AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 14, 2000
REGISTRATION NO. 333-[ ]
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
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 (Primary and industrial (I.R.S. Employer
jurisdiction of classification Identification No.)
incorporation or organization code number)
-------------------------------------------
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 AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SECURITY OFFERING 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 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
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Loyalty Units 138,000 --- --- ---
Units
--------------------------------------------------------------------------------------------------------
Common Stock underlying Loyalty 276,000 --- --- ---
Units Shares
--------------------------------------------------------------------------------------------------------
Warrants underlying Loyalty 138,000 --- --- ---
Units Warrants
--------------------------------------------------------------------------------------------------------
Common Stock underlying Warrants 138,000 $8.20 $1,131,600.00 $299
contained in Loyalty Units 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 of Units(5)
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(12) 240,000 $6.00 $1,440,000.00 $381
Shares
--------------------------------------------------------------------------------------------------------
Common Stock, no par value(13) 1,270,332 $6.00(8) $7,621,992 $2,013
Shares
--------------------------------------------------------------------------------------------------------
Common Stock, no par value(14) 74,870 $6.00(8) $449,220.00 $119
Shares
========================================================================================================
TOTAL $29,863,822 $7,890
========================================================================================================
</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.
(6) Based upon 120% of the Units public offering price.
(7) Shares issuable upon exercise of options issued as severance to
Raymond Meyers, former Chief Executive Officer.
(8) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended.
(9) Shares issuable to Continental Capital & Equity Corporation for
marketing services.
(10) Shares issuable upon exercise of Warrants issuable to Continental
Capital & Equity Corporation for marketing services.
(11) Shares issuable upon exercise of options granted to Seymour Siegel,
Paul Rich, and Michael Gales.
(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.
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>
PROTOSOURCE CORPORATION
600,000 units
(each unit consisting of two shares of common stock and
one class B common stock purchase warrant)
ProtoSource Corporation: o Our principal executive offices are located at
2300 Tulare Street, Suite 210, Fresno, CA 93721
and our telephone number is (559) 486-8600.
o Nasdaq SmallCap Market Symbols: PSCO; PSCOW
The offering: o We are offering 600,000 units, each unit
consisting of two shares of common stock and one
class B common stock purchase warrant. It is
currently anticipated that the offering will be
between $12.00 and $15.00 per unit. Purchasers
of the units in this offering who continue to
hold them six months from the date hereof will
be entitled to receive, at no additional cost,
one loyalty unit for every ten units so held and
a second loyalty unit if such ten units are
continuously held for an additional six months
thereafter. Loyalty units are identical to the
units offered hereby. Only securityholders who
purchase units in this offering will be eligible
to receive loyalty units. To be entitled to
receive loyalty units, a purchaser must comply
with the applicable requirements set forth
herein.
o Kashner Davidson Securities Corporation is the
underwriter for this offering.
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 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.
--------------------------------------------------------------------------------
The offering Per unit Total
------------ -------- -----
Public offering price..................
Underwriting discounts.................
Proceeds to ProtoSource Corporation....
--------------------------------------------------------------------------------
KASHNER DAVIDSON SECURITIES CORPORATION
<PAGE>
PROSPECTUS SUMMARY
ProtoSource Corporation
Our Business............. Our psnw.com division provides residential and
business Internet access via dial-up and digital
subscriber line, private line service, Web site
development, Web hosting and outsourced technical
support. We operate our own Internet network
facilities in Central California and offer Internet
access nationwide through the "backbone" providers
with which we have agreements. Our customer base
consists of over 6,500 Internet access accounts and
over 200 accounts for other services. We provide
technical support 24 hours a day, 7 days a week to
all of our accounts plus an additional 4,000
accounts of other internet service providers.
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 extended-stay hospitality
industry. Suncoast's offerings include premium tier
cable channels, and high-speed Internet access to
resort guests.
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 extended-stay hospitality
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 extended-stay
hospitality industry.
Our Customers............ Our customers consist of residential and business
Internet users and the extended-stay hospitality
industry.
Our Industry............. The Internet services industry continues to grow at
a rapid pace, and is expected to grow between 40-50%
per year over the next few years.
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 extended-stay
hospitality 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.
