are placing greater emphasis on their Internet transaction and
communication operations. Internet-based companies, and to a growing extent,
traditional businesses, require non-congested and scalable Internet operations
to allow them to perform digital communication and commerce transactions
globally over the Internet. Due to constraints posed by the lack of technical
personnel with Internet skills or experience, the high cost of advanced
networking equipment and the complexity of innovative web solutions, many
businesses are unable internally to develop, maintain and continually enhance
their facilities and systems to conduct desired levels of Internet-based
activities. As a result of these constraints and other factors, many businesses
are seeking to outsource their facilities and systems requirements as the
preferred means for providing electronic commerce solutions. To this end, an
increasing demand is developing for:
- dedicated and broadband Internet access services to support reliable,
high speed and/or constantly connected Internet access and
communication;
- web hosting and co-location services which enable businesses to obtain
equipment, technical expertise and infrastructure for their Internet
needs on an outsourced basis; and
- end-to-end electronic commerce solutions to sell goods and services on
the web in a secure transaction environment.
- By outsourcing their facilities and systems needs, businesses are able
to focus on their core competencies rather than expending vital
resources to support their Internet operations.
The Opportunity For psnw.com
Management believes that the future of psnw.com is to be found in business
rather than residential customers. To this end, this division will focus on
three offerings to business customers:
(1) Web design, development and hosting. A small but highly skilled team of
developers has been part of our company for several years. This team previously
focused on activities related to maintaining our web portal. Earlier this year,
a concerted effort was made to solicit businesses that needed assistance with
designing and developing e-commerce solutions. To date, over $100,000 in such
contracts have been signed. The acquisition of Suncoast will provide additional
potential customers for this effort. Additionally, this team will support and
enhance the software that Suncoast has developed, precluding the need for
outside development on which they have had to rely.
(2) High-speed Internet access. In January of this year, we entered into a
contract to resell ADSL and SDSL services provided by New Edge Networks, Inc.
This service is currently available in the greater Fresno area and will soon be
available throughout the San Joaquin Valley of central California. Our focus
will remain in this geographic area since competition is limited and our
reputation for quality service is well known.
28
<PAGE>
(3) Outsourced technical support. We provide technical support 24 hours a
day, 7 days a week for our 6,500 existing dial-up customers. Recently, we
decided to offer this resource to other ISPs on a charge per customer basis. To
date, we support an additional 6,500 customers of other ISPs. A potentially
lucrative niche that we have found is for bilingual (Spanish/English) support.
Now managed as a profit-center, we believe this unit can achieve short-term
profitability.
At present, the major cost, other than personnel expense, associated with
this division is the network infrastructure required to provide dial-up access
to over 6,500 residential customers. Because we have decided not to make further
marketing expenditures for the residential dial-up segment of the business, it
is not expected to achieve profitability. Thus, a number of options are being
explored for this segment, including selling the customer base. Because of our
reputation for quality service, our customer base continues to grow slowly
despite the lack of marketing. Therefore, we believe there is inherent value in
our customer base , which we expect to exploit.
Competition
-----------
The Internet services business is highly competitive and highly fragmented.
With the exception of the demand for highly skilled personnel, there are few
significant barriers to market entry. Coupled with the rapid growth of the
Internet, this has resulted in the emergence of thousands of ISPs and Internet
consulting companies of various sizes across the country. The market can be
segmented into four categories:
1. Large national access providers (AOL, Earthlink, Microsoft Network)
spending large sums on marketing to acquire customers;
2. Cable and telephone companies providing primarily
high-speed/high-priced access through their existing infrastructure;
3. Thousands of small and medium size companies providing services in a
given, local geography, with limited resources to expand; and
4. Large consulting companies offering customized high-end e-commerce
solutions for large businesses.
psnw.com's first level of competition is Pacific Bell for ADSL/SDSL in
central California. Because of "the telephone company's" poor image in the
marketplace, demand for our service exceeds our ability to provide it. Our
current installed DSL customer base is profitable and we have a backlog of
orders. Our objective for this business is to build it to a critical mass that
either generates significant profits, or becomes attractive to a potential
acquirer.
The second level of competition is the small and medium sized Internet
services companies. The central California valley contains few large businesses
and thus has not attracted any major consulting companies. Our Web design and
development business will be limited by the size of the clients that are
available to us in our geographical area. Although this unit is not currently
profitable, we believe that the addition of one or two significant clients will
make the unit profitable. Additionally, this unit will provide support for
Suncoast's software, making it a critical component of our future growth plans.
29
<PAGE>
The outsourcing of technical support for other ISPs was driven by our
desire to cover the cost of providing technical support 24 hours a day, 7 days a
week to our existing customer base. Although the results in a short period of
time are modest - 4,000 new customers - several new large-scale opportunities
for our bilingual services could potentially make this business very profitable.
The competition for this business is other ISPs providing technical support with
their own resources. We have thus focused our sales effort on those companies
that have already made the decision to outsource technical support.
The future of psnw.com will clearly depend on our ability to make this
division profitable. The leaders of the three business units in this division
clearly understand and are committed to achieving this objective.
Trademarks And Registered Domain Names
--------------------------------------
Our policy is to pursue registration of all the trademarks associated with
our key products. We rely on common law trademark rights to protect our
unregistered trademarks. Common law trademark rights generally are limited to
the geographic area in which the trademark is actually used, while a United
States federal registration of a trademark enables the registrant to stop the
unauthorized use of the trademark by any third party anywhere in the United
States. Furthermore, the protection available, if any, in foreign jurisdictions
may not be as extensive as the protection available to us in the United States.
Although we seek to ensure that we do not infringe upon the intellectual
property rights of others, there can be no assurance that third parties will not
assert intellectual property infringement claims against us. Any infringement
claims by third parties against us may have a materially adverse affect on our
business, financial condition, results of operations and cash flows.
Government Regulatory Matters
-----------------------------
The laws and regulations applicable to the Internet and to our services are
evolving and unclear and could damage our business. There are currently few laws
or regulations directly applicable to access to, or commerce on, the Internet.
Due to the increasing popularity and use of the Internet, it is possible that
laws and regulations may be adopted, covering issues such as user privacy,
defamation, pricing, taxation, content regulation, quality of products and
services, and intellectual property ownership and infringement. Such legislation
could expose us to substantial liability as well as dampen the growth in use of
the Internet, decrease the acceptance of the Internet as a communications and
commercial medium, or require us to incur significant expenses in complying with
any new regulations. The European Union has recently adopted privacy and
copyright directives that may impose additional burdens and costs on
international operations. In addition, several telecommunications carriers,
including America's Carriers' Telecommunications Association, are seeking to
have telecommunications over the Internet regulated by the Federal
Communications Commission, or FCC, in the same manner as other
telecommunications services. A number of proposals have been made at the
federal, state and local level that would impose additional taxes on the sale of
goods and services through the Internet. Such proposals, if adopted, could
substantially impair the growth of electronic commerce and could adversely
affect us. Also, Congress recently passed (and the President has signed into
law) the Digital Millennium Copyright Act, which is intended to reduce the
liability of online service providers for listing or linking to third-party Web
sites that include materials that infringe copyrights. Congress also recently
passed (and the President has signed into law) the Children's Online Protection
30
<PAGE>
Act and the Children's Online Privacy Act, which will restrict the distribution
of certain materials deemed harmful to children and impose additional
restrictions on the ability of online services to collect user information from
minors. There can be no assurance that this legislation will not impose
significant additional costs on our business or subject us to additional
liabilities. Moreover, the applicability to the Internet of existing laws
governing issues such as property ownership, copyright, defamation, obscenity
and personal privacy is uncertain. We may be subject to claims that our services
violate such laws. Any new legislation or regulation in the United States or
abroad or the application of existing laws and regulations to the Internet could
damage our business.
Due to the global nature of the Internet, it is possible that the
governments of other states and foreign countries might attempt to regulate our
transmissions or prosecute us for violations of their laws. We might
unintentionally violate such laws. Such laws may be modified, or new laws may be
enacted, in the future. Any such development could damage our business.
Employees
---------
As of November 1, 2000, we had 35 employees. Of these employees, 12 are
technical support, 4 are finance, administration, and billing, 8 are operations,
5 are web design and development, 5 are sales and marketing, and 1 is
management. None of our employees are covered by a collective bargaining
agreement. We believe we have good relations with our employees.
Properties
----------
The psnw.com division leases 4,000 square feet of space for our offices and
operating facilities at 2300 Tulare Street, Suite 210, Fresno, California 93721.
The lease term is 5 years, ending May 2002, and requires minimum annual payments
of $40,250, increasing each year to a maximum of $55,375 in 2002. The Suncoast
Automation division leases 3,000 square feet of office and warehouse space at
150 Dunbar Avenue, Suite C, Oldsmar, Florida 34677. The lease term is 3 years
ending July 2002, and requires minimum annual payments of $18,000, increasing
each year to a maximum of $19,845 in 2002.
Legal Matters
-------------
During the ordinary course of business we may be subject to various legal
proceedings and claims, either asserted or unasserted. While the outcome of
these claims cannot be predicted with certainty, we do not believe that the
outcome of any such legal matters will have a material adverse effect on our
business, operating results, and financial condition.
31
<PAGE>
MANAGEMENT
Executive Officers, Directors, Director Nominees And Key Employees
------------------------------------------------------------------
Our executive officers, directors and key employees and their ages and
positions with us as of August 31, 2000, are as follows:
NAME AGE POSITION
---- --- --------
William Conis 53 Chief Executive Officer, President,
Chief Financial Officer and Director
James Sette 33 Vice President - Business Development
Mark Blanchard 46 Vice President and General Manager -
Suncoast Division
Theodore Triantafilu 52 Chief Operating Officer - Suncoast
Division and Director
Andrew Stathopoulos 51 Director
Michael A. Gales 55 Director
Seymour G. Siegel 57 Director
William Conis became a director in 1998 and became ProtoSource
Corporation's Chief Executive Officer and Chief Financial Officer in November
1999. Mr. Conis was Vice President, Eastern Region for Hitachi Data Systems from
July 1997 through July 1999, and was Hitachi's New York-based District Manager
from July 1995 to July 1997. From March 1984 to July 1995, Mr. Conis was a
senior consultant for the Kappa Group, a management consulting firm located in
New Jersey. Mr. Conis earned a Bachelor's degree and Master's degree in
Electrical Engineering from New York University in 1968 and 1971, respectively.
James Sette joined ProtoSource in November 1999 as Vice President of
Business Development. He was the founder, and managing partner of Micro-Net
Services, Inc., a nationwide ISP from 1995 to 1998. Micro-Net, which was
established in 1995, was the first Internet acquisition for ProtoSource. Prior
to Micro-Net, Mr. Sette was the Vice President of Acquisitions for a large
privately held investment firm from 1991 to 1995. During his six year tenure at
that firm he was responsible for negotiating the purchase of over $250 million
of assets. From 1985 to 1989, Mr. Sette studied business, with an emphasis in
urban economics, at the University of Connecticut.
Mark Blanchard became Vice President and General Manager of the Suncoast
division in August 2000. Mr. Blanchard formed Suncoast in September 1998. Prior
thereto, from 1995 to 1998 he was founder and President of Internet Stock Market
Inc., which facilitated the promotion of public companies. From 1992 to 1995,
Mr. Blanchard was founder and President to Pension Specialists Management Group,
a company that advised pension funds on investments. From 1979 to 1992, Mr.
Balanchard held several positions with Raymond James and Associates and Smith
Barney, full service brokerage firms. His final position with Smith Barney was
Senior Vice President of Municipals. He graduated from Rutgers University with a
degree in business in 1976.
Theodore Triantafilu was the Chief Operating Officer of Suncoast
Automation, Inc. from July 1999 to August 2000. He became Chief Operating
Officer of the Suncoast division and a director upon the completion of the
ProtoSource acquisition in August 2000. Mr. Triantfilu has over 29 years
experience in telephone operations, digital cable television operations, and
marketing as well as establishing new businesses. From 1995 through June 1999,
he was the area operations manager for GTE Media Ventures, Pinellas County,
Florida, the first overbuild and launch of digital CATV and high-speed cable
modem service for GTE Corporation. Prior to that assignment, he served in
successive positions of increasing responsibilities both in Florida and World
Headquarters in Irving, Texas for GTE during his 28-year career. While serving
Corporate Headquarters, he attended GTE Telops Management Development Program
for executives.
32
<PAGE>
Andrew Stathopoulos became a director in 1998. He has over 25 years
experience in finance, operations, marketing, mergers and acquisitions,
engineering, manufacturing and consulting. From March 1998 to the present he has
been with the Bank of New York as a Vice President to launch a software and
hardware vendor management program. From 1996 to 1997, he was Vice President of
Finance for New Alliance Corp., an emerging markets investment bank specializing
in Eastern Europe. He was responsible for financial reporting, internal audit
and controls, mid-office and back-office operations, information systems, and
management reporting. From 1994 to 1996, he was Vice President of Business
Development for Nautical Technology Corp., an independent software developer for
the maritime industry. He was responsible for developing and implementing a new
marketing and sales program, seeking strategic partners and providing general
business advice. Also, from 1994 to 1996, he was Vice President of Business
Development for Interbank of New York, a Greek commercial bank where he was
responsible for identifying and marketing new products and pursuing new business
opportunities. From 1992 to 1994, he was the Vice President of Finance and
Administration for Societe Generale Energie, an oil trading products firm. He
was responsible for establishing financial controls, accounting and reporting
procedures; monitoring cash flow and working capital requirements; managing
human resources administration; and dealing with auditors, insurers and vendors.
Mr. Stathopoulos holds a BS degree in Industrial Engineering and an MBA degree
in Finance and International Business, both from Columbia University.
Michael A. Gales became a director in October 1999. Mr. Gales has served as
Executive Vice President/Corporate Finance of Andrew, Alexander, Wise & Company,
Inc., since June 1999. From 1998 to June 1999, Mr. Gales served as Managing
Director of InterBank Capital Group, LLC. Prior to joining InterBank Capital
Group, from 1996 Mr. Gales served as Managing Director/Corporate Finance of
Janssen-Meyers Associates, LP. From 1990 to 1995, Mr. Gales served as Chief
Executive Officer and Chairman of the Board of Anchor Capital Co., LLC. For 13
years prior to 1990, Mr. Gales was in successively senior management roles in
international engineering and technology licensing operations focusing on the
maritime, petroleum and process industries. Mr. Gales is Chairman of the Board
of TEAMIES, LLC, a privately held television production and licensing
organization focusing on sports related children's programming.
Seymour G. Siegel became a director in February 2000. Mr. Siegel is a
principal in the Siegel Rich Division of Rothstein, Kass & Company, P.C.,
Certified Public Accountants and Consultants who provide strategic advisory
services to businesses including mergers and acquisitions, succession and
strategic planning, as well as capital market assistance. From 1974 to 1990, he
was senior partner of Siegel Rich & Co., CPAs, P.C. In 1990, the firm merged
with M.R. Weiser & Co., a large regional accounting firm, where he remained a
senior partner until 1994. Mr. Siegel is a director of Barpoint.com and has been
a director of numerous business and charitable organizations. Mr. Siegel is a
Certified Public Accountant (inactive).
Board Committees And Compensation
---------------------------------
Outside Board members receive $100 per hour for time expended on behalf of
ProtoSource Corporation, including attendance at Board meetings. Our audit
committee is composed of Messrs. Stathopoulos, Gales, and Siegel. Our
compensation committee is composed of Messrs. Stathopoulos, Gales and Conis.
33
<PAGE>
Employment Agreements
---------------------
Protosurce and William Conis are parties to an employment agreement, dated
as of November 1, 1999, which expires on October 31, 2001. The employment
agreement provides for a base salary of not less than $175,000 per year, the
precise rate to be fixed by our board of directors. Mr. Conis' base salary
increases to $200,000 per year once our gross revenues run at the rate of
$3,500,000 annually and operating profitability exceeds on an annual basis
$600,000 for at least three consecutive months and further increases to $250,000
if our gross revenues run at the rate of $5,000,000 annually and operating
profitability on an annual basis exceeds $1,200,000 for at least three
consecutive months. The Employment Agreement also provides for the issuance of
100,000 stock options exercisable at $6.875 per share, subject to a vesting
schedule or (i) at any time Protosource is liquidated, purchased, acquired by or
merged in to another business entity, (ii) in the event of Mr. Conis' death, or
(iii) in the event the employment agreement is terminated.