2
<PAGE>
The Offering
Shares Outstanding....... We have 3,470,586 shares of common stock and
1,137,000 class A common stock purchase warrants
outstanding prior to this offering.
Units Offered............ We are offering 600,000 units. Upon completion of
the offering, there will be 4,670,586 shares of
common stock, 1,137,000 class A common stock
purchase warrants and 600,000 class B common stock
purchase warrants outstanding. We have granted the
underwriters of this offering a 45-day option to
purchase 90,000 additional units to cover any
over-allotments.
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.
3
<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.
4
<PAGE>
RISK FACTORS
An investment in our securities involves a high degree of risk. Before
deciding whether to invest, you should read and consider carefully the following
risk factors.
Risks Related To Our Business And Industry
------------------------------------------
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 extended-stay 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. 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, we would be adversely affected and could suffer
substantial losses in our psnw.com division.
Our Suncoast division is in its early stage of development and its success
cannot be assured. We are relying heavily on the prospects of our Suncoast
division for our future 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 the division is able to obtain substantial additional long term contacts
with extended-stay hospitality resorts. At present, approximately 70% of
Suncoast's business is from a single account operating under protection of the
Bankruptcy Court and the 30% balance is derived from one other account.
We have a history of operating losses and expect future losses. 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 to incur additional losses in the future.
We must adapt to technology trends and evolving industry standards to
remain competitive. The technology market is characterized by rapid changes due
to technological innovation, evolving industry standards, changes in customer
needs and frequent new service and product introductions. New services and
products based on new technologies or new industry standards expose us to risk
of equipment obsolescence. We will need to use leading technologies effectively,
continue to develop our technical expertise and enhance our existing services on
a timely basis to compete successfully in the technology industry. We cannot be
certain that we will be successful in these efforts.
If Internet usage does not continue to grow, we may not be able to continue
our business plan. 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
5
<PAGE>
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.
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 are dependent on key management personnel for our future success. As a
small company, with only 34 employees, our success depends greatly on our senior
management team. The loss of one or more of these employees may materially and
adversely affect our business.
Our industry is highly competitive, and we cannot assure you that we will
be able to compete effectively. Both the cable TV industry and Internet services
market are crowded with competitors. Our strategy of combining these cable TV
and Internet services can be copied by our competition. Although we believe our
strategy is novel at this time, there is no guarantee that competitors will not
adopt similar or preferable strategies or if we achieve a lead that we will be
able to maintain such position.
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.
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.
6
<PAGE>
We may incur liabilities for the activities of users of our service. 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.
We cannot assure you that our stock price will not decline during or as a
result of this offering. 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.
Risks Related To This Offering
------------------------------
Our common stock price may fall upon the future sale of additional shares
of our common stock. Future sales of our common stock in the public market, or
even the prospect of such sales, may materially and adversely affect the market
price of our common stock. There were 3,470,586 shares of common stock
outstanding before this offering. Of such shares, 1,617,942 shares are currently
subject to lock-up agreements. All of these shares of our common stock will
become eligible for resale within the next three years.
Projections included in this prospectus relating to the growth of the
Internet are based on assumptions that could turn out to be incorrect, and
actual results could be materially different from these projections. This
prospectus contains various third-party data and projections, including those
relating to the number of Internet users and the amount spent on online commerce
and advertising. These data and projections have been included in studies
prepared by independent market research firms, and the projections are based on
surveys, financial reports and models used by these firms. Actual results or
circumstances may be materially different from the projections. Any difference
could reduce our revenue and the growth of our business. These data and
projections are inherently imprecise and investors are cautioned not to place
undue reliance on them.
7
<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 short-term loan ................. $ 1,500,000 22.4%
Business expansion ........................... $ 3,000,000 44.9%
Working capital and general corporate purposes $ 2,190,000 32.7%
------------ -----
Total .................................... $ 6,690,000 100%
============ =====
-----------
We routinely evaluate potential acquisitions of business and/or product
lines that would complement or expand our business or further our strategic
goals. We may use a portion of the net proceeds of this offering for one or more
such transactions; however, we currently have no commitments or agreements with
respect to such transactions.
8
<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 July 31, 2000, there were approximately 950 record and beneficial
owners.
9
<PAGE>
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.
10
<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%)
==============
11
<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.
12
<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.
13
<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., new
reseller accounts, and completed web development projects. 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. 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.
14
<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
acquisition and internal marketing activities and web design and development
projects. 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.
15
<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 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 & Company, 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 & Company,
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.
16
<PAGE>
BUSINESS
Overview
--------
We operate two divisions: psnw.com, a full-service Internet service
provider with primary offices in Fresno, California and Suncoast Automation, a
provider of cable TV and high-speed Internet access to the extended-stay
hospitality industry, with primary offices in Oldsmar, Florida. We acquired
Suncoast in August 2000. Psnw.com has refocused to concentrate on three
offerings to business customers. Through that division, we will offer high-speed
Internet access via ADSL/SDSL, Web design, development and hosting services and
outsourced technical support for other ISPs.
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 hospitality industry. Suncoast has
identified and targeted a niche segment of this industry that we believe is
currently underserved by larger private cable operators and franchise cable
companies. This niche is largely comprised of extended-stay resorts. Suncoast
delivers basic cable TV, premium channels and high-speed Internet access to this
market segment.
Industry and Competition
------------------------
There are approximately 500,000 extended-stay resort units in North
America. The number of units is currently growing at an estimated rate of 15%
per annum. Currently, property owners with multiple locations have to utilize a
different cable vendor for each property. Each cable system has a different look
to the resort guest. The installed cable systems yield no profits for the
property owners and are viewed as a utility expense. This is changing as resort
operators are beginning to recognize that cable systems are potential revenue
sources. In addition, resort owners want to deliver a premium entertainment
experience superior to that available in hotels and provide a common interface
and a consistent level of service across each brand of resort. Because of the
demographics of guests at these resorts, demand for high-speed Internet access
has been growing.
Currently, cable television systems in the vast majority of hotels provide
a lower level of service to guests than is available in their own homes. Many of
these guests expect higher-level amenities when they are in a resort and they
have shown a willingness to pay for such services. In order to meet these needs,
we believe that resort owners must upgrade to new two-way addressable cable
systems before cable services can be converted from a utility expense to a
revenue source from premium services.
Resort property 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.
17
<PAGE>
The large franchise cable companies have traditionally shown little
interest in the extended-stay 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.
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.
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 Business Model
-------------------------
The extended-stay resort niche has a unique customer base that results in
each unit served by the cable operator having four different tenants per month
for a typical one week stay. This makes an installed unit potentially more
valuable than a traditional cable customer. While Suncoast and its partner, the
resort operator, only pay once per month for premium programming, they can
resell these services four or more times per month. Thus, a 1,000 unit resort
enjoys over 4,000 potential monthly customers for premium programming, Internet
access, and concierge services. Fees paid by guests for premium channels and
Internet access are shared between Suncoast and the resort owner.
Sunterra Corporation has signed contracts with Suncoast for 6 resorts
representing 1,816 units. Sunterra 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. Currently, contracts are pending with three other resort
owners for over 2,100 additional units. In addition, Suncoast designs, tests,
and repairs the cable TV distribution system for Walt Disney World in Orlando,
Florida.
Advantages to Resort Guests
---------------------------
Guests have access to cable services that:
- have a higher level of service than are generally available in their
homes (e.g., premium programming channels, video games, and cable
modem Internet access); and
- enhance their resort experience (e.g., concierge services such as
direct scheduling and the purchase of resort services like golf,
sailing and tours).
Advantages to Property Owner
----------------------------
1. Cable TV service is converted from an expense item to a source of revenue
from:
o the sale of premium channel packages to guests;
o high-speed Internet access;
o e-commerce purchases made by guests using the cable system; and
o ad insertion and static ads.
18
<PAGE>
2. Enhanced marketing tools:
o Practical access to guest preference data for individualized customer
service (e.g., interest in golf or special needs);
o Ability to analyze aggregate customer preference data for insight and early
identification of trends; and
o Ability to promote additional resort sales and services using two dedicated
resort specific cable channels controlled from the home office of the
resort owner.
3. More centralized control:
o Provides a consistent image across all properties run under a specific
brand;
o Simplifies administrative operations by dealing with a single cable vendor;
and
o Allows access to each resort from the corporate office interface.