Protosurce and Ted Triantafilu are parties to an employment agreement,
effective as of August 1, 2000, which expires at the end of 27 months from the
effective date. The employment agreement provides for a base salary of not less
than $130,000 per year, the precise rate to be fixed by our board of directors.
The employment agreement also provides for the issuance of 30,000 stock options
subject to a three year vesting schedule.
Protosurce and Mark Blanchard are parties to an employment agreement,
effective as of August 1, 2000, which expires at the end of 27 months from the
effective date. The employment agreement provides for a base salary of not less
than $104,000 per year, the precise rate to be fixed by our board of directors.
Protosurce and Kent Spears are parties to an employment agreement,
effective as of August 1, 2000, which expires at the end of 27 months from the
effective date. The employment agreement provides for a base salary of not less
than $104,000 per year, the precise rate to be fixed by our board of directors.
SUMMARY COMPENSATION TABLE
The following table discloses certain compensation paid to our Chief
Executive Officer for the calendar years ended December 31, 1999 and 1998.
<TABLE>
Long Term
Compensation
Name and Other Annual All Other Awards/Securities
Principal Position Year Salary ($) Compensation Bonus Compensation Underlying Options(#)
------------------ ---- ---------- ------------ ----- ------------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
William Conis,
Chief Executive
Officer 1999 $ 27,259 - - - 100,000
1998 - - - - -
Raymond J. Meyers,
Former Chief
Executive Officer 1999 $162,795 - - - 20,000
1998 $140,005 - - - -
</TABLE>
34
<PAGE>
Option Grants in 1999
--------------------
The following table provides the specified information concerning grants of
options to purchase ProtoSource's common stock made during 1999 to the Named
Executive Officers.
Individual Grants
-----------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted Fiscal Year Per Share Date
---- ------- ----------- --------- ----
William Conis 100,000 50.4% $6.875 2004
Raymond J. Meyers 20,000 10.1% $6.00 2004
Aggregate Option Exercises and 1999 Year-End Values
---------------------------------------------------
The following table provides the specified information concerning exercises
of options to purchase our common stock in 1999 and unexercised options held as
of December 31, 1999 by the Named Executive Officers.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
at December 31, 1999 (shares) at December 31, 1999 (1)
----------------------------- ----------------------------
Number of
Shares
Acquired on Value
Name Exercise Realized Exercisable Unexerciseable Exercisable Unexerciseable
---- -------- -------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
William Conis -0- -0- 5,000 110,000 $0 $0
Raymond Meyers -0- -0- 36,667 20,000 $91,668 $5,000
</TABLE>
(1) The closing stock price of the Common Stock on December 31, 1999, as
reported on the Nasdaq SmallCap Market was $6.25.
Compensation Pursuant to Plans
------------------------------
1995 Stock Option Plan
In November 1994, we adopted a stock option plan which provides for the
grant of options intended to qualify as "incentive stock options" and
"nonqualified stock options" within the meaning of Section 422 of the United
States Internal Revenue Code of 1986. Incentive stock options are issuable only
to eligible officers, directors, key employees and consultants of ours.
The 1994 Plan is administered by the board of directors and terminates in
November 2004. We have reserved 150,000 shares of common stock for issuance
under the 1994 Plan. Under the 1994 Plan, the board of directors determines
which individuals shall receive options, the time period during which the
options may be partially or fully exercised, the number of shares of common
stock that may be purchased under each option and the option price.
The board of directors has the power to interpret the 1994 Plan, determine
which persons are to be granted options and the amount of such options. The
provisions of the Federal Employee Retirement Income Security Act of 1974 do not
apply to the 1994 Plan. Shares issuable upon exercise of options will not be
purchased in open market transactions but will be issued by us from authorized
shares. Payment for shares must be made by optionees in cash from their own
funds. No payroll deductions or other installment plans have been established.
No reports will be made to optionees under the 1994 Plan except in the form of
updated information for the prospectus. There are no assets administered under
the 1994 Plan, and, accordingly, no investment information is furnished
herewith.
35
<PAGE>
Shares issuable under the 1994 Plan may be sold in the open market, without
restrictions, as free trading securities. No options may be assigned,
transferred, hypothecated, or pledged by the option holder. No person may create
a lien on any securities under the 1994 Plan, except by operation of law.
However, there are no restrictions on the resale of the shares underlying the
options.
As of July 31, 2000, 135,167 options are outstanding.
1999 Executive Officer Stock Option Plan
In May 1999, the board of directors approved the 1999 Executive Officer
Stock Option Plan for the benefit of the executive officers. The 1999 Plan is
intended to provide an incentive to individuals to act as executive officers and
to maintain a continued interest in our operations. All options under the 1999
Plan will be issued under Section 422A of the Internal Revenue Code, and include
qualified and non-qualified stock options.
The terms of the 1999 Plan provide that we are authorized to grant options
to purchase shares of common stock to executive officers upon the majority
consent of the board of directors. The option price to be paid by optionees for
shares under qualified stock options must not be less than the fair market value
of the options shares as reported by the Nasdaq SmallCap Market on the date of
the grant. The option price for nonqualified stock options must not be less than
85% of such fair market value. Options must be exercised within six years
following the date of grant and the optionee must exercise options during
service to us or within three months of termination of such service (12 months
in the event of death or disability). The board of directors may extend the
termination date of an option granted under the 1999 Plan.
A total of 150,000 shares of authorized but unissued common stock have been
reserved for issuance pursuant to the 1999 Plan of which 100,000 options are
currently outstanding, exercisable at $6.875 per share.
Options under the 1999 Plan may not be transferred, except by will or by
the laws of intestate succession. The number of shares and price per share of
the options under the 1999 Plan will be proportionately adjusted to reflect
forward and reverse stock splits. The holder of an option under the 1999 Plan
has none of the rights of a shareholder until shares are issued.
The 1999 Plan is administered by the board of directors, which has the
power to interpret the 1999 Plan, determine which persons are to be granted
options and the amount of such options. The provisions of the Federal Employee
Retirement Income Security Act of 1974 do not apply to the 1999 Plan. Shares
issuable upon exercise of options will not be purchased in open market
transactions but will be issued by us from authorized shares. Payment for shares
must be made by optionees in cash from their own funds. No payroll deductions or
other installment plans have been established.
Shares issuable under the 1999 Plan may be sold in the open market, without
restrictions, as free trading securities. No options may be assigned,
transferred, hypothecated or pledged by the option holder. No person may create
a lien on any securities under the 1999 Plan, except by operation of law.
However, there are no restrictions on the resale of the shares underlying the
options. The 1999 Plan will remain in effect until May 2009 but may be
terminated or extended by the board of directors.
36
<PAGE>
Director and Officer Indemnification
------------------------------------
Our articles of incorporation provide that we will indemnify our officers,
directors and other eligible persons to the fullest extent permitted under the
laws of the state of California. We have also entered into indemnification
agreements with each of our current directors and executive officers which will
provide for indemnification of, and advancement of expenses to, such persons for
expenses and liability incurred by them by reason of the fact that they are or
were a director, officer, or shareholder of ProtoSource Corporation including
indemnification under circumstances in which indemnification and advancement of
expenses are discretionary under California law.
We believe that it is the position of the Securities and Exchange
Commission that, insofar as the foregoing provisions may be invoked to disclaim
liability for damages arising under the Securities Act of 1933, the provisions
are against public policy as expressed in the Securities Act of 1933 and are,
therefore, unenforceable.
37
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth the beneficial ownership of ProtoSource
Corporation voting securities as of the closing date of this offering, by each
person known by us to beneficially own 5% or more of the outstanding shares of
our voting securities, each of our directors, our named executive officers, and
all directors and executive officers as a group. The applicable percentage is
based on 3,470,586 shares outstanding and 4,670,586 shares to be outstanding
upon consummation of this offering and the concurrent offering by the selling
stockholders. The information set forth in the table and accompanying footnotes
has been furnished by the named beneficial owners.
<TABLE>
<CAPTION>
Before Offering After Offerings
------------------------------- ------------------------------
Amount and Nature Percent of Amount and Nature Percent of
Name of Beneficial of Beneficial Class of Beneficial Class
Owner (1) Ownership (2) (%) Ownership (2) (%)
-------------------------- ----------------- ---------- ----------------- ----------
<S> <C> <C> <C> <C>
William Conis(3) 70,300 2.0% 70,300 1.5%
Andrew Stathopoulos(4) 10,000 * 10,000 *
Michael A. Gales(10) 5,000 * 5,000 *
Seymour G. Siegel(5) 2,500 * 2,500 *
James Sette(6) 22,461 * 22,461 *
Mark Blanchard(7)(8) 397,883 11.5% 397,883 8.5%
Theodore Triantafilu(7)(9) 66,735 1.9% 66,735 1.4%
Kent Spears(7) 352,411 10.2% 352,411 7.5%
SHA Cable Holdings(7) 176,596 5.1% -- --
All officers and directors
as a group (7 persons) 569,879 15.9% 569,879 12.0%
</TABLE>
--------------------
* Less than 1%
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
ProtoSource Corporation, 2300 Tulare Street, Suite 210, Fresno, CA 93721.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to the shares shown. Except where indicated by footnote and subject to
community property laws where applicable, the persons named in the table
have sole voting and investment power with respect to all shares of voting
securities shown as beneficially owned by them.
(3) Includes presently exercisable options to purchase (i) 10,000 shares at
$6.00 per share at any time until October 2003, and (ii) 60,000 shares at
$6.875 per share anytime until November 2004. Does not include shares
issuable upon exercise of 45,000 options that are not presently
exercisable.
(4) Represents stock options to purchase 10,000 shares at $6.00 per share at
any time until October 2003. Does not include shares issuable upon the
exercise of 5,000 options that are not presently exercisable.
(5) Represents stock options to purchase 2,500 shares at $6.00 per share at any
time until February 2005. Does not include shares issuable upon the
exercise of 5,000 options that are not presently exercisable.
(6) Includes 7,302 shares owned as joint tenants with rights of survivorship
with his wife, Luciana Sette, and 7,857 shares owned as tenants in common
with Stuart Rosenkrantz. Does not include shares issuable upon exercise of
50,000 options that are not presently exercisable.
(7) Includes 4.74% of each individual's shares currently in escrow as
collateral for fees owed a consultant, Andrew, Alexander, Wise & Company,
Inc. In accordance with Rule 13d-3 under the Securities Exchange Act of
1934, Alan Docter, Adam Wagner, JRodili partners, Gerald Bedrin, Atti
Vilpulla, David Weinberger, John Wagner, Daniel Marx, Paul Beck, Eric
Salomon, Steve Marvin and Colin Frey may be deemed a control persons of the
shares owned by SHA Cable Holdings.
(8) Includes 45,472 shares owned by his wife, Virginia M. Blanchard.
(9) Does not include shares issuable upon exercise of 30,000 options that are
not presently exercisable.
(10) Represents 5,000 options to purchase shares of common stock at $6.00 per
share at anytime until October 2004. Does not include shares issuable upon
exercise of 10,000 options that are not exercisable.
38
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The units being offer under this prospectus consists of two shares of our
common stock and one class B warrant to purchase one share of our common stock.
See below for a description of our common stock and class B warrants.
Common Stock
------------
We are authorized to issue 10,000,000 shares of common stock, of which
3,470,586 shares are currently outstanding. Upon issuance, the shares of common
stock are not subject to further assessment or call. The holders of common stock
are entitled to one vote for each share held of record on each matter submitted
to a vote of stockholders. Cumulative voting for election of directors is
permitted. Subject to the prior rights of any series of preferred stock which
may be issued by us in the future, holders of common stock are entitled to
receive ratably such dividends that may be declared by the Board of Directors
out of funds legally available therefore, and, in the event of the liquidation,
dissolution or winding up of us, are entitled to share ratably in all assets
remaining after payment of liabilities. Holders of common stock have no
preemptive rights and have no rights to convert their common stock into any
other securities. The outstanding common stock is, and the common stock to be
outstanding upon completion of the offering will be, validly issued, fully paid
and non-assessable.
Class B Warrants
----------------
Each class B warrant represents the right to purchase one share of common
stock at an initial exercise price of $___ per share (110% of the offering price
of one share of common stock in this prospectus) for a period of five years from
the date hereof. The exercise price and the number of shares issuable upon
exercise of the class B warrants will be adjusted upon the occurrence of the
following events:
o issuance of common stock as a dividend on shares of common stock,
o subdivisions, reclassifications or combinations of the common stock or
similar events.
The class B warrants do not contain provisions protecting against dilution
resulting from the sale of additional shares of common stock for less than the
exercise price of the class B warrants or the current market price of our
securities and do not entitle class B warrant holders to any voting or other
rights as a shareholder until such class B warrants are exercised and common
stock is issued.
Class B warrants may be redeemed in whole or in part at our option after
one year from the date hereof, upon 30 days' notice and with the consent of
Kashner Davidson Securities Corporation, at a redemption price equal to $.10 per
class B warrant if the closing price of our Common Stock on the Nasdaq SmallCap
Market (or the Bulletin Board) is at least $ per share (150% of the offering
price of one share of common stock in this prospectus) for 20 consecutive
trading days, ending not earlier than 15 days before the class B warrants are
called for redemption.
Holders of class B warrants may exercise their class B warrants for the
purchase of shares of common stock only if a current prospectus relating to such
shares is then in effect and only if such shares are qualified for sale, or
deemed to be exempt from qualification under applicable state securities laws.
We are required to use our best efforts to maintain a current prospectus
relating to such shares of common stock at all times when the market price of
the common stock exceeds the exercise price of the class B warrants until the
expiration date of the class B warrants, although there can be no assurance that
we will be able to do so.
The shares of common stock issuable on exercise of the class B warrants
will be, when issued in accordance with the class B warrants, duly and validly
issued, fully paid and non-assessable. At all times that the class B warrants
are outstanding, we will authorize and reserve at least that number of shares of
common stock equal to the number of shares of common stock issuable upon
exercise of all outstanding class B warrants.
For the term of the class B warrants, the holders thereof are given the
opportunity to profit from an increase in the per share market price of our
common stock, with a resulting dilution in the interest of all other
stockholders. So long as the class B warrants are outstanding, the terms on
which we could obtain additional capital may be adversely affected. The holders
of the class B warrants might be expected to exercise the class B warrants at a
time when we would, in all likelihood, be able to obtain additional capital by a
new offering of securities on terms more favorable than those provided by the
class B warrants.
39
<PAGE>
Other Warrants
--------------
By a prospectus dated May 13, 1998, we sold 1,137,000 units of our
securities at a price of $5.75 per unit. Each unit consisted of one share of
common stock, no par value, and one class A common stock purchase warrant. Each
class A warrant represents the right to purchase one share of common stock at an
exercise price of $6.325 per share through May 13, 2003. The exercise price and
the number of shares issuable upon exercise of the class A warrants will be
adjusted upon the occurrence of certain events, including the issuance of common
stock as a dividend on shares of common stock, subdivisions, reclassifications
or combinations of the common stock or similar events. The class A warrants do
not contain provisions protecting against dilution resulting from the sale of
additional shares of common stock for less than the exercise price of the class
A warrants or the current market price of our securities and do not entitle
class A warrant holders to any voting or other rights as a shareholder until
such class A warrants are exercised and common stock is issued.
Class A warrants may be redeemed in whole or in part at our option after
one year from the prospectus date, upon 30 days notice and with the consent of
Andrew, Alexander, Wise & Company, Inc., at a redemption price equal to $.10 per
class A warrant if the closing price of our Common Stock on the Nasdaq SmallCap
Market (or the Bulletin Board) is at least $8.625 per share for 20 consecutive
trading days, ending not earlier than 15 days before the class A warrants are
called for redemption.
Holders of class A warrants may exercise their class A warrants for the
purchase of shares of common stock only if a current prospectus relating to such
shares is then in effect and only if such shares are qualified for sale, or
deemed to be exempt from qualification under applicable state securities laws.
We are required to use our best efforts to maintain a current prospectus
relating to such shares of common stock at all times when the market price of
the common stock exceeds the exercise price of the class A warrants until the
expiration date of the class A warrants, although there can be no assurance that
we will be able to do so.
The shares of common stock issuable on exercise of the class A warrants
will be, when issued in accordance with the class A warrants, duly and validly
issued, fully paid and non-assessable. At all times that the class A warrants
are outstanding, we will authorize and reserve at least that number of shares of
common stock equal to the number of shares of common stock issuable upon
exercise of all outstanding class A warrants.
For the term of the class A warrants, the holders thereof are given the
opportunity to profit from an increase in the per share market price of the our
common stock, with a resulting dilution in the interest of all other
stockholders. So long as the class A warrants are outstanding, the terms on
which we could obtain additional capital may be adversely affected. The holders
of the class A warrants might be expected to exercise the class A warrants at a
time when we would, in all likelihood, be able to obtain additional capital by a
new offering of securities on terms more favorable than those provided by the
class A warrants.
Preferred Stock
---------------
We are authorized to issue 5,000,000 shares of preferred stock, none of
which is currently outstanding. The preferred stock may, without action by our
stockholders, be issued by the Board of Directors from time to time in one or
more series for such consideration and with such relative rights, privileges and
preferences as the Board may determine. Accordingly, the Board has the power to
fix the dividend rate and to establish the provisions, if any, relating to
voting rights, redemption rates, sinking fund provisions, liquidation
preferences and conversion rights for any series of preferred stock issued in
the future.
40
<PAGE>
Use of Preferred Stock As Anti-Takeover Device
----------------------------------------------
It is not possible to state the actual effect of any authorization of
preferred stock upon the rights of holders of common stock until the Board
determines the specific rights of the holders of any other series of preferred
stock. The Board's authority to issue preferred stock also provides a convenient
vehicle in connection with possible acquisitions and other corporate purposes,
but could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock. Accordingly, the future
issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of us without further action by the stockholders
and therefore, may be used as an "anti-takeover" device adversely affecting the
holders of the common stock and depressing the value of the common stock. We
have no current plans to issue any preferred stock.
Transfer Agent And Registrar
----------------------------
Corporate Stock Transfer, Inc., 3200 Cherry Creek Drive South, Suite 430,
Denver, Colorado 80209, is our transfer agent and warrant agent.
41
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Shares Outstanding and Freely Tradable After Offering. Upon completion of
this offering, we will have approximately 4,670,586 shares of common stock
outstanding. The 1,200,000 shares underlying the units to be sold by ProtoSource
Corporation in this offering will be freely tradable without restriction or
limitation under the Securities Act, except for any such shares held by
"affiliates" of ProtoSource Corporation, as such term is defined under Rule 144
of the Securities Act, which shares will be subject to the resale limitations
under Rule 144.
Lock-up Agreements. In connection with our acquisition of MicroNet
Services, Inc., dated as of November 1, 1999, we issued 74,870 shares of our
common stock pursuant to a Stock Purchase Agreement. The parties to the Stock
Purchase Agreement agreed not to sell, transfer, or otherwise dispose of any
shares of our common stock owned by them for a 36 month period ending on
November 1, 2002 (except that with respect to the shares owned by Denise &
Stuart Rosenkrantz, $12,500 worth of shares may be sold per fiscal quarter)
without our prior written consent. The shares may be released from this lock-up
upon: (i) the common stock of the Purchaser closing at or above $15.00 per share
for thirty (30) consecutive trading days on any Nasdaq Market; or (ii) our
common stock trading 500,000 or more shares per week on average on any Nasdaq
Market for thirty (30) consecutive trading days at a closing price not less than
$10.00.
In connection with a bridge financing of $1,500,000, we issued 240,000
shares of our common stock pursuant to Promissory Notes. The parties to the
Promissory Notes agreed not to sell, transfer, or otherwise dispose of any
shares of our common stock owned by them for a 12 month period from the
effective date of this Prospectus without the prior written consent of Andrew,
Alexander, Wise & Company, Inc.
In connection with our acquisition of Suncoast Automation, Inc., dated as
of August 22, 2000, we issued 1,303,072 shares of our common stock and reserved
1,000,000 shares of our common stock, which can be earned out pursuant to a
Stock Exchange Agreement. The parties to the Stock exchange Agreement agreed not
to sell, transfer, or otherwise dispose of any shares of our common stock owned
by them or acquired by them under the terms of the earn out provisions for a 36
month period ending on August 1, 2003 without our prior written consent. The
shares may be released from this lock-up upon: (i) the common stock of the
purchaser closing at or above $15.00 per share for twenty (20) consecutive
trading days on any Nasdaq Market; (ii) the common stock of ProtoSource trading
500,000 or more shares per week on average on any Nasdaq Market for twenty (20)
consecutive trading days at a closing price not less than $10.00; or (iii) we
are sold for a market capitalization above $100,000,000 and the acquiring party
shall not agree to honor the earn out provisions in the Stock Exchange
Agreement.
Rule 144. In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated) who has beneficially owned shares for at
least one year, including an affiliate of us, would be entitled to sell, within
any three-month period, that number of shares that does not exceed the greater
of 1% of the then-outstanding shares of common stock (approximately 46,706
shares after this offering) or the average weekly trading volume in the common
stock during the four calendar weeks immediately preceding the date on which the
notice of sale is filed with the Commission, provided certain manner of sale and
notice requirements and requirements as to the availability of current public
information about us is satisfied. In addition, affiliates of ours must comply
with the restrictions and requirements of Rule 144, other than the one-year
holding period requirement, in order to sell shares of common stock. As defined
in Rule 144, an "affiliate" of an issuer is a person who, directly or
indirectly, through the use of one or more intermediaries controls, or is
controlled by, or is under common control with, such issuer. Under Rule 144(k),
a holder of "restricted securities" who is not deemed an affiliate of the issuer
and who has beneficially owned shares for at least two years would be entitled
to sell shares under Rule 144(k) without regard to the limitations described
above.
Effect of Substantial Sales on Market Price of Common Stock. We are unable
to estimate the number of shares that may be sold in the future by our existing
shareholders or the effect, if any, that such sales will have on the market
price of the common stock prevailing from time to time. Sales of substantial
amounts of common stock, or the prospect of such sales, could adversely affect
the market price of the common stock.
42
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, the underwriter named below has agreed to purchase from ProtoSource
Corporation, and ProtoSource Corporation has agreed to sell to the underwriter,
the number of units set forth opposite the underwriter's name below, excluding
units set aside for options granted for over-allotments. Kashner Davidson
Securities Corporation shall serve as the managing underwriter for the offering.
--------------------------------------------------------------------------------
UNDERWRITERS NUMBER OF UNITS
--------------------------------------------------------------------------------
Kashner Davidson Securities Corporation........... 600,000
Total............................................. 600,000
--------------------------------------------------------------------------------
Kashner Davidson Securities Corporation has agreed, subject to the terms
and conditions of the underwriting agreement, to purchase from us all of the
units offered hereby. Kashner Davidson Securities Corporation commenced business
in 1969. The underwriter's principal business function is to act as a retail
brokerage firm purchasing and selling the securities of publicly traded
companies on behalf of its clients. There are no material relationships between
our promoters and the underwriter.
The managing underwriter has advised us that it proposes to offer the units
purchased by it directly to the public at the public offering set forth on the
cover page of this prospectus and to certain dealers at a price that represents
a concession of $ __ per unit. The managing underwriter is committed to
purchasing and paying for all of the units if any units are taken. After the
initial public offering of the units, the offering price and the selling terms
may be changed in the sole discretion of the managing underwriter. The managing
underwriter does not intend to sell any of our securities to accounts for which
it exercises discretionary authority.
We have also granted the managing underwriter an overallotment option,
exercisable within 45 days from the date of this prospectus, to purchase from us
up to 90,000 units solely to cover overallotments. The managing underwriter is
otherwise under no obligation to exercise their overallotment option or purchase
any units subject to the overallotment option.
The managing underwriter shall purchase the units (including units subject
to the overallotment option) from us at a price of $ __ per unit. In addition,
we have agreed to pay the managing underwriter a 3% nonaccountable expense
allowance on the aggregate initial public offering price of the units, including
units subject to the overallotment option.
We have agreed to issue the underwriter's warrants to the managing
underwriter for a consideration of $10. The underwriter's warrants are
exercisable at any time in the four-year period commencing one year from the
date of this prospectus to purchase up to an aggregate of 60,000 units for $ __
per unit in cash (120% of the offering price of the units) or on a cashless
basis by exchanging the "value" of the existing underwriter's warrants (such
"value" based upon the difference between the exercise price and the market
price of the underwriter's warrants on the date of exercise). The units which
may by purchased upon exercise of the underwriter's warrants will be identical
to the units offered to the public, except that the redeemable common stock
purchase warrants included in the underwriter's units will be exercisable to
purchase shares of common stock at a purchase price equal to 120% of the
effective public offering price for the common stock in this offering. The
underwriter's warrants are not transferable for one year from the date of this
prospectus except (i) to an underwriter or a partner or officer of an
underwriter or (ii) by will or operation of law. During the term of the
underwriter's warrants, the holder thereof is given the opportunity to profit
from an increase in the per share market price of our securities. As long as the
underwriter's warrants are outstanding, we may find it more difficult to raise
additional equity capital. At any time at which the underwriter's warrants are
likely to be exercised, we would probably be able to obtain additional equity
capital on more favorable terms. If we file a registration statement relating to
an equity offering under the provisions of the 1933 Act at any time during the
five-year period following the date of this prospectus, the holders of the
underwriter's warrants or underlying units will have the right, subject to
certain conditions, to include in such registration statement, at our expense,
all or part of the underlying units at the request of the holders. Additionally,
we have agreed, for a period of five years commencing on the date of this
43
<PAGE>
prospectus, on demand of the holders of a majority of the underwriter's warrants
or the units issued or issuable thereunder, to register the units underlying the
underwriter's warrants one time at our expense. The registration of securities
pursuant to the underwriter's warrants may result in substantial expense to us
at a time when we may not be able to afford such expense and may impede future
financing. The number of units covered by the underwriter's warrants and the
exercise price are subject to adjustment under certain events to prevent
dilution.
In connection with the offering, the managing underwriter and selling group
members (if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the common stock and
warrants. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may bid
or purchase common stock or warrants for the purpose of stabilizing their market
prices. The managing underwriter may also create a short position for the
account of the managing underwriter by selling more securities in connection
with the offering than it is committed to purchase from us and in such case may
purchase securities in the open market following completion of the offering to
cover all or a portion of such short overallotment option. Any of the
transactions described in this paragraph may result in the maintenance of the
securities at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph is required, and,
if they are undertaken, they may be discontinued at any time.
In connection with the Offering, the Underwriter may also purchase and sell
the common stock and warrants in the open market. These transactions may include
overallotment and stabilizing transactions as described above, and purchases to
cover syndicate short positions created in connection with the offering.
Stabilizing transactions consist of certain bids or purchases for the purposes
of preventing or retarding a decline in the market price of the common stock and
warrants; and syndicate short positions involve the sale by the underwriter of a
greater number of shares of common stock or of warrants than they are required
to purchase from us in the offering. The managing underwriter also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the common stock and warrants sold in the offering
for their account may be reclaimed by the managing underwriter if such
securities are repurchased by the managing underwriter in stabilizing or
covering transactions. These activities may stabilize, maintain or otherwise
affect the market price of the common stock and warrants, which may be higher
than the price that might otherwise prevail in the open market; and these
activities, if commenced, may be discontinued at any time. These transactions
may be effected on the Nasdaq SmallCap Market.
We have agreed upon completion of the offering to retain the managing
underwriter as financial consultants for a period of one year at a monthly fee
of $5,000 (a total of $60,000), payable in full upon the closing of the
offering. The consulting agreement will not require the managing underwriter to
devote a specific amount of time to the performance of its duties thereunder.
We have agreed to indemnify the managing underwriter against certain
liabilities including liabilities under the Securities Act and to contribute in
certain events to liabilities incurred by the managing underwriter in connection
with the sale of the Units. In the opinion of the Commission, indemnification
against liabilities under the Securities Act is against public policy and is
therefore unenforceable.
44
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon
for ProtoSource Corporation by Sichenzia, Ross & Friedman LLP, New York, New
York. From time to time, Sichenzia, Ross & Friedman LLP has represented the
undewriter in connection with other matters. Snow Becker Krauss P.C., New York,
New York, has acted as counsel for the Underwriters in connection with the
Offering.
EXPERTS
Our financial statements as of December 31, 1999 and for the years ended
December 31, 1999 and 1998 have been included in this prospectus in reliance on
the report of Angell & Deering, independent certified public accountants, as
given upon the authority of said firm as experts in accounting and auditing.
The financial statements for Suncoast Automation, Inc. as of December 31,
1999 and 1998 and for the years December 31, 1999 and 1998 have been included in
this prospectus in reliance on the report of Cherry, Bekaert & Holland, L.L.P.
given upon their authority as experts in accounting and auditing.
45
<PAGE>
ADDITIONAL INFORMATION
ProtoSource Corporation is subject to the informational requirements of the
Securities Exchange Act of 1934, and in accordance therewith files reports,
proxy or information statements and other information with the Securities and
Exchange Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
as well as at the following regional offices: Seven World Trade Center, New
York, New York 10048, and Citicorp Center, 500 W. Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C.20549, at prescribed rates. In addition, the Commission
maintains a web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the Commission's web site is http://www.sec.gov.
ProtoSource Corporation has filed with the Commission, a registration
statement on Form SB-2 under the Securities Act of 1933 with respect to the
common stock being offered hereby. As permitted by the rules and regulations of
the Commission, this prospectus does not contain all the information set forth
in the registration statement and the exhibits and schedules thereto. For
further information with respect to us and the common stock offered hereby,
reference is made to the registration statement, and such exhibits and
schedules. A copy of the registration statement, and the exhibits and schedules
thereto, may be inspected without charge at the public reference facilities
maintained by the Commission at the addresses set forth above, and copies of all
or any part of the registration statement may be obtained from such offices upon
payment of the fees prescribed by the Commission. In addition, the registration
statement may be accessed at the Commission's web site. Statements contained in
this prospectus as to the contents of any contract or other document are not
necessarily complete and, in each instance, reference is made to the copy of
such contract or document filed as an exhibit to the registration statement,
each such statement being qualified in all respects by such reference.
46
<PAGE>
TABLE OF CONTENTS
Section Page Number
------- -----------
Prospectus Summary
Risk Factors
Use of Proceeds
Price Range of Common Stock
Dividend Policy
Dilution
Capitalization
Selected Financial Data
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Business
Management
Summary Compensation Table
Security Ownership of Management and Certain Beneficial Owners
Description of Capital Stock
Shares Eligible for Future Sale
Underwriting
Legal Matters
Experts
Additional Information
Index to Financial Statements
47
<PAGE>
PROTOSOURCE CORPORATION
INDEX TO FINANCIAL STATEMENTS
Financial Statements Page
-------------------- ----
Proforma Unaudited Combined Financial Statements of
ProtoSource Corporation as of June 30, 2000 and for the
six months ended June 30, 2000 and for the year ended
December 31, 1999 F-2
Financial Statements of ProtoSource Corporation as of
June 30, 2000 (Unaudited) and December 31, 1999 and for
the six months ended June 30, 2000 and 1999 (Unaudited)
and for the years ended December 31, 1999 and 1998 F-8
Financial Statements of Suncoast Automation, Inc. as of
June 30, 2000 (Unaudited) and December 31, 1999 and 1998 and
for the six months ended June 30, 2000 and 1999 (Unaudited)
and for the years ended December 31, 1999 and 1998 F-26
F-1
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
UNAUDITED PROFORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 2000
The following unaudited proforma combined balance sheet gives effect to the
acquisition of Suncoast Automation, Inc. ("Suncoast") by ProtoSource Corporation
("Proto") in a transaction accounted for as a purchase. The proforma information
is presented for illustrative purposes only and is not necessarily indicative of
the operating results or financial position that would have occurred if the
acquisition had been consummated nor is it necessarily indicative of future
operating results or financial position. The unaudited proforma balance sheet
gives effect to the acquisition as if it had occurred on June 30, 2000. This
proforma balance sheet should be read in conjunction with the accompanying notes
and related historical financial statements and notes thereto of Proto and
Suncoast.