4. Property owner, rather than cable services provider, selects programming
options.
5. Checkout and room charges are delivered to the guest through the TV easing
front desk congestion.
6. Cable system, excluding proprietary software and servers, is eventually
owned by property owner, not the cable services provider.
The Partnership with the Resort Owner
-------------------------------------
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 extended-stay resorts 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
recent study. This average spans all income brackets of the general population.
Considering that the extended-stay resort industry enjoys a demographic base of
customers that are in the top twenty-percentile income bracket, it is possible
that a substantial percent of resort guests will select premium channels during
their stay.
Unique Aspects of the Suncoast Value Proposition
------------------------------------------------
o Suncoast partners with the property owner to maximize cable services
revenue;
o Suncoast provides resort guests with more cable services than most get at
home;
19
<PAGE>
o Suncoast provides concierge services that enhance the service quality
provided to guests without increasing staff cost;
o Suncoast provides the property owner with two cable channels to promote
property owner services and sales of other resort locations; and
o Suncoast provides an on-premises LAN connecting all TVs into the property
management system allowing two-way messaging and other guest amenities.
Profile of Typical Suncoast Agreement
-------------------------------------
o Suncoast invests capital to upgrade the cable TV hardware and software in
the resort;
o 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;
o 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
o 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 seven-year term.
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
20
<PAGE>
networking capabilities to the home computing market. CyberAtlas, the Computer
Industry Almanac, conducted a study that found that North America will remain
the leading region for Internet users until at least 2005, projecting that it
will grow from about 83 million Internet users at the end of 1998 to nearly 230
million by the end of 2005. By the end of the year 2000, the Computer Industry
Almanac projects that Internet users in North America will number almost 149
million. The Computer Industry Almanac defines Internet users as adults with
weekly usage in businesses and homes.
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
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.
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
21
<PAGE>
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:
o dedicated and broadband Internet access services to support reliable,
high speed and/or constantly connected Internet access and
communication;
o 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
o 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:
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.
High-speed Internet access. In January of this year, we entered into a
contract to sell 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.
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 4,000 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.
22
<PAGE>
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:
* Large national access providers (AOL, Earthlink, Microsoft Network)
spending large sums on marketing to acquire customers;
* Cable and telephone companies providing primarily high-speed/high-priced
access through their existing infrastructure;
* Thousands of small and medium size companies providing services in a given,
local geography, with limited resources to expand; and
* 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.
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.
23
<PAGE>
Trademarks And Registered Domain Names
--------------------------------------
Our policy is to pursue registrations 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
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.
24
<PAGE>
Employees
---------
As of August 31, 2000, we had 34 employees. Of these employees, 12 are
technical support, 4 are finance, administration, and billing, 8 are operations,
4 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 3000 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.
25
<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 which 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 Barnet 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,
26
<PAGE>
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.
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 become 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 merger and acquisition, succession and
strategic planning, as well as capital market assistance. From 1994 to 2000, Mr.
Siegel was a founder of Siegel Rich, Inc., the predecessor company. 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.
27
<PAGE>
Executive Compensation
----------------------
None of our executive officers or directors currently receives compensation
in excess of $100,000 per year except Mr. Conis, our Chief Executive Officer,
who receives a base salary of $175,000 per year pursuant to an Employment
Agreement which expires on October 31, 2001, subject to renewal, Mark Blanchard,
our Vice President and General Manager of the Suncoast Division, who receives a
base salary of $104,000 per year pursuant to an Employment Agreement which
expires on October 31, 2002, Kent Spears, our Director of Operations of the
Suncoast Division, who receives a base salary of $104,000 per year pursuant to
an Employment Agreement which expires on October 31, 2002 and Mr. Triantafilu,
our Chief Operating Officer of the Suncoast Division, who receives a base salary
of $130,000 per year pursuant to an Employment Agreement which expires on
October 31, 2003. 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. Except for Raymond Meyers who received
$162,795 and $140,005 for the calendar years ended December 31, 1999 and 1998
respectively, no executive officer or director received compensation in excess
of $100,000 for the calendar years ended December 31, 1999 or 1998. Compensation
for all officers and directors as a group for the calendar years ended December
31, 1999 and 1998 aggregated $190,054 and $158,753, respectively.