ASSETS Proforma Proforma
------ Proto Suncoast Adjustments Combined
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents $ 935,454 $ 127,651 $ -- $ 1,063,105
Accounts receivable 106,514 30,857 -- 137,371
Inventory -- 13,783 -- 13,783
Prepaid expenses and other 10,140 27,838 -- 37,978
Note receivable 500,000 -- (1)(500,000) --
------------ ------------ ------------ ------------
Total Current Assets 1,552,108 200,129 (500,000) 1,252,237
------------ ------------ ------------ ------------
Property and Equipment, at cost:
Equipment 979,613 657,647 -- 1,637,260
Furniture 147,533 44,818 -- 192,351
Leasehold improvements 6,462 -- -- 6,462
------------ ------------ ------------ ------------
1,133,608 702,465 -- 1,836,073
Less accumulated depreciation (919,558) (56,523) (1)56,523 (919,558)
------------ ------------ ------------ ------------
Net Property and Equipment 214,050 645,942 56,523 916,515
------------ ------------ ------------ ------------
Other Assets:
Intangible assets, net of amortization 2,040,706 -- (1)8,189,618 10,230,324
Investment in Corporation 1,800,000 -- -- 1,800,000
Deposits 20,867 -- -- 20,867
Deferred offering costs 35,000 -- -- 35,000
------------ ------------ ------------ ------------
Total Other Assets 3,896,573 -- 8,189,618 12,086,191
------------ ------------ ------------ ------------
Total Assets $ 5,662,731 $ 846,071 $ 7,746,141 $ 14,254,943
============ ============ ============ ============
The accompanying notes are an integral part of these
unaudited proforma combined condensed financial statements.
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
UNAUDITED PROFORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 2000
LIABILITIES AND STOCKHOLDERS' EQUITY Proforma Proforma
------------------------------------ Proto Suncoast Adjustments Combined
Current Liabilities: ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Accounts payable - trade $ 3,927 $ 126,019 $ -- $ 129,946
Accrued expenses 43,116 203,721 (1)400,000 646,837
Deferred revenue 23,206 15,299 -- 38,505
Notes payable -- 610,183 (1)(500,000) 110,183
Current portion of long-term debt 1,563,441 -- -- 1,563,441
------------ ------------ ------------ ------------
Total Current Liabilities 1,633,690 955,222 (100,000) 2,488,912
------------ ------------ ------------ ------------
Long-Term Debt, net of current portion above 26,920 -- -- 26,920
------------ ------------ ------------ ------------
Commitments and Contingencies -- -- -- --
Stockholders' Equity:
Preferred stock -- -- -- --
Common stock 13,150,885 119 (1)7,736,871 20,887,875
Additional paid in capital 28,158 781,147 (1)(781,147) 28,158
Accumulated deficit (9,176,922) (890,417) (1)890,417 (9,176,922)
------------ ------------ ------------ ------------
Total Stockholders' Equity 4,002,121 (109,151) 7,846,141 11,739,111
------------ ------------ ------------ ------------
Total Liabilities and Stockholders' Equity $ 5,662,731 $ 846,071 $ 7,746,141 $ 14,254,943
============ ============ ============ ============
The accompanying notes are an integral part of these
unaudited proforma combined condensed financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
UNAUDITED PROFORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
The following unaudited proforma combined statement of operations and per share
data gives effect to the acquisition of Suncoast by Proto in a transaction
accounted for as a purchase. The proforma information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the acquisition had
been consummated nor is it necessarily indicative of future operating results or
financial position. The unaudited proforma statement of operations gives effect
to the acquisition as if it had occurred on January 1, 2000. This proforma
statement of operations should be read in conjunction with the accompanying
notes and related historical financial statements and notes thereto of Proto and
Suncoast.
Proforma Proforma
Proto Suncoast Adjustments Combined
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 751,145 $ 102,253 $ -- $ 853,398
Operating expenses 1,345,201 397,985 -- 1,743,186
(2)634,515
Depreciation and amortization 504,626 49,542 (2)(49,542) 1,139,141
----------- ----------- ----------- -----------
Income (Loss) From Operations (1,098,682) (345,274) (584,973) (2,028,929)
----------- ----------- ----------- -----------
Other Income (Expense):
Interest expense (36,982) (41,964) -- (78,946)
Interest income and other 15,516 (6,873) -- 8,643
----------- ----------- ----------- -----------
Total Other Income (Expense) (21,466) (48,837) -- (70,303)
----------- ----------- ----------- -----------
Net Income (Loss) $(1,120,148) $ (394,111) $ (584,973) $(2,099,232)
=========== =========== =========== ===========
Net Income (Loss) Per Basic and
Diluted Share of Common Stock $ (.56) $ (.64)
Weighted Average Number of Basic and
Diluted Common Shares Outstanding 2,002,381 3,305,453
The accompanying notes are an integral part of these
unaudited proforma combined condensed financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
UNAUDITED PROFORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
The following unaudited proforma combined statement of operations and per share
data gives effect to the acquisition of Suncoast by Proto in a transaction
accounted for as a purchase. The proforma information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the acquisition had
been consummated nor is it necessarily indicative of future operating results or
financial position. The unaudited proforma statement of operations gives effect
to the acquisition as if it had occurred on January 1, 1999. This proforma
statement of operations should be read in conjunction with the accompanying
notes and related historical financial statements and notes thereto of Proto and
Suncoast.
Proforma Proforma
Proto Suncoast Adjustments Combined
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 1,125,225 $ 164,535 $ -- $ 1,289,760
Operating expenses 2,348,141 546,013 -- 2,894,154
(2)1,200,954
Depreciation and amortization 218,077 31,008 (2)(31,008) 1,419,031
----------- ----------- ----------- -----------
Income (Loss) From Operations (1,440,993) (412,486) (1,169,946) (3,023,425)
----------- ----------- ----------- -----------
Other Income (Expense):
Interest expense (16,763) (13,881) -- (30,644)
Interest income and other 164,116 (4,452) -- 159,664
----------- ----------- ----------- -----------
Total Other Income (Expense) 147,353 (18,333) -- 129,020
----------- ----------- ----------- -----------
Net Income (Loss) $(1,293,640) $ (430,819) $(1,169,946) $(2,894,405)
=========== =========== =========== ===========
Net Income (Loss) Per Basic and
Diluted Share of Common Stock $ (.72) $ (.94)
Weighted Average Number of Basic and
Diluted Common Shares Outstanding 1,789,453 3,092,525
The accompanying notes are an integral part of these
unaudited proforma combined condensed financial statements.
F-5
</TABLE>
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO UNAUDITED PROFORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
On August 22, 2000, Proto executed a Stock Exchange Agreement (the
"Agreement") to purchase all of the outstanding common stock of
Suncoast. The assets acquired consist of property and equipment,
accounts receivable, subscriber base, intellectual property rights
and various other assets. The purchase price was $7,736,990
consisting of 1,303,072 shares of the Company's common stock. The
Company also paid a finders fee of approximately $315,000 in
connection with the acquisition and estimated legal expenses and
other direct costs of the acquisition of $85,000 resulting in a
total purchase price of $8,136,990. The acquisition will be
accounted for as a purchase. A summary of the allocation of the
purchase price to the specific assets and liabilities acquired is as
follows:
Cash $ 127,651
Accounts receivable, inventory and
other current assets 72,478
Property and equipment 702,465
Goodwill, contract rights and other
intangible assets 8,189,618
Less liabilities assumed (955,222)
----------
Net Purchase Price $8,136,990
==========
In addition, Proto shall deposit 1,000,000 shares of its common
stock (the "Earnout Shares") with an Escrow Agent. The shares will
be held for a maximum of twenty seven months from the date of the
acquisition. The Earnout Shares may be earned by Suncoast's
shareholders upon meeting certain subscriber and cash flow
provisions over a twenty seven month period.
The proforma combined condensed balance sheet gives effect to the
acquisition of Suncoast in a transaction accounted for as a
purchase. The transaction is reflected in the proforma balance sheet
as if it occurred on June 30, 2000.
The proforma combined condensed statement of operations gives effect
to the acquisition of Suncoast in a transaction accounted for as a
purchase. The transaction is reflected in the proforma statement of
operations as if it occurred at the beginning of the period
presented.
2. Proforma Net Income (Loss) Per Share of Common Stock
----------------------------------------------------
The proforma net income (loss) per share of common stock is based on
the weighted average number of common shares outstanding after
giving effect to the shares issued for the acquisition.
3. Proforma Adjustments
--------------------
Adjustments to present the proforma combined condensed financial
statements are as follows:
F-6
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO UNAUDITED PROFORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
3. Proforma Adjustments (Continued)
--------------------------------
1. Record the acquisition of Suncoast for $7,736,990 in common
stock of the Company. The Company also paid a finders fee of
approximately $315,000 in connection with the acquisition and
estimates legal expenses and other direct costs of the
acquisition to be approximately $85,000 which are added to the
cost of the assets acquired.
2. Record amortization expense of goodwill and depreciation of
property and equipment recorded in the acquisition. The
goodwill is amortized over a seven year life. Also includes
reversal of depreciation and amortization expense of Suncoast
for the periods presented.
F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
ProtoSource Corporation
We have audited the accompanying balance sheet of ProtoSource Corporation as of
December 31, 1999 and the related statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 1999 and
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ProtoSource Corporation as of
December 31, 1999 and the results of its operations and its cash flows for the
years ended December 31, 1999 and 1998 in conformity with generally accepted
accounting principles.
/s/ Angell & Deering
--------------------
Angell & Deering
Certified Public Accountants
Denver, Colorado
February 17, 2000, except for
Note 14 as to which the date
is February 22, 2000
F-8
<PAGE>
PROTOSOURCE CORPORATION
BALANCE SHEETS
ASSETS
------
June 30, December 31,
2000 1999
----------- -----------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 935,454 $ 677,319
Accounts receivable:
Trade, net of allowance for doubtful
accounts of $15,000 and $39,698 106,514 97,752
Employees -- 5,000
Prepaid expenses 10,140 38,451
Note receivable 500,000 --
----------- -----------
Total Current Assets 1,552,108 818,522
----------- -----------
Property and Equipment, at cost:
Equipment 979,613 979,613
Furniture 147,533 147,533
Leasehold improvements 6,462 6,462
----------- -----------
1,133,608 1,133,608
Less accumulated depreciation and amortization (919,558) (846,439)
----------- -----------
Net Property and Equipment 214,050 287,169
----------- -----------
Other Assets:
Goodwill, net of accumulated amortization
of $110,022 and $32,020 671,711 762,165
Investment in corporation 1,800,000 1,800,000
Debt issuance costs, net of accumulated
amortization of $353,505 1,368,995 --
Deposits 20,867 17,325
Deferred offering costs 35,000 --
----------- -----------
Total Other Assets 3,896,573 2,579,490
----------- -----------
Total Assets $ 5,662,731 $ 3,685,181
=========== ===========
The accompanying notes are an integral
part of these financial statements.
F-9
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
Current Liabilities:
<S> <C> <C>
Accounts payable $ 3,927 $ 96,639
Accrued expenses:
Payroll taxes and wages 13,521 47,113
Other 29,595 49,750
Deferred revenue 23,206 6,911
Current portion of long-term debt 1,563,441 63,441
------------ ------------
Total Current Liabilities 1,633,690 263,854
------------ ------------
Long-Term Debt, net of current portion above:
Individuals and other 1,500,000 --
Obligations under capital leases 90,361 84,460
Less current portion above (1,563,441) (63,441)
------------ ------------
Total Long-Term Debt 26,920 21,019
------------ ------------
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, 2,175,395 and 1,879,332 shares
issued and outstanding 13,150,885 11,428,924
Additional paid in capital 28,158 28,158
Accumulated deficit (9,176,922) (8,056,774)
------------ ------------
Total Stockholders' Equity 4,002,121 3,400,308
------------ ------------
Total Liabilities and Stockholders' Equity $ 5,662,731 $ 3,685,181
============ ============
The accompanying notes are an integral
part of these financial statements.
F-10
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
STATEMENTS OF OPERATIONS
Six Months Ended June 30, Year Ended December 31,
-------------------------- -------------------------
2000 1999 1999 1998
----------- ----------- ----------- ----------
(Unaudited)
Net Revenues:
<S> <C> <C> <C> <C>
Internet service fees and other $ 751,145 $ 522,687 $ 1,125,225 $ 882,651
----------- ----------- ----------- -----------
Total Revenues 751,145 522,687 1,125,225 882,651
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative 1,005,136 772,802 1,835,744 966,528
Network lines 340,065 168,495 494,897 342,042
Depreciation and amortization 504,626 92,520 218,077 748,917
Stock compensation expense -- -- 17,500 10,658
----------- ----------- ----------- -----------
Total Operating Expenses 1,849,827 1,033,817 2,566,218 2,068,145
----------- ----------- ----------- -----------
Operating Loss (1,098,682) (511,130) (1,440,993) (1,185,494)
----------- ----------- ----------- -----------
Other Income (Expense):
Interest income 15,516 60,528 91,866 127,760
Interest expense (36,982) (15,619) (16,763) (705,021)
Rent and other income -- 105,000 72,250 73,479
Loss on disposal of assets -- -- -- (6,953)
----------- ----------- ----------- -----------
Total Other Income (Expense) (21,466) 149,909 147,353 (510,735)
----------- ----------- ----------- -----------
Income (Loss) Before
Provision For Income Taxes (1,120,148) (361,221) (1,293,640) (1,696,229)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net Loss $(1,120,148) $ (361,221) $(1,293,640) $(1,696,229)
=========== =========== =========== ===========
Net Loss Per Share of Common Stock:
Basic $ (.56) $ (.20) $ (.72) $ (1.24)
Diluted $ (.56) $ (.20) $ (.72) $ (1.24)
Weighted Average Number of
Common Shares Outstanding:
Basic 2,002,381 1,776,697 1,789,453 1,365,484
Diluted 2,002,381 1,776,697 1,789,453 1,365,484
The accompanying notes are an integral
part of these financial statements.
F-11
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND FOR
THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Common Stock Additional
------------------ Paid In Accumulated
Shares Amount Capital Deficit
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 665,333 $ 5,590,455 $ -- $ (5,066,905)
Issuance of common stock and
warrants in public offering
(net of offering costs of $1,166,846) 1,137,000 5,370,904 -- --
Repurchase of common stock
for cash (15,112) (77,165) -- --
Issuance of fractional shares
from 1997 stock splits 79 -- -- --
Compensation from issuance of
stock options to Directors -- -- 10,658 --
Net loss -- -- -- (1,696,229)
------------ ------------ ------------ ------------
Balance at December 31, 1998 1,787,300 10,884,194 10,658 (6,763,134)
Issuance of common stock upon
exercise of stock options 28,334 106,252 -- --
Repurchase of common stock for cash (15,112) (91,522) -- --
Compensation from issuance of
stock options -- -- 17,500 --
Issuance of common stock in
connection with acquisition 78,810 530,000 -- --
Net loss -- -- -- (1,293,640)
------------ ------------ ------------ ------------
Balance at December 31, 1999 1,879,332 11,428,924 28,158 (8,056,774)
Issuance of common stock upon
exercise of stock options (unaudited) 52,122 195,458 -- --
Issuance of common stock in
connection with financing (unaudited) 240,000 1,500,000 -- --
Issuance of common stock in
connection with acquisition (unaudited) 3,941 26,503 -- --
Net loss (unaudited) -- -- -- (1,120,148)
------------ ------------ ------------ ------------
Balance at June 30, 2000 (unaudited) 2,175,395 $ 13,150,885 $ 28,158 $ (9,176,922)
============ ============ ============ ============
The accompanying notes are an integral
part of these financial statements.
F-12
</TABLE>
<PAGE>
<TABLE>
*<CAPTION>
PROTOSOURCE CORPORATION
STATEMENTS OF CASH FLOWS
Six Months Ended June 30, Year Ended December 31,
------------------------- -----------------------
2000 1999 1999 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $(1,120,148) $ (361,221) $(1,293,640) $(1,696,229)
Adjustments to reconcile net loss to net cash
(used) by operating activities:
Depreciation and amortization 504,626 92,520 218,077 748,917
Provision for bad debts -- -- 32,198 173,000
Compensation from issuance of stock options -- -- 17,500 10,658
Loss on termination of capital lease -- -- -- 6,953
Changes in operating assets and liabilities:
Accounts receivable (8,762) (48,374) (75,851) (31,609)
Prepaid expenses and other assets 28,311 (20,941) 57,807 (34,550)
Accounts payable (53,757) (107,567) (25,079) 25,611
Accrued liabilities (53,747) 45,899 (2,689) (14,665)
Deferred revenue 16,295 (3,995) (6,836) 13,747
----------- ----------- ----------- -----------
Net Cash (Used) By Operating Activities (687,182) (403,679) (1,078,513) (798,167)
----------- ----------- ----------- -----------
Cash Flows From Investing Activities:
Purchase of property and equipment -- (28,957) (63,793) (54,082)
Payment for termination of capital lease -- -- -- (150,000)
Increase in note receivable (500,000) -- -- (24,999)
Increase in employee receivables 5,000 -- (5,000) --
Receipt of principal on note receivable -- -- -- 250,817
Deposits (3,542) -- (1,501) --
Investment in corporation -- (1,800,000) (1,800,000) --
Cash paid for acquisition -- -- (203,985) --
----------- ----------- ----------- -----------
Net Cash Provided (Used) By Investing Activities (498,542) (1,828,957) (2,074,279) 21,736
----------- ----------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from borrowing 1,541,028 -- -- --
Payments on notes payable (35,127) (31,667) (70,503) (828,095)
Issuance of common stock 195,458 -- 106,252 6,537,750
Offering costs incurred (35,000) -- -- (1,068,323)
Purchase of common stock -- (91,522) (91,522) (77,165)
Debt issuance costs incurred (222,500) -- -- --
----------- ----------- ----------- -----------
Net Cash Provided (Used) By Financing Activities 1,443,859 (123,189) (55,773) 4,564,167
----------- ----------- ----------- -----------
The accompanying notes are an integral
part of these financial statements.
F-13
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
STATEMENTS OF CASH FLOWS
Six Months Ended June 30, Year Ended December 31,
------------------------- -----------------------
2000 1999 1999 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Net Increase (Decrease) in Cash
and Cash Equivalents $ 258,135 $(2,355,825) $(3,208,565) $ 3,787,736
Cash and Cash Equivalents at
Beginning of Period 677,319 3,885,884 3,885,884 98,148
----------- ----------- ----------- -----------
Cash and Cash Equivalents at
End of Period $ 935,454 $ 1,530,059 $ 677,319 $ 3,885,884
=========== =========== =========== ===========
Supplemental Disclosure of Cash
Flow Information:
Cash paid during the period for:
Interest $ 7,387 $ 15,619 $ 16,763 $ 222,737
Income taxes -- -- -- 1,600
Supplemental Disclosure of Noncash
Investing and Financing Activities:
Acquisition of equipment under
capital leases $ -- $ -- $ -- $ 80,515
Issuance of common stock in
connection with acquisition 26,503 -- 530,000 --
Issuance of common stock in
connection with financing 1,500,000 -- -- --
The accompanying notes are an integral
part of these financial statements.
F-14
</TABLE>
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
------------------------------------------
Description of Business
-----------------------
ProtoSource Corporation, formerly SHR Corporation, doing business as
Software Solutions Company (the "Company"), was incorporated on July
1, 1988, under the laws of the state of California. The Company is
an Internet service provider. The Company provides dial-up Internet
access, web hosting services and web development services.
Unaudited Interim Financial Statements
--------------------------------------
The financial statements as of June 30, 2000 and for the six months
ended June 30, 2000 and 1999 are unaudited, however, in the opinion
of management of the Company, all adjustments (consisting solely of
normal recurring adjustments) necessary to a fair presentation of
the financial statements for the interim periods have been made.
Revenue Recognition
-------------------
The Company charges customers monthly access fees to the Internet
and recognizes the revenue in the month the access is provided. For
certain customers billed in advance, the Company recognizes the
revenue over the period the billing covers. Revenue for other
services provided, including web development services, are
recognized as the service is performed.
Cash and Cash Equivalents
-------------------------
For purposes of the statements of cash flows, the Company considers
all highly liquid investments with a maturity of three months or
less at the date of purchase to be cash equivalents.
Property and Equipment
----------------------
Depreciation and amortization of equipment, furniture and leasehold
improvements are computed using the straight-line method over
estimated useful lives of three to seven years. Assets held under
capital lease obligations, are amortized using the straight-line
method over the shorter of the useful lives of the assets or the
term of the lease. Depreciation of property and equipment charged to
operations was $190,896 and $220,168 for the years ended December
31, 1999 and 1998, respectively.
Amortization
------------
Goodwill is being amortized using the straight-line method over an
estimated useful life of 5 to 15 years.
Debt issuance costs are being amortized using the straight-line
method over the fifteen month term of the loans.
Investment
----------
The Company's investment is in a privately-held corporation which
represents less than a ten percent ownership interest in the
corporation. The Company's investment in the corporation is recorded
using the cost method of accounting. The Company reviews its
investment for impairment whenever events or changes in
circumstances indicate that the carrying value of its investment is
less than its cost. The Company utilizes publicly available market
information or other appropriate estimates determined by management
to evaluate impairment.
Stock-Based Compensation
------------------------
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation". The
Company will continue to measure compensation expense for its stock-
F-15
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued)
-----------------------------------------------------
Stock-Based Compensation (Continued)
-----------------------------------
based employee compensation plans using the intrinsic value method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees". See Note 8 for pro forma disclosures of net income and
earnings per share as if the fair value-based method prescribed by
SFAS No. 123 had been applied in measuring compensation expense.
Long-Lived Assets
-----------------
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the
Company reviews for the impairment of long- lived assets, certain
identifiable intangibles, and associated goodwill, whenever events
or changes in circumstances indicate that the carrying value of an
asset may not be recoverable. An impairment loss would be recognized
when the estimated future cash flows is less than the carrying
amount of the asset. No impairment losses have been identified by
the Company.
Advertising
-----------
The Company advertises primarily through radio, television and print
media. The Company's policy is to expense advertising costs,
including productions costs, as incurred. Advertising expense was
$123,841 and $29,820 for the years ended December 31, 1999 and 1998,
respectively.
Income Taxes
------------
Deferred income taxes are provided for temporary differences between
the financial reporting and tax basis of assets and liabilities
using enacted tax laws and rates for the years when the differences
are expected to reverse.
Net Income (Loss) Per Share of Common Stock
-------------------------------------------
The Company adopted 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 1999 and 1998 and the inclusion of stock
options and other incremental shares would be antidilutive. Options
and warrants to purchase 1,823,000 and 1,673,333 shares of common
stock at December 1999 and 1998, respectively were not included in
the computation of diluted earnings per share because the Company
had a net loss and their effect would be antidilutive.
Estimates
---------
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles requires the Company's
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
F-16
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Reclassifications
-----------------
Certain prior period amounts have been reclassified to conform with
the current period presentation.
2. Long-Term Debt
--------------
Obligations Under Capital Leases
--------------------------------
Long-term debt consists of the following:
15.4% to 23.0% installment notes due in 2000
to 2001, collateralized by equipment. $ 84,460
--------
Total Long-Term Debt 84,460
Less current portion of long-term debt (63,441)
--------
Long-Term Debt $ 21,019
========
Installments due on debt principal, including the capital leases, at
December 31, 1999 are as follows:
Year Ending
December 31,
------------
2000 $ 63,441
2001 21,019
--------
Total $ 84,460
========
3. Income Taxes
------------
The components of the provision for income taxes are as follows:
1999 1998
Current: ---- ----
Federal $ -- $ --
State -- --
-------- --------
Total -- --
-------- --------
Deferred:
Federal -- --
State -- --
-------- --------
Total -- --
-------- --------
Total Provision For Income Taxes $ -- $ --
======== ========
The provision for income taxes reconciles to the amount computed by
applying the federal statutory rate to income before the provision
for income taxes as follows:
1999 1998
---- ----
Federal statutory rate (25)% (25)%
State franchise taxes,
net of federal benefits (4) (4)
Valuation allowance 29 29
---- ----
Total --% --%
==== ====
F-17
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
3. Income Taxes (Continued)
------------------------
Significant components of deferred income taxes as of December 31,
1999 are as follows:
Net operating loss carryforward $ 2,291,200
Vacation accrual 4,100
Allowance for bad debts 13,600
Amortization of goodwill 5,900
Stock option compensation 6,000
-----------
Total Deferred Tax Asset 2,320,800
-----------
Accelerated depreciation (17,300)
-----------
Total Deferred Tax Liability (17,300)
Less valuation allowance (2,303,500)
-----------
Net Deferred Tax Asset $ --
===========
The Company has assessed its past earnings history and trends,
budgeted sales, and expiration dates of carryforwards and has
determined that it is more likely than not that no deferred tax
assets will be realized. The valuation allowance of $2,303,500 is
maintained on deferred tax assets which the Company has not
determined to be more likely than not realizable at this time. The
net change in the valuation allowance for deferred tax assets was an
increase of $356,200. The Company will continue to review this
valuation on a quarterly basis and make adjustments as appropriate.
At December 31, 1999, the Company had federal and state net
operating loss carryforwards of approximately $8,000,000 and
$3,800,000, respectively. Such carryforwards expire in the years
2007 through 2019 and 2000 through 2004 for federal and state
purposes, respectively.
4. Stockholders' Equity
--------------------
Public Stock Offering
---------------------
The closing for the Company's secondary offering occurred on May 20,
1998. The Company sold 1,137,000 units of the Company's securities
at $5.75 per unit and paid the Underwriter a 10% commission and a 3%
non-accountable expense allowance. Each unit consisted of one share
of the Company's common stock and one redeemable common stock
purchase warrant. Each warrant is exercisable to purchase one share
of common stock at $6.33 per share until May 13, 2003 and may be
redeemed by the Company anytime after May 13, 1999 if the closing
price of the Company's common stock is at least $8.63 per share for
20 consecutive trading days.
In connection with the offering, the Company issued the Underwriter
a warrant, for $10, to purchase up to 105,000 units which are
exercisable at $9.49 per unit (equal to 165% of the public offering
price of the Units). The Underwriter's warrant is exercisable
through May 13, 2003. The units subject to the Underwriter's warrant
are identical to the units sold to the public. The Company has also
retained the Underwriter as a financial consultant for a period of
one year at a monthly fee of $5,000 (a total of $60,000) which was
paid in full upon completion of the Offering. In May 1999, the
consulting agreement was extended for an additional two years at
$5,000 per month through May 2001.
F-18
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
5. Preferred Stock
---------------
The authorized preferred stock of the Company consists of 5,000,000
shares, no par value. The preferred stock may be issued in series
from time to time with such designation, rights, preferences and
limitations as the Board of Directors of the Company may determine
by resolution. The rights, preferences and limitations of separate
series of preferred stock may differ with respect to such matters as
may be determined by the Board of Directors, including without
limitation, the rate of dividends, method and nature of payment of
dividends, terms of redemption, amounts payable on liquidation,
sinking fund provisions (if any), conversion rights (if any), and
voting rights. Unless the nature of a particular transaction and
applicable statutes require approval, the Board of Directors has the
authority to issue these shares without shareholder approval.
6. Stock Options and Warrants
--------------------------
Incentive Stock Option Plan
---------------------------
In November 1994, the Company's Board of Directors authorized and
the shareholders approved, a stock option plan which provides for
the grant of incentive and nonqualified options to eligible officers
and key employees of the Company to purchase up to 150,000 shares of
the Company's common stock. The purchase price of such shares shall
be at least equal to the fair market value at the date of grant.
Such options vest at the discretion of the Board of Directors. The
stock option plan expires in 2004. Under the Company's stock option
plan, outstanding options vest over three years from the grant date
and are generally for a six year term.
The following table contains information on the stock options under
the Company's plan for the years ended December 31, 1998 and 1999.
The outstanding agreements expire from May 2004 to November 2005.
Weighted
Average
Number of Exercise
Shares Price
-------- --------
Options outstanding at December 31, 1997 $ -- $ --
Granted 56,750 5.75
Exercised -- --
Cancelled (2,750) 5.75
------- -------
Options outstanding at December 31, 1998 54,000 5.75
Granted 78,500 6.71
Exercised -- --
Cancelled (16,500) 5.75
------- -------
Options outstanding at December 31, 1999 116,000 $6.67
======= =======
1999 Executive Officers Stock Option Plan
-----------------------------------------
In May 1999, the Company's Board of Directors authorized a stock
option plan which provides for the grant of incentive and
nonqualified options to eligible officers and directors of the
Company to purchase up to 150,000 shares of the Company's common
stock. The purchase price of such shares shall be at least equal to
the fair market value at the date of grant. Such options vest at the
discretion of the Board of Directors. The stock option plan expires
in 2009. Under the Company's stock option plan, options are
generally for a six year term. The Company had previously granted
options to its Chief Executive Officer in 1996 which were added to
this stock option plan in May 1999 and are reflected as outstanding
at December 31, 1998 in the table below.
F-19
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
6. Stock Options and Warrants (Continued)
--------------------------------------
1999 Executive Officers Stock Option Plan (Continued)
-----------------------------------------------------
The following table contains information on the stock options under
the Company's plan for the year ended December 31, 1999. The
outstanding agreements expire from October 2001 to November 2005.
Weighted
Average
Number of Exercise
Shares Price
------- -------
Options outstanding at December 31, 1998 36,667 $3.75
Granted 100,000 6.88
Exercised -- --
Cancelled -- --
------- -------
Options outstanding at December 31, 1999 136,667 $6.04
======= =======
Financing Warrants
------------------
As a part of a restructuring of its operations in 1996, the Company
granted an Underwriter and a financial consulting firm warrants to
purchase common stock. The warrants are exercisable at $3.75 per
share for a four year period through October 31, 2001. In 1999
28,334 warrants were exercised and as of December 31, 1999, 158,333
warrants are outstanding.
Severance Warrants
------------------
The Company issued 20,000 warrants to a former officer in connection
with termination of his employment. The warrants are exercisable at
anytime after January 31, 2000 at $6.00 per share until November
2004.
Board of Directors Options
--------------------------
The Company issued 45,000 stock options to its three Non-Employee
Directors in October 1998. The options vest over a three year period
and are exercisable at $6.00 per share and the options are for a
five year term.
Warrants From Secondary Offering
--------------------------------
The Company issued warrants in connection with a secondary offering
of its common stock (Note 4).
7. Commitments and Contingencies
-----------------------------
Leases
------
The Company leases certain computer equipment and furniture and
fixtures under noncancellable capital leases. The Company leases its
facilities and certain computer equipment under noncancellable
operating leases. The Company's facilities lease contains a five
year renewal option.
The following is a schedule of future minimum lease payments at
December 31, 1999 under the Company's capital leases (together with
the present value of minimum lease payments) and operating leases
that have initial or remaining noncancellable lease terms in excess
of one year:
F-20
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
7. Commitments and Contingencies (Continued)
-----------------------------------------
Leases (Continued)
------------------
Year Ending Capital Operating
December 31, Leases Leases Total
------------ -------- -------- --------
2000 $ 73,678 $ 54,918 $128,596
2001 22,375 56,016 78,391
2002 -- 23,340 23,340
-------- -------- --------
Total Minimum Lease
Payments 96,053 $134,274 $230,327
======== ========
Less amount representing interest (11,593)
--------
Present Value of Net Minimum
Lease Payments $ 84,460
========
Rent expense amounted to approximately $72,081 and $62,703 for the
years ended December 31, 1999 and 1998, respectively.
Leased equipment under capital leases as of December 31, 1999 is as
follows:
Equipment $188,738
Less accumulated amortization (125,924)
--------
Net Property and Equipment Under Capital Lease $ 62,814
========
8. Stock-Based Compensation Plans
------------------------------
In accordance with the provisions of SFAS No. 123, the Company
applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for its plans
and does not recognize compensation expense for its stock-based
compensation plans other than for options granted to non-employees.
If the Company had elected to recognize compensation expense based
upon the fair value at the grant date for awards under these plans
consistent with the methodology prescribed by SFAS No. 123, the
Company's net income and earnings per share would be reduced to the
following pro forma amounts:
1999 1998
---- ----
Net Loss:
As reported $(1,293,640) $(1,696,229)
Pro forma $(1,388,153) $(1,732,742)
Net Loss Per Share of Common Stock:
As reported $ (.72) $ (1.24)
Pro forma $ (.78) $ (1.27)
These pro forma amounts may not be representative of future
disclosures since the estimated fair value of stock options is
amortized to expense over the vesting period and additional options
may be granted in future years. The fair value for these options was
estimated at the date of grant using the Black-Scholes option
pricing model with the following assumptions for the years ended
December 31, 1999 and 1998:
F-21
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
8. Stock-Based Compensation Plans (Continued)
------------------------------------------
1999 1998
---- ----
Risk free interest rate 5.99% 5.28%
Expected life 5.0 years 5.0 years
Expected volatility 38.18% 41.25%
Expected dividend yield 0% 0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different
from those of traded options, and because changes in subjective
input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide
a reliable single measure of the fair value of its employee
stock-based compensation plans.
The weighted average fair value price of options granted in 1999 and
1998 was $2.92 and $2.48, respectively.