SUMMARY COMPENSATION TABLE
The following table discloses certain compensation paid to our Chief
Executive Officer for the calendar years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Long Term
Compensation
Name and Other Annual All Other Awards/Securities
Principal Position Year Salary ($) 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>
28
<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 (the "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 (the "Code"). Incentive stock
options are issuable only to eligible officers, directors, key employees and
consultants of ours.
The 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 Plan. Under the 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 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
29
<PAGE>
the 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 Plan except in the form of updated information for
the prospectus. There are no assets administered under the Plan, and,
accordingly, no investment information is furnished herewith.
Shares issuable under the 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 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 (the "1999 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 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 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
30
<PAGE>
a lien on any securities under the 1999 lan, 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.
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.
31
<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. As of August 22, 2000 there
were 3,470,586 common shares issued and outstanding. The information set forth
in the table and accompanying footnotes has been furnished by the named
beneficial owners.
<TABLE>
<CAPTION>
Before Offering After Offering
------------------------------- ------------------------------
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) 5,300 * 5,300 *
Andrew Stathopoulos(4) 5,000 * 5,000 *
Michael A. Gales -- -- -- --
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% 176,596 3.8%
All officers and directors
as a group (7 persons) 502,379 14.4% 502,379 10.7%
---------------
</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 5,000 shares at $6.00
per share at any time until November 2003. Does not include shares issuable
upon exercise of 110,000 options that are not presently exercisable.
(4) Represents stock options to purchase 5,000 shares at $6.00 per share at any
time until November 2003.
(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 exercise of
5,000 options that are not presently exercisable.
32
<PAGE>
(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.
(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.
33
<PAGE>
DESCRIPTION OF CAPITAL STOCK
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 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 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.
34
<PAGE>
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.
Loyalty Units
-------------
A purchaser of units pursuant to this offering (including units sold in any
over-allotment) who holds some or all of his or her units of ours continuously
from the completion of the offering until six months from the date hereof and
from the completion of the offering until one year from the date of this
prospectus will be entitled to receive, at no additional cost, one additional
loyalty unit of ours for every ten units continuously held for each respective
six month period. The loyalty units will be identical to the units being offered
pursuant to this prospectus.
In order to be entitled to receive loyalty units, a purchaser must comply
with the applicable requirements set forth below. Only securityholders who
purchase units in this offering are entitled to receive loyalty units. The legal
relationship between a purchaser of units hereunder and us with regard to
loyalty units is governed by the terms of this prospectus and there is no other
written agreement with respect thereto.
In order to be entitled to receive the loyalty units, a person who
purchases Units in this offering must certify to us, in writing, that such units
were purchased for the account of the purchaser. The purchaser's certification
must be signed by the purchaser and, if applicable, by the purchaser's
qualifying nominee. The purchaser's certification must state that he or she is a
qualifying securityholder as described below, and must be accompanied by the
certification of a qualifying nominee (1) that such nominee purchased a
specified number of Units in the offering for such securityholder, (2)
specifying such securityholder's name, address, internal account number with
such qualifying nominee and social security or tax identification number, and
(3) that we or our representatives may review such nominee's records showing the
foregoing, and that we or our representatives must be reasonably satisfied with
the accuracy of such records. Purchasers acquiring units in the name of a
nominee should determine in advance that such nominee plans to cooperate with
the purchaser in exercising its rights to receive Loyalty units since such
nominee may not have any legal obligation to assist the purchaser in this
regard.
To be entitled to receive loyalty units, a securityholder must hold units
continuously for the required period, either through the purchaser's original
nominee or directly in the purchaser's own name on the register of the Transfer
Agent ("qualifying securityholder"). In the case of joint purchasers, the
surviving qualifying securityholder will remain eligible to receive loyalty
units. A qualifying securityholder will lose all rights to loyalty units in the
event that we receive more than one certification on behalf of such
securityholder. In the event a qualifying securityholder dies prior to the six
months or one year from the date of this prospectus, the decedent qualifying
securityholder's estate will be entitled to the loyalty units which the
qualifying securityholder would have been entitled to receive, provided the
decedent qualifying securityholder's estate complies with the other requirements
applicable to purchasers of the units. The number of units which will qualify
for loyalty units will be changed pro rata (ignoring fractions) if there is any
recapitalization, consolidation, subdivision or other similar changes in our
securities except for recapitalizations contemplated or disclosed by or in this
Prospectus.