The following table summarizes information about the Company's
stock-based compensation plans outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life-Years Price Exercisable Price
------ ----------- ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$3.75 - 5.50 36,667 1.84 $3.75 36,667 $3.75
$5.75 - 7.00 216,000 5.59 $6.62 12,500 $5.75
------------ ------- ---- ----- ------ -----
$3.75 - 7.00 252,667 5.05 $6.20 49,167 $4.26
============ ======= ==== ===== ====== =====
</TABLE>
Compensation Expense
--------------------
The Company recorded compensation expense of $17,500 and $10,658 for
the years ended December 31, 1999 and 1998, respectively, for the
value of certain options granted to officers and Directors of the
Company. The valuation of the options and warrants granted to
employees is based on the difference between the exercise price and
the market value of the stock on the measurement date. The valuation
of the options granted to non-employees is estimated using the
Black-Scholes option pricing model.
9. Concentration of Credit Risk
----------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and accounts receivable. The Company places its cash
equivalents and short term investments with high credit quality
financial institutions and limits its credit exposure with any one
financial institution. The Company provides credit, in the normal
course of business, to a large number of companies in the Internet
services industry. The Company's accounts receivable are due from
customers located in California and throughout the United States.
The Company performs periodic credit evaluations of its customers'
financial condition and generally requires no collateral. The
F-22
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
9. Concentration of Credit Risk (Continued)
----------------------------------------
Company maintains reserves for potential credit losses, and such
losses have not exceeded management's expectations.
10. Employee Benefit Plan
---------------------
Effective May 29, 1997, the Company adopted a 401(K) savings plan
for employees who are not covered by any collective bargaining
agreement, have attained age 21 and have completed one year of
service. Employee and Company matching contributions are
discretionary. The Company made matching contributions of $2,364 and
$3,070 for the years ended December 31, 1999 and 1998, respectively.
Company contributions vest as follows:
Years of Service Percent Vested
---------------- --------------
1 33%
2 66%
3 100%
11. Acquisition
-----------
On October 28, 1999, the Company purchased the Internet subscriber
base and Web hosting subscriber base from MicroNet Services, Inc.
("MicroNet"), a New Haven, Connecticut based Internet service
provider. The Company paid cash of $132,500 and issued 78,810 shares
of the Company's common stock valued at $530,000. The Company also
incurred an additional $38,955 in cash and common stock which is
payable in 2000 for certain post-closing adjustments which was
accrued in 1999. The Company also incurred legal, accounting,
finders fees and other direct costs related to the acquisition of
approximately $71,485. The acquisition was accounted for using the
purchase method of accounting. Results of the acquired entity are
included in the Company's operations commencing on the acquisition
date.
The following presents the unaudited proforma results of operations
as if the acquisition of MicroNet occurred on January 1 of each
year. The proforma information does not purport to be indicative of
the results that actually would have been obtained if the operations
had been combined during the years presented and is not intended to
be a projection of future results.
1999 1998
---- ----
(Unaudited) (Unaudited)
Net sales $ 1,966,563 $ 1,795,788
Net income (loss) (1,363,349) (2,026,020)
Net income (loss) per
share of common stock (.73) (1.40)
12. Fair Value of Financial Instruments
-----------------------------------
Disclosures about Fair Value of Financial Instruments for the
Company's financial instruments are presented in the table below.
These calculations are subjective in nature and involve
uncertainties and significant matters of judgment and do not include
income tax considerations. Therefore, the results cannot be
determined with precision and cannot be substantiated by comparison
to independent market values and may not be realized in actual sale
or settlement of the instruments. There may be inherent weaknesses
in any calculation technique, and changes in the underlying
assumptions used could significantly affect the results. The
following table presents a summary of the Company's financial
instruments as of December 31, 1999:
F-23
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
12. Fair Value of Financial Instruments (Continued)
-----------------------------------------------
1999
-----------------------
Carrying Estimated
Amount Fair Value
-------- --------
Financial Assets:
Cash and cash equivalents $677,319 $677,319
Financial Liabilities:
Long-term debt 84,460 84,460
The carrying amounts for cash and cash equivalents, receivables,
accounts payable and accrued expenses approximate fair value because
of the short maturities of these instruments. The fair value of
long-term debt, including the current portion, approximates fair
value because of the market rate of interest on the long-term debt
and the interest rate implicit in the obligations under capital
leases.
13. Proposed Acquisition
--------------------
In December 1999, the Company entered into a nonbinding letter of
intent to acquire certain assets of Innovative Software Designs,
Inc. ("Innovative"), an Internet service provider in Minnesota.
Innovative has filed for protection from creditors pursuant to
chapter eleven of the United States Bankruptcy Code. The Company
will acquire Innovative's subscriber base and certain intangible
assets for an aggregate purchase price of approximately $2,600,000
plus 50% of Innovative's gross revenues for a period of 90 days
following the closing date. $1.6 million of the purchase price shall
be paid in cash and $1 million will be paid in shares of the
Company's stock at the thirty day average of the closing price of
the common stock prior to closing.
14. Proposed Public Stock Offering
------------------------------
On February 22, 2000, the Company executed a letter of intent with
an Underwriter to offer 800,000 shares of the Company's common stock
at approximately $6.25 per share on a firm commitment basis. The
Company will also grant the Underwriter an option to purchase an
additional 120,000 shares from the Company to cover over-allotments
for a period of forty-five days from the effective date of the
Registration Statement.
The Company will pay the Underwriter a commission equal to ten
percent of the gross proceeds of the offering and a non-accountable
expense allowance equal to three percent of the gross proceeds of
the offering. In connection with the offering, the Company has
agreed to issue the Underwriter a warrant, for $10, to purchase up
to 80,000 shares of common stock. The Underwriter's warrant is
exercisable for a period of four years beginning one year from the
effective date of the Registration Statement. The exercise price of
the Underwriter's warrant shall be an amount equal to 120% of the
price of the shares sold to the public. There can be no assurance
that the Offering will be successfully completed.
The Underwriter has also agreed to act as placement agent for a
minimum $1,000,000 bridge financing on a best efforts basis prior to
the public offering described above. The bridge financing is to be
in the form of units which would contain promissory notes with
interest at 10% to 12%. In addition, each $25,000 unit would contain
such number of shares of the Company's common stock equal to $25,000
divided by the closing stock price on the closing date for the
bridge financing. The promissory notes will be due at the closing
F-24
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
14. Proposed Public Stock Offering (Continued)
------------------------------------------
of the above public offering or one year from the date of issuance,
whichever occurs first. The Underwriter will be paid a 10%
commission and a 3% nonaccountable expense allowance and warrants to
purchase up to 10% of the common stock issuable as part of the units
at an exercise price equal to 120% of the closing price of the
common stock on the day prior to closing.
15. Subsequent Events (Unaudited)
-----------------------------
Proposed Acquisitions
---------------------
In May 2000, the Company terminated its letter of intent to purchase
Innovative.
On August 22, 2000, the Company acquired all of the outstanding
common stock of Suncoast Automation, Inc. ("Suncoast") in exchange
for 1,303,072 shares of the Company's common stock, which is valued
at approximately $7,736,990. The Company also paid a finders fee of
$315,000 in connection with the acquisition and estimates legal
expenses and other direct costs of the acquisition to be
approximately $85,000. The acquisition will be accounted for as a
purchase. In addition, the Company will deposit 1,000,000 shares of
its common stock (the "Earnout Shares") with an Escrow Agent. The
shares will be held for a maximum of twenty seven months from the
date of acquisition. The Earnout Shares may be earned by Suncoast's
shareholders upon meeting certain subscriber and cash flow
provisions over a twenty seven month period. If the criteria for
issuance of the Earnout Shares are met the fair market value of the
shares issued will be added to goodwill as an additional element of
the cost of Suncoast.
Bridge Loan Financing
---------------------
The Company completed a private placement of $1,500,000 of bridge
loan financing in May 2000. The bridge 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 the Company's common
stock which were valued at $6.25 per share. The value of the common
stock, commissions and other debt issuance costs will be amortized
over the one year term of the notes. The promissory notes are due at
the closing of the public offering described below, or one year from
the date of issuance, whichever occurs first.
Proposed Public Stock Offering
------------------------------
The Company entered into a new letter of intent with an Underwriter
to offer 600,000 units of the Company's securities at approximately
$12.00 to $15.00 per unit on a firm commitment basis. Each unit
consists of two shares of common stock and one class B common stock
purchase warrant. The Company will also grant the Underwriter an
option to purchase an additional 90,000 units from the Company to
cover over-allotments for a period of forty-five days from the
effective date of the Registration Statement.
The Company will pay the Underwriter a commission equal to ten
percent of the gross proceeds of the offering and a non-accountable
expense allowance equal to three percent of the gross proceeds of
the offering. In connection with the offering, the Company has
agreed to issue the Underwriter a warrant, for $10, to purchase up
to 60,000 units of the Company's securities. The Underwriter's
warrant is exercisable for a period of four years beginning one year
from the effective date of the Registration Statement. The exercise
price of the Underwriter's warrant shall be an amount equal to 120%
of the price of the units sold to the public. There can be no
assurance that the Offering will be successfully completed.
F-25
<PAGE>
SUNCOAST AUTOMATION, INC.
Financial Statements
December 31, 1999 and 1998
Contents
Page
----
Report of Independent Certified Public Accountants F-27
Balance Sheets F-28
Statements of Operations F-29
Statements of Changes in Stockholders' Deficit F-30
Statements of Cash Flows F-31
Notes to Financial Statements F-32
F-26
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Stockholders
Suncoast Automation, Inc.
Oldsmar, Florida
We have audited the accompanying balance sheets of Suncoast Automation, Inc. as
of December 31, 1999 and 1998 and the related statements of operations, changes
in stockholders' deficit, and cash flows for the year ended December 31, 1999
and the period from inception through December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Suncoast Automation, Inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the year and period then ended, in conformity with generally accepted
accounting principles.
/s/ Cherry, Bekaert & Holland, L.L.P.
St. Petersburg, Florida
May 26, 2000, except Notes 5 and 12
which are dated August 14, 2000
F-27
<PAGE>
<TABLE>
<CAPTION>
SUNCOAST AUTOMATION, INC.
Balance Sheets
December 31,
June 30, ----------------------
2000 1999 1998
--------- --------- ---------
(unaudited)
<S> <C> <C> <C>
Current assets
Cash $ 127,651 $ 9,541 $ 102
Accounts receivable 30,857 62,805 --
Inventory 13,783 13,783 --
Prepaid expenses 27,838 17,768 --
--------- --------- ---------
Total current assets 200,129 103,897 102
--------- --------- ---------
Property and equipment - net 645,942 385,247 1,652
Intangible assets - net -- 12,035 --
--------- --------- ---------
Total assets $ 846,071 $ 501,179 $ 1,754
========= ========= =========
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable $ 126,019 $ 113,749 $ 33,222
Accrued payroll 196,221 76,760 --
Deferred revenue 15,299 -- --
Accrued interest 7,500 24,881 --
Notes payable 550,000 715,000 --
Stockholder note payable 60,183 60,183 --
--------- --------- ---------
Total current liabilities 955,222 990,573 33,222
Committments and contingencies -- -- --
Stockholders' deficit
Preferred stock -- -- --
Common stock 119 100 85
Paid in capital 781,147 6,812 --
Accumulated deficit (890,417) (496,306) (31,553)
--------- --------- ---------
Total stockholders' deficit (109,151) (489,394) (31,468)
--------- --------- ---------
Total liabilities and
stockholders' deficit $ 846,071 $ 501,179 $ 1,754
========= ========= =========
See notes to financial statements
F-28
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUNCOAST AUTOMATION, INC.
Statements of Operations
For the period from inception through
For the six-month periods December 31, 1998 and for the
ended June 30, year ended December 31, 1999
------------------------- ----------------------------
2000 1999 1999 1998
--------- --------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue
Sales $ 102,253 $ 44,841 $ 164,535 $ 16,203
Less cost of goods sold 83,258 1,307 65,236 26,399
--------- --------- --------- ---------
Gross profit (loss) 18,995 43,534 99,299 (10,196)
Operating expenses
Selling, general and
administrative expenses 364,269 80,426 511,785 17,019
--------- --------- --------- ---------
Loss from operations (345,274) (36,892) (412,486) (27,215)
--------- --------- --------- ---------
Other income (expense)
Interest income 2,423 -- 3,718 --
Interest expense (41,964) -- (13,881) --
Other expense (9,296) -- (8,170) --
--------- --------- --------- ---------
Total other
income (expense) (48,837) -- (18,333) --
--------- --------- --------- ---------
Net loss $(394,111) $ (36,892) $(430,819) $ (27,215)
========= ========= ========= =========
See notes to financial statements
F-29
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUNCOAST AUTOMATION, INC.
Statements of Changes in Stockholders' Deficit
Preferred stock Common stock
---------------------- ---------------------- Paid in Accumulated
Shares Amount Shares Amount Capital Deficit Total
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning balances -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock -- -- 85,000 85 -- -- 85
Net income (loss) from inception
through December 31, 1998 -- -- -- -- -- (27,215) (27,215)
Distributions in 1998 -- -- -- -- -- (4,338) (4,338)
--------- --------- --------- --------- --------- --------- ---------
Balances, December 31, 1998 -- -- 85,000 85 -- (31,553) (31,468)
Exchange of common stock -- -- (85,000) (85) -- -- (85)
Issuance of common stock -- -- 100,000 100 -- -- 100
Contributions -- -- -- -- 6,812 -- 6,812
Net income (loss) for 1999 -- -- -- -- -- (430,819) (430,819)
Distributions in 1999 -- -- -- -- -- (33,934) (33,934)
--------- --------- --------- --------- --------- --------- ---------
Balances, December 31, 1999 -- -- 100,000 100 6,812 (496,306) (489,394)
Conversion of note payable -- -- 9,728 10 774,335 -- 774,345
Exercise of options -- -- 9,000 9 -- -- 9
Net loss for the six months
ended June 30, 2000 -- -- -- -- -- (394,111) (394,111)
--------- --------- --------- --------- --------- --------- ---------
Balances, June 30,
2000 (unaudited) -- $ -- 118,728 $ 119 $ 781,147 $(890,417) $(109,151)
========= ========= ========= ========= ========= ========= =========
See notes to financial statements
F-30
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUNCOAST AUTOMATION, INC.
Statements of Cash Flows
For the period from
inception through
For the six-month periods December 31, 1998 and for the
ended June 30, year ended December 31, 1999
------------------------- ----------------------------
2000 1999 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities (unaudited) (unaudited)
Reconciliation of net income to net cash
used in operating activities
Net loss $(394,111) $ (36,892) $(430,819) $ (27,130)
Adjustments to reconcile net income to net
cash used in provided by operating activities:
Depreciation and amortization 49,542 216 31,008 43
Decrease (Increase) in accounts receivable 31,948 -- (62,805) --
Increase in inventories -- -- (6,956) --
Increase in prepaid expenses (10,070) (6,000) (17,768) --
Increase (Decrease) in accounts payable 12,270 (32,406) 80,527 33,222
Increase in accrued expenses and other 176,723 -- 101,641 --
--------- --------- --------- ---------
Net cash used in operating activities (133,698) (75,082) (305,172) 6,135
--------- --------- --------- ---------
Cash flows from investing activities
Capital expenditures (298,192) (41,784) (402,568) (1,695)
--------- --------- --------- ---------
Net cash used in investing activities (298,192) (41,784) (402,568) (1,695)
--------- --------- --------- ---------
Cash flows from financing activities
Proceeds from long-term debt borrowings 550,000 80,000 715,000 --
Proceeds from stockholder notes payable -- 83,800 60,183 --
Debt issuance costs -- -- (24,070) --
Distributions to stockholders -- (31,934) (33,934) (4,338)
--------- --------- --------- ---------
Net cash provided by financing activities 550,000 131,866 717,179 (4,338)
--------- --------- --------- ---------
Net increase in cash 118,110 15,000 9,439 102
Cash at beginning of period 9,541 102 102 --
--------- --------- --------- ---------
Cash at end of period $ 127,651 $ 15,102 $ 9,541 $ 102
========= ========= ========= =========
Cash paid for interest $ -- $ -- $ -- $ --
========= ========= ========= =========
Non-cash financing activities
Stockholder contribution of inventory $ -- $ -- $ 6,812 $ --
========= ========= ========= =========
See notes to financial statements
F-31
</TABLE>
<PAGE>
SUNCOAST AUTOMATION, INC.