35
<PAGE>
Two blank forms for a qualifying securityholder's certification to us are
included within the back front cover page of this Prospectus. A copy of said
form must be postmarked and mailed not later than March [ ], 2001 and September
[ ], 2001, respectively, to ProtoSource Corporation, 2300 Tulare Street, Suite
210, Fresno, California, 93721 in order for a qualifying securityholder to
receive Loyalty units with regard to the six month and twelve month holding
periods. Additional blank forms may be obtained directly from us by a written
request made at our executive offices located at 2300 Tulare Street, Suite 210,
Fresno, California, 93721. We are under no obligation to send any further
notices to purchasers of units in this offering. INVESTORS WILL NOT BE ENTITLED
TO RECEIVE LOYALTY UNITS UNLESS THEY TRANSMIT EXECUTED CERTIFICATION FORMS PRIOR
TO THE CERTIFICATION DEADLINES PROVIDED ABOVE.
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
36
<PAGE>
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.
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.
37
<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 earnout 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 earnout 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
38
<PAGE>
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.
39
<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
40
<PAGE>
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
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.
41
<PAGE>
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.
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
underwriter 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.
42
<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.
43
<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-7
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-25
F-1
<PAGE>
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.
<TABLE>
<CAPTION>
Proforma Proforma
ASSETS 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
Proforma Proforma
LIABILITIES AND STOCKHOLDERS' EQUITY Proto Suncoast Adjustments Combined
------------------------------------ ----- -------- ----------- --------
<S> <C> <C> <C> <C>
Current Liabilities:
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>
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.
<TABLE>
<CAPTION>
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>
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.
<TABLE>
<CAPTION>
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 acquisition will be accounted for as a
purchase. 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:
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-6
<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-7
<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-8
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Current Liabilities:
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-9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROTOSOURCE CORPORATION
STATEMENTS OF OPERATIONS
Six Months Ended June 30, Year Ended December 31,
-------------------------- ---------------------------
2000 1999 1999 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Net Revenues:
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-10
</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-11
</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-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>
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-13
</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.
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
-------------------
Revenue from the Internet operations is recognized over the period the
services are provided. Deferred revenue consists primarily of monthly
subscription fees billed in advance. Advance payments for web
development services received prior to completion of the services
performed are also recorded as deferred revenue until the services are
completed.
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.
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-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
F-14
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (Continued)
------------------------------------------------------
Stock-Based Compensation (Continued)
------------------------------------
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-15
<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-16
<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-17
<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.
Number of Weighted Average
Shares Exercise 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-18
<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.
Number of Weighted Average
Shares Exercise 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-19
<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-20
<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:
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
------ ----------- ---------- ----- ----------- -----
$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
============ ======= ==== ===== ====== =====
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'
F-21
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
9. Concentration of Credit Risk (Continued)
----------------------------------------
financial condition and generally requires no collateral. The 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-22
<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
F-23
<PAGE>
PROTOSOURCE CORPORATION
NOTES TO FINANCIAL STATEMENTS
14. Proposed Public Stock Offering (Continued)
----------------------------------------------
promissory notes will be due at the closing 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. 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.
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.
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-24
<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-25
<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-26
</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-27
</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-28
</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-29
</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.
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.
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.
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.
F-30
<PAGE>
SUNCOAST AUTOMATION, INC.
Notes to Financial Statements - continued
December 31, 1999 and 1998
Note 1 - Summary of significant accounting policies - continued
---------------------------------------------------------------
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.
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.
F-31
<PAGE>
SUNCOAST AUTOMATION, INC.
Notes to Financial Statements - continued
December 31, 1999 and 1998
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.
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.
Note 4 - Property and equipment
-------------------------------
Property and equipment and related allowance for depreciation are summarized as
follows:
1999 1998
---- ----
Cable system equipment - on site $ 352,758 $ --
Office equipment and furnishings 36,643 1,695
Computers 14,862 --
--------- ---------
404,263 1,695
Less accumulated depreciation (19,016) (43)
--------- ---------
Property and equipment, net $ 385,247 $ 1,652
========= =========
F-32
<PAGE>
SUNCOAST AUTOMATION, INC.