Notes to Financial Statements
December 31, 1999 and 1998
Note 1 - Summary of significant accounting policies
---------------------------------------------------
Financial statement presentation
--------------------------------
The financial statements include the activities of Suncoast Home Automation,
Inc. (Home) and Suncoast Automation, Inc. (Auto), collectively known as "the
Company", for the period from Home's inception, May 23, 1998 through and as of
December 31, 1998. In 1999, the companies merged as described in Note 2 and,
accordingly, the activities of Home and Auto are included in the 1999 financial
statements.
In management's opinion, the financial information as of and for the six month
period ended June 30, 2000 and 1999 which is unaudited, reflects all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the financial information for those interim periods. Operating
results for the six month periods ended June 30, 2000 and 1999, are not
necessarily indicative of the results that may be expected in future periods.
Revenue recognition
-------------------
The company recognizes revenue from service contracts in the period in which the
service is provided.
Cash equivalents
----------------
For the purpose of the statement of cash flows, Suncoast Automation, Inc. (the
Company) considers all short-term debt instruments purchased with a maturity of
three months or less to be cash equivalents. At December 31, 1999, the Company
owned no cash equivalents.
Allowance for uncollectible accounts
------------------------------------
The Company provides an allowance for uncollectible accounts based upon prior
experience and management's assessment of the collectibility of specific
accounts. There was no amount provided for uncollectible accounts at December
31, 1999 and 1998. All accounts were deemed collectible.
Inventory
---------
Inventory consists of parts for replacement of existing cable systems and is
stated at the lower of cost (first-in, first-out) or market.
Property and equipment
----------------------
Property and equipment are stated at cost. Construction costs, including
interest during construction and applicable overhead, are capitalized.
Provisions for depreciation are determined on the straight-line method, over the
estimated useful lives of the related assets ranging from five to seven years.
F-32
<PAGE>
SUNCOAST AUTOMATION, INC.
Notes to Financial Statements - continued
December 31, 1999 and 1998
Note 1 - Summary of significant accounting policies -continued
--------------------------------------------------------------
Maintenance and repairs are charged to operating expenses as incurred, and
renewals and betterments are capitalized. Any gains and losses on the sale of
property are reflected in current operations. The Company reviews its long-lived
assets and certain identifiable intangibles to be held and used by the Company
for impairment whenever events or changes in circumstances indicate their
carrying amount may not be recoverable. In so doing, the Company estimates the
future net cash flows expected to result from the use of the asset and its
eventual disposition. If the sum of the expected future net cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized to reduce the asset to its estimated
fair value. Otherwise, an impairment loss is not recognized. Long-lived assets
and certain identifiable intangibles to be disposed of, if any, are reported at
the lower of carrying amount or fair value less cost to sell.
Intangible assets
-----------------
Intangible assets consist of debt issuance costs. Amortization of debt issuance
costs is provided over the term of the loan on a straight line basis which is
not materially different from the interest method. Accumulated amortization at
December 31, 1999 is $12,035.
Income taxes
------------
Income taxes are accounted for according to Statement of Financial Accounting
Standards No. 109, (SFAS 109). The statement requires the use of an asset and
liability approach for the recognition of income taxes. Deferred tax assets and
liabilities are recorded for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns. In
estimating future tax consequences, SFAS 109 generally considers all expected
future events.
Use of estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-33
<PAGE>
SUNCOAST AUTOMATION, INC.
Notes to Financial Statements - continued
December 31, 1999 and 1998
Note 1 - Summary of significant accounting policies -continued
--------------------------------------------------------------
Advertising
-----------
Advertising costs are expensed as incurred and totaled $1,924 and $0 for the
year and period ended December 31, 1999 and 1998, respectively.
Stock option plan
-----------------
The Company applies the provisions of Accounting Principles Board Opinion No. 25
in accounting for the plan and accordingly, no compensation expense has been
recognized in connection with the granting of the stock options. In accordance
with SFAS No. 123, Accounting for Stock-Based Compensation, the Company adopted
the disclosure - only option and elected to apply the provisions of APB No. 25
for financial statement purposes.
Note 2 - Organization and merger
--------------------------------
Suncoast Home Automation, Inc. (Home) incorporated in Florida as an "S"
corporation on May 23, 1998. Suncoast Automation, Inc. (Auto) incorporated on
June 29, 1999 as a Delaware "C" corporation. On July 8, 1999 a plan of merger
was effected with Home whereby Auto was the surviving corporation. The
shareholders of Home received one share of Auto for each Home share of stock. A
total of 85,000 shares were exchanged. Shareholders of Auto who were also
shareholders of Home owned 100% of the outstanding shares of Home prior to the
merger and 85% of Auto immediately following the merger. At the time of the
merger, Auto had no assets or liabilities and had not begun operations. The
merger was accounted for as a transfer between entities under common control
similar to a pooling of interests.
Note 3 - Nature of business
---------------------------
The Company, headquartered in Oldsmar, Florida, was incorporated in June 1999 as
a Delaware corporation. The Company provides interactive cable television
systems and services to the timeshare resort industry. Currently, the Company
operates systems, under contracts for generally seven years, in Scottsdale,
Arizona, Williamsburg, Virginia, St. Croix, U.S. Virgin Islands and Sint
Marteen. The Company also has a service agreement with an amusement park in
Orlando, Florida.
F-34
<PAGE>
SUNCOAST AUTOMATION, INC.
Notes to Financial Statements - continued
December 31, 1999 and 1998
Note 4 - Property and equipment
-------------------------------
Property and equipment and related allowance for depreciation are summarized as
follows:
Useful
1999 1998 Life (yrs.)
--------- --------- -----------
Cable system equipment - on site $ 352,758 $ -- 5 - 7
Office equipment and furnishings 36,643 1,695 7
Computers 14,862 -- 5
--------- ---------
404,263 1,695
Less accumulated depreciation (19,016) (43)
--------- ---------
Property and equipment, net $ 385,247 $ 1,652
========= =========
Note 5 - Note payable
---------------------
Note payable consists of a secured convertible note payable dated July 19, 1999
with interest compounded monthly at 8% per annum. Security for the note includes
the Company's rights to and interests in certain agreements and future income
derived therefrom. No principal or interest payments are due until maturity,
July 19, 2000. The holder of the note has the right to convert the note, any
time prior to the maturity date, into approximately ten percent of the Company's
outstanding shares. In May 2000, the holder converted this debt into 9,728
shares of common stock. The holder of the note also owns a warrant for the
purchase of an additional 6,383 shares of the Company's common stock for $.01
per share. This warrant is exercisable until July, 19, 2009. The holder of the
note also has an option to purchase additional common stock up to approximately
ten percent of the then existing authorized shares for up to $1.1 million.
Interest expense for 1999 was $13,881 which is net of capitalized interest of
$11,000.
In May 2000, the Company entered into a senior secured promissory note agreement
with Protosource, Inc. for $500,000. The note is payable at the earliest of one
year, at the time of any public or private debt offering greater than two
million dollars or if the Company's stock is exchanged for another company's
stock. Interest is accruing at 12% and is payable at maturity. The note is
secured with 91,000 shares of the Company's stock owned by individuals.
Protosource, Inc. has also entered into a binding agreement with the Company for
the purchase of the Company's stock.
F-35
<PAGE>
SUNCOAST AUTOMATION, INC.
Notes to Financial Statements - continued
December 31, 1999 and 1998
Note 6 - Notes payable - stockholder
------------------------------------
A stockholder of the Company advanced funds to the Company for cash flow needs.
There are no stated terms for repayment.
Note 7 - Income taxes
---------------------
The Company has available a net operating loss carryforward, generated in 1999,
of approximately $350,000 which will expire in 2019. This net operating loss can
be carried forward to reduce future taxable income of an equal amount with a
potential tax effect of approximately $140,000. No asset has been recocognized
in these financial statements relating to this carryforward due to the
uncertainty of the ultimate realization and timing of taxable income to offset.
This valuation was recorded because management's estimates of the realization of
the benefits are more likely than not to result in less than full utilization of
the losses due to the start up nature of the business and having no history of
profitable operations. The Company's tax returns, not barred by statute, are
subject to audit and possible adjustment.
Note 8 - Lease commitments
--------------------------
The Company leases office space in Oldsmar, Florida under an operating lease for
a three year term ending in July 2002 at a base annual rent of $18,000 per year
and increased by five percent in each subsequent year. Minimum lease commitments
are as follows:
Year ending
December 31
-----------
2000 $18,450
2001 19,373
2002 9,922
Note 9 - Capitalization
-----------------------
The Company is authorized to issue 2,000,000 shares of common stock with a par
value of $.001 per share. Common stock issued and outstanding at December 31,
1999 is 100,000 shares. The Company is also authorized to issue 500,000 shares
of preferred stock with a par value of $.001 per share. At December 31, 1999
there were no shares of preferred stock issued or outstanding.
F-36
<PAGE>
SUNCOAST AUTOMATION, INC.
Notes to Financial Statements - continued
December 31, 1999 and 1998
Note 10 - Major customers
-------------------------
Approximately seventy percent of the Company's sales for 1999 were to one
customer. On May 31, 2000 the parent corporation of this customer filed for
protection under current bankruptcy laws. The Company's customer contracts
directly with homeowner associations where the service is provided. Accounts
receivable from this customer at June 30, 2000 were $28,629 (unaudited).
Accounts receivable from this customer at December 31, 1999 were $31,395 all of
which was collected in 2000. The Company's customer is a profitable segment of
the entity under bankruptcy. The Company has not experienced any cash flow or
operational difficulties with this customer and does not anticipate any
difficulties in the future due to the contractual relationships between the
Company, the customer and the related homeowner associations. Management
believes there will be no significant adverse impact on its operations as a
result of these actions. The remainder of the Company's sales are to another
customer.
Note 11 - Stock option plan
---------------------------
On July 29, 1999, the Company's shareholders approved the Suncoast Automation,
Inc. Formation Stock Incentive Plan that provided the issuance of 9,000 options
for key employees to purchase the Company's common stock. As of December 31,
1999, 9,000 shares had been awarded under the plan at an exercise price of $.001
per share. The exercise price of each option approximates the fair market value
of the Company's common stock at the date of the grants. One half of the options
vest on January 1, 2000 and the remaining half vest on January 1, 2001. Certain
acceleration clauses exist. The options expire on July 27, 2009. Due to the
start up nature of the Company at the grant date of the options, no compensation
expense has been assigned to the options, and the fair value of the options
granted is considered immaterial.
Note 12 - Liquidity
-------------------
At December 31, 1999, the Company has a deficiency in assets of $490,000,
current liabilities of $990,000 and successive years of losses. However,
management has taken certain actions to obtain additional capital and improve
liquidity. Certain liabilities totaling $740,000 were converted to equity
subsequent to December 31, 1999. Also, additional loans were obtained with
repayment terms extending beyond 2000. In addition, start up costs and
non-recurring expenses were incurred in 1999 which are not anticipated in the
future. The Company also has long term contracts for cable services that will
produce revenues sufficient to cover operating costs at a minimum funding level.
Management has entered into a binding agreement with a third party for the
purchase of its stock which will provide access to additional sources of funds.
Management believes the conversion of debt to equity already completed, along
with existing operating contracts are adequate to fund operations at the current
level. Management also believes that other potential sources of funds will
provide sufficient capital resources to fund expansion. However, there can be no
assurances that such potential sources of funds will be obtained or that they
will be adequate to fund expanded operations.
F-37
<PAGE>
================================================================================
600,000 UNITS
PROTOSOURCE CORPORATION
-----------------
PROSPECTUS
-----------------
KASHNER DAVIDSON SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS _____________ [ ], 2000
================================================================================
<PAGE>
[ALTERNATE PAGE FOR SELLING STOCKHOLDERS PROSPECTUS]
PROTOSOURCE CORPORATION
Cross Reference Sheet
Form SB-2 Item Number and Caption Captions In Prospectus
1. Front of Registration Statement and
Outside Front Cover of Prospectus Cover Page
2. Inside Front and Outside Back Cover Cover Page, Inside Cover Page,
Pages of Prospectus Outside Back Page
3. Summary Information and Risk Factors Prospectus Summary, Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Cover Page, Risk Factors
6. Dilution Dilution
7. Selling Securityholders Selling Stockholders, Plan of
Distribution
8. Plan of Distribution Prospectus Summary, Selling
Stockholders, Plan of Distribution
9. Legal Proceedings Business
10. Directors, Executive Officers, Management, Security Ownership of
Promoters and Control Persons Management and Certain Beneficial
Owners
11. Security Ownership of Certain Security Ownership of Management
Beneficial Owners and Management and Certain Beneficial Owners
12. Description of Securities Description of Capital Stock
13. Interest of Named Experts and Counsel Legal Matters, Experts
14. Disclosure of Commission Position on Management
Indemnification for Securities Act
Liabilities
15. Organization Within Last Five Years Not Applicable
16. Description of Business Prospectus Summary, Business
17. Management's Discussion and Analysis Management's Discussion and
or Plan of Operation Analysis of Financial Condition and
Results of Operations
18. Description of Property Business
19. Certain Relationships and Related Not Applicable
Transactions
20. Market for Common Equity and Related Front Cover Page, Description of
Shareholder Matters Capital Stock
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Not Applicable
Accounts on Accounting and Financial
Disclosure
<PAGE>
[ALTERNATE PAGE FOR SELLING STOCKHOLDERS PROSPECTUS]
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
Prospectus Subject To Completion
--------------------------------
PROTOSOURCE CORPORATION
816,418 Shares of Common Stock
This prospectus relates to the possible sale, from time to time, by the
selling stockholders of Protosource of up to 816,418 shares of our common stock.
Please see the "Selling Stockholders" section in this prospectus for a complete
description of all of the selling stockholders.
There is no underwriter or coordinating broker acting in connection with
this offering of common shares by our selling stockholders.
We will not receive any proceeds from sales by our selling stockholders.
Concurrently with the commencement of this offering, we are offering by
separate prospectus, 600,000 units, each unit consisting of 2 shares of our
common stock and 1 class B common stock purchase warrant through Kashner
Davidson Securities Corporation on a firm commitment basis. The class B common
stock purchase warrants entitles the holder to purchase one share of our common
stock at an exercise price of $___ per share at anytime within a five year
period from the date on this prospectus.
Our common stock is quoted on the Nasdaq SmallCap Market under the symbol
"PSCO." On November __, 2000, the last reported price for our common stock on
the Nasdaq SmallCap Market was __________.
This investment involves a high degree of risk. See the "Risk Factors" beginning
on page 5.
Neither the securities and exchange commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is complete or accurate. Any representation to the contrary is a
criminal offense.
<PAGE>
[ALTERNATE PAGE FOR SELLING STOCKHOLDERS PROSPECTUS]
The Offering
Common stock outstanding prior to
this offering......................... 3,470,586 shares of common stock
Securities offered by the selling
stockholders in this offering......... 816,418 shares of common stock
Securities offered by Protosource
Corporation in a concurrent
underwritten offering................. 600,000 units consisting of two shares
of our common stock with no par value
and one class B common stock purchase
warrant.
Common stock to be outstanding after
this offering......................... 4,670,586 shares of common stock. In
calculating the number of shares, we
included the shares being offered by
Protosource Corporation in a concurrent
underwritten offering by a separate
prospectus
Use of proceeds....................... We will not receive any proceeds from
the sale of securities by the selling
stockholders.
Trading symbols....................... Our common stock trades on the Nasdaq
SmallCap Market under the symbol PSCO
and our class A common stock purchase
warrants trade under the symbol PSCOW.
Our class B common stock purchase
warrants will trade under the symbol
PSCOZ. The units will not be a traded
security.
The number of shares of common stock to be outstanding immediately after
this offering excludes:
o 1,137,000 shares of common stock issuable upon the exercise of
1,137,000 class A common stock purchase warrants
o 600,000 shares of common stock issuable upon the exercise of 600,000
class B common stock purchase warrants.
o 90,000 shares of common stock subject to the underwriter's
over-allotment option
o 674,833 shares of common stock issuable upon the exercise of
additional warrants and options
o 135,167 shares of common stock issuable upon the exercise of options
issued in connection with our 1994 Stock Option Plan
o 100,000 shares of common stock issuable upon the exercise of options
issued in connection with our 1999 Stock Option Plan
<PAGE>
[ALTERNATE PAGE FOR SELLING STOCKHOLDERS PROSPECTUS]
USE OF PROCEEDS
We will not receive any proceeds from the sale of securities by the selling
stockholders.
<PAGE>
[ALTERNATE PAGE FOR SELLING STOCKHOLDERS PROSPECTUS]
SELLING STOCKHOLDERS
The following table gives information on the selling stockholders based on
the number of outstanding shares of common stock as of November 1, 2000. Please
note that a large majority of the selling stockholders shares of common stock
are subject to various lock-up agreements. See "Shares Eligible for Future Sale
- Lock-up Agreements."
<TABLE>
<CAPTION>
No. of
Shares No. of Shares
Beneficially No. of Shares Owned After
Name Owned Offered Sale
---- ----- ------- ----
<S> <C> <C> <C>
Raymond J. Meyers(1) 22,500 22,500 --
Anaka Prakash(2) 16,000 16,000 --
Manousos Maropakis(2) 16,000 16,000 --
Veronica Leonard(2) 4,000 4,000 --
John Benedetto(2) 20,000 20,000 --
Panayiotis Manavis(2) 16,000 16,000 --
Christine & Paul Kasabian, JTWROS(2) 8,000 8,000 --
James Ippolito(2) 12,000 12,000 --
Peter J. Pappas(2) 16,000 16,000 --
Laury Pensa(2) 32,000 32,000 --
Brian A. Brewer(2) 4,000 4,000 --
Edward B. Wilkey(2) 8,000 8,000 --
Andrew J. Begosh, Jr. (2) 4,000 4,000 --
LeChun & Maria Chen, JTWROS(2) 4,000 4,000 --
Kit Ching, Inc. (2) 4,000 4,000 --
Xiao Shan Ren(2) 16,000 16,000 --
Simon and Raisa Fishman, JTWROS(2) 4,000 4,000 --
Dickon Pownall-Gray(2) 16,000 16,000 --
Kit Ching Wong(2) 4,000 4,000 --
Victor Ippolito(2) 16,000 16,000 --
Olga Ippolito(2) 16,000 16,000 --
Sim & Ling Realty Corp. (2)(3) 4,000 4,000 --
SHA Cable Holdings(4)(5) 176,596 176,596 --
South Ocean, LLC(4)(6) 90,945 90,945 --
Guy L. Ashley II(4) 4,420 4,420 --
George Teichner 4,274 4,274 --
Arthur Shinensky 4,274 4,274 --
Continental Capital & Equity Corporation (8) 221,000 221,000 --
Ira and Elizabeth Kanfer, JTWROS (7) 2,434 2,434 --
Ira Kanfer and Stuart Rosenkrantz, Tenants in Common (7) 1,309 1,309 --
Denise and Stuart Rosenkrantz, JTWROS(7) 48,666 48,666 --
</TABLE>
<PAGE>
[ALTERNATE PAGE FOR SELLING STOCKHOLDERS PROSPECTUS]
-----------------
(1) Former Chief Executive Officer of Protosource Corporation.
(2) Independent third party who invested in our March 31, 2000 bridge
financing. In connection with our bridge financing of $1,500,000, we issued
240,000 shares of our common stock pursuant to promissory notes. The
parties to the promissory notes agreed not to sell, transfer, or otherwise
dispose of any shares of our common stock owned by them for a 12 month
period from the effective date of this Prospectus without the prior written
consent of Andrew, Alexander, Wise & Company, Inc.
(3) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934,
Leong Joo Lim may be deemed a control person of the shares owned by such
entity.
(4) Independent third party who received shares of our common stock pursuant to
our August 22, 2000 acquisition of Suncoast Automation, Inc. We issued
1,303,072 shares of our common stock and reserved 1,000,000 shares of our
common stock, which can be earned out pursuant to a Stock Exchange
Agreement. The parties to the Stock exchange Agreement agreed not to sell,
transfer, or otherwise dispose of any shares of our common stock owned by
them or acquired by them under the terms of the Earn out provisions for a
36 month period ending on August 1, 2003 without our prior written consent.
(5) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934,
Alan Docter, Adam Wagner, JRodili partners, Gerald Bedrin, Atti Vilpulla,
David Weinberger, John Wagner, Daniel Marx, Paul Beck, Eric Salomon, Steve
Marvin and Colin Frey may be deemed a control persons of the shares owned
by such entity.
(6) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934,
Jeanne F. Jennings and David Jennings may be deemed control persons of the
shares owned by such entity.
(7) Independent third party who received shares of our common stock in
connection with our November 1, 1999 acquisition of MicroNet Services, Inc.
We issued 74,870 shares of our common stock pursuant to a Stock Purchase
Agreement. The parties to the Stock Purchase Agreement agreed not to sell,
transfer, or otherwise dispose of any shares of our common stock owned by
them for a 36 month period ending on November 1, 2002 (except that with
respect to the shares owned by Denise & Stuart Rosenkrantz, $12,500 worth
of shares may be sold per fiscal quarter) without our prior written
consent.
(8) Includes 200,000 shares underlying options exercisable between $5.50 -
$9.625, which vests as follows: (i) 50,000 on August 1, 2000; (ii) 50,000
on November 1, 2000; (iii) 50,000 on February 1, 2001; and (iv) 50,000 on
May 1, 2001. These options expire on August 1, 2005.
<PAGE>
[ALTERNATE PAGE FOR SELLING STOCKHOLDERS PROSPECTUS]
PLAN OF DISTRIBUTION
Sales of the shares may be effected by or for the account of the selling
stockholders from time to time in transactions (which may include block
transactions) on the Nasdaq SmallCap Market, in negotiated transactions, through
a combination of such methods of sale, or otherwise, at fixed prices that may be
changed, at market prices prevailing at the time of sale or at negotiated
prices. The selling stockholders may effect such transactions by selling the
shares directly to purchasers, through broker-dealers acting as agents of the
selling stockholders, or to broker-dealers who may purchase shares as principals
and thereafter sell the shares from time to time in transactions (which may
include block transactions) on the Nasdaq SmallCap Market, in negotiated
transactions, through a combination of such methods of sale, or otherwise. In
effecting sales, broker-dealers engaged by a selling stockholder may arrange for
other broker-dealers to participate. Such broker-dealers, if any, may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders and/or the purchasers of the shares for whom such
broker-dealers may act as agents or to whom they may sell as principals, or
both, which compensation may not exceed 8% of the proceeds of the sale of such
shares.
The selling stockholders and any broker-dealers or agents that participate
with the selling stockholders in the distribution of the shares may be deemed to
be "underwriters" within the meaning of the Securities Act of 1933. Any
commissions paid or any discounts or concessions allowed to any such persons,
and any profits received on the resale of the shares purchased by them may be
deemed to be underwriting commission or discounts under the Securities Act of
1933.
We have agreed to bear all expenses of registration of the shares other
than legal fees and expenses, if any, of counsel or other advisors of the
selling stockholders. The selling stockholders will bear any commissions,
discounts, concessions or other fees, if any, to broker-dealers in connection
with any sale of their shares.
We have agreed to indemnify the selling stockholders, or their transferees
or assignees, against certain liabilities, including liabilities under the
Securities Act of 1933 or to contribute to payments the selling stockholders or
their respective pledgees, donees, transferees or other successors in interest,
may the required to make in respect thereof.
<PAGE>
[ALTERNATE PAGE FOR SELLING STOCKHOLDERS PROSPECTUS]
TABLE OF CONTENTS
Section Page Number
------- -----------
Prospectus Summary
Use of Proceeds
Risk Factors
Price Range of Common Stock
Dividend Policy
Dilution
Capitalization
Selected Financial Data
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Business
Management
Summary Compensation Table
Selling Stockholders
Plan of Distribution
Security Ownership of Management and Certain Beneficial Owners
Description of Capital Stock
Shares Eligible for Future Sale
Experts
Additional Information
Index to Financial Statements
<PAGE>
[ALTERNATE PAGE FOR SELLING STOCKHOLDERS PROSPECTUS]
================================================================================
816,418
SHARES OF COMMON STOCK
PROTOSOURCE CORPORATION
-----------------
PROSPECTUS
-----------------
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus, and if given or made, such information or representations must not
be relied upon as having been authorized by us. This prospectus does not
constitute an offer to sell or a solicitation of any offer to buy any securities
in any jurisdiction in which such offer or solicitation would be unlawful. The
delivery of this prospectus shall not under any circumstances create any
implication that there has not been any change in our affairs since the date
hereof; however, any changes that may have occurred are not material to an
investment decision. In the event there have been any material changes in our
affairs, a post-effective amendment will be filed. We reserve the right to
reject any order, in whole or in part, for the purchase of any of the shares
offered.
Until __, 2000 (25 days after the date of this prospectus), all dealers
effecting transactions in the shares, whether or not participating in this
distribution, may be required to deliver a prospectus. This is in addition to
the obligation of dealers to deliver a prospectus when acting as underwriters to
their unsold allotments or subscriptions.
The date of this prospectus is ___________, 2000
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles of Incorporation provide that liability of directors to us for
monetary damages is eliminated to the full extent provided by California law.
Under California law, a director is not personally liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director
except for liability arising from (i) any breach of the director's duty of
loyalty to us or our shareholders; (ii) acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law; (iii)
authorizing the unlawful payment of a dividend or other distribution on our
capital stock or the unlawful purchases of our capital stock, or (iv) any
transaction from which the director derived any improper personal benefit.
The effect of this provision in the Articles of Incorporation is to
eliminate the rights of us and our stockholders (through stockholders'
derivative suits on behalf of us) to recover monetary damages from a director
for breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior) except in the situations
described above. This provision does not limit or eliminate the rights of any
stockholder or us to seek non-monetary relief such as an injunction or
rescission in the event of a breach of a director's duty of care or any
liability for violation of the federal securities laws.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for the underwriters' indemnification of us and our directors
and officers for certain liabilities arising under the Securities Act or
otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the securities offered hereby.
Securities and Exchange Commission Registration Fee $ 7,890
NASD Filing Fee 3,520
Nasdaq Listing Fee 10,000
Boston Stock Exchange Listing Fee 1,000
Blue Sky Legal Fees and Expenses 25,000
Printing and Engraving Expenses 25,000
Transfer Agent's Fees and Expenses 5,000
Accounting Fees and Expenses 45,000
Legal Fees and Expenses 100,000
Underwriter's Consulting Agreement 60,000
Underwriter's Non-Accountable Expense 243,000
Miscellaneous Expenses 74,590
--------
Total Estimated Expenses $600,000
========
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On January 28, 2000, Howard Silverman exercised his option for 5,000 shares
of our common stock.
On March 2, 2000, Howard Silverman exercised his option for 10,455 shares
of our common stock.
On March 3, 2000, Raymond Meyers exercised his option for 5,000 shares of
our common stock.
On March 20, 2000, Raymond Meyers exercised his option for 10,000 shares of
our common stock.
On April 28, 2000, Raymond Meyers exercised his option for 21,667 shares of
our common stock.
On November 1, 1999, we issued 70,929 shares of our common stock pursuant
to a stock purchase agreement in connection with our acquisition of MicroNet
Services, Inc.
On March 31, 2000, we issued 240,000 shares of our common stock to various
investors in connection with a Bridge Loan.
On July 31, 2000, we issued 3,941 shares of our common stock to MicroNet
Services, Inc. to settle a dispute over shares of our common stock held in
escrow in connection with our purchase of certain Assets of MicroNet.
On August 22, 2000, we issued 1,303,072 shares of our common stock pursuant
to a stock exchange agreement in connection with our acquisition of Suncoast
Automation, Inc.
Each of the foregoing issuances of securities was made in reliance on
Section 4(2) of the Securities Act of 1933, as amended.
ITEM 27. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
1.01 Form of Underwriting Agreement**
1.02 Form of Underwriter's Warrant Agreement**
1.03 Form of Warrant Agreement**
1.04 Financial Advisory and Investment Banking Agreement**
2.01 Restated Articles of Incorporation of the Registrant (1)
II-2
<PAGE>
2.02 By-laws of the Registrant (1)
5.01 Opinion and consent of Sichenzia, Ross & Friedman LLP
10.01 1995 Incentive Stock Option Plan (2)
10.02 Severance Agreement with Raymond Meyers (3)
10.03 Consulting Agreement with Raymond Meyers (3)
10.04 Employment Agreement with William Conis (3)
10.05 Bridge Loan Agreement**
10.06 Asset Purchase Agreement, dated as of October 28, 1999 and effective
as of November 1, 1999, by and among MicroNet Services, Inc., Kanfer
Associates, Denise Rosenkrantz, James Sette and ProtoSource
Corporation (3)
10.07 Stock Exchange Agreement, dated as of August 22, 2000 and effective
as of August 1, 2000, by and among ProtoSource Corporation, Suncoast
Automation, Inc. and the shareholders of Suncoast Automation, Inc.
(4)
10.08 Form of Employment Agreement with Theodore Triantafilu (4)
10.09 Form of Employment Agreement with Mark Blanchard (4)
10.10 Form of Employment Agreement with Kent Spears (4)
10.11 1999 Executive Officer Stock Option Plan (5)
10.12 Form of Master Agreement for Construction between Suncoast
Automation, Inc. and Walt Disney World**
10.13 Exclusive Cable Development and Programming Services Agreement
between Suncoast Automation, Inc. and Sunterra Communications
Corporation for Scottsdale Village Mirage**
10.14 Exclusive Cable Development and Programming Services Agreement
between Suncoast Automation, Inc. and Sunterra Communications
Corporation for Greenspring Plantation and Powhatan Plantation**
10.15 Exclusive Cable Development and Programming Services Agreement
between Suncoast Automation, Inc. and Sunterra Communications
Corporation for Carambola Beach Estate, Flamingo Beach, and Royal
Palm Beach**
10.16 Exclusive Cable Development and Programming Services Agreement
between Suncoast Automation, Inc. and Bluegreen Resorts Management,
Inc for Laurel Crest, Mountainloft, Shenandoah Crossing and
Christmas Mountain Resorts
23.01 Consent of Angell & Deering
23.02 Consent of Cherry, Bekaert & Holland, L.L.P.
27.01 Financial Data Schedule of ProtoSource Corporation
27.02 Financial Data Schedule of Suncoast Automation, Inc.
II-3
<PAGE>
----------
* To be filed by amendment.
** Previously filed.
(1) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2/A, as filed with the Commission on May 5, 1998.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2, declared effective by the Commission on February 9, 1995, file
number 333-56242.
(3) Incorporated by reference to the Registrant's Form 8-K, as filed with the
Commission on November 9, 1999.
(4) Incorporated by reference to the Registrant's Form 8-K, as filed with the
Commission on August 31, 2000.
(5) Incorporated by reference to the Registrant's Registration Statement on
Form S-8, as filed with the Commission on May 14, 1999, file number
333-78497.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file a post-effective amendment to this Registration Statement during any
period in which offers or sales are being made:
(i) to include any Prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually, or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
((S)230.424(b) of this Chapter) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement of
any material change to such information in the Registration Statement.
II-4
<PAGE>
(2) To remove from registration by means of a post-effective amendment any of
the securities being registered that remain unsold at the termination of this
offering.
(3) To provide to the Underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in such names as
required by the Underwriters to permit prompt delivery to each purchaser.
(4) That, for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and this offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(5) That, insofar as indemnification for liabilities arising from the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
That, for purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or Rule
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Act, we certify that it has reasonable
grounds to believe that it meets all of the requirements for filing on Form SB-2
and has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the State of California on
November 7, 2000.
PROTOSOURCE CORPORATION
By: /s/ WILLIAM CONIS, CHIEF EXECUTIVE OFFICER
----------------------------------------------
William Conis, Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints William
Conis his true and lawful attorney-in-fact and agent, acting alone, with full
powers of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, any Amendments
thereto and any Registration Statement of the same offering which is effective
upon filing pursuant to Rule 462(b) under the Securities Act, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Commission, granting unto said attorney-in-fact and agent, each acting
alone, full powers and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intends and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent, acting alone, or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act, this
Registration Statement has been signed below by the following persons on behalf
of us in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- --------- ----
/s/ WILLIAM CONIS Chief Executive Officer, Chief November 7, 2000
------------------------- Financial Officer, President,
William Conis Director [Principal Executive and
Accounting Officer]
/s/ THEODORE TRIANTAFILU Director, Chief Operating November 7, 2000
------------------------- Officer - Suncoast Division
Theodore Triantafilu and Director
/s/ ANDREW STATHOPOULOS Director November 7, 2000
-------------------------
Andrew Stathopoulos
/s/ MICHAEL A. GALES Director November 7, 2000
-------------------------
Michael A. Gales
/s/ SEYMOUR G. SIEGEL Director November 7, 2000
-------------------------
Seymour G. Siegel