Notes to Financial Statements - continued
December 31, 1999 and 1998
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.
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.
F-33
<PAGE>
SUNCOAST AUTOMATION, INC.
Notes to Financial Statements - continued
December 31, 1999 and 1998
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.
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. 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.
F-34
<PAGE>
SUNCOAST AUTOMATION, INC.
Notes to Financial Statements - continued
December 31, 1999 and 1998
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-35
<PAGE>
TABLE OF CONTENTS
Section Page Number
------- -----------
Prospectus Summary .................................................... 2
Risk Factors .......................................................... 5
Use of Proceeds ....................................................... 8
Price Range of Common Stock ........................................... 9
Dividend Policy ....................................................... 10
Dilution .............................................................. 11
Capitalization ........................................................ 12
Selected Financial Data ............................................... 13
Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................. 14
Business .............................................................. 17
Management ............................................................ 26
Summary Compensation Table ............................................ 28
Security Ownership of Management and Certain Beneficial Owners ........ 32
Description of Capital Stock .......................................... 34
Shares Eligible for Future Sale ....................................... 38
Underwriting .......................................................... 40
Legal Matters ......................................................... 42
Experts ............................................................... 42
Additional Information ................................................ 43
Index to Financial Statements ......................................... F-1
<PAGE>
================================================================================
600,000 UNITS
PROTOSOURCE CORPORATION
-----------------
PROSPECTUS
-----------------
KASHNER DAVIDSON SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS SEPTEMBER [ ], 2000
================================================================================
<PAGE>
PROTOSOURCE CORPORATION
1,858,702 Shares of Common Stock
ProtoSource Corporation: o Our principal executive offices are located at
2300 Tulare Street, Suite 210, Fresno, CA 93721
and our telephone number is (559) 486-8600.
o Nasdaq SmallCap Market Symbols: PSCO; PSCOW
The offering: o This prospectus relates to the possible sale,
from time to time, by certain stockholders (the
"selling stockholders") of up to 1,858,702
shares of our common stock.
o There is no underwriter or coordinating broker
acting in connection with the offering of common
stock by the selling stockholders.
o Concurrently with the commencement of this
offering, we are offering by separate
prospectus, 600,000 Units, each Unit consisting
of 2 shares of Common Stock and 1 Common Stock
Purchase Warrant through Kashner Davidson
Securities Corporation on a firm commitment
basis.
o We will not receive any proceeds from sales by
the selling stockholders. See "Plan of
Distribution" for further details concerning the
possible sale of these shares.
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 [ ].
------------------
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>
The Offering
Shares Outstanding.................. We have 3,470,586 shares of common stock
and 1,137,000 class A common stock
purchase warrants outstanding prior to
this offering.
Common Stock Offered by the
Selling Stockholders................ 1,858,702 shares.
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.
Forward-Looking Statements.......... This prospectus contains forward-looking
statements that address, among other
things, our expansion strategy, business
development, use of proceeds, projected
capital expenditures, liquidity, and our
development of additional revenue
sources. The forward-looking statements
are based on our current expectations
and are subject to risks, uncertainties
and assumptions. We base these
forward-looking statements on
information currently available to us,
and we assume no obligation to update
them. Our actual results may differ
materially from the results anticipated
in these forward-looking statements, due
to various factors.
USE OF PROCEEDS
We will not receive any proceeds from the sale of securities by the selling
stockholders.
<PAGE>
SELLING STOCKHOLDERS
The following table gives information on the selling stockholders based on
the number of outstanding shares of common stock as of September 1, 2000. The
number of shares to be beneficially owned following completion of the offering
is based on the assumption that the stockholder will not sell any of the shares
that may be offered for the stockholder's account in this offering, due to a
lock-up agreement, as described below, and that the stockholder will not
purchase or sell any other shares. Stockholders are not required to sell the
shares that may be offered in this offering. Under Securities and Exchange
Commission rules, beneficial ownership includes all shares of common stock
issuable within 60 days after the date of this prospectus upon exercise of
outstanding options, warrants, convertible securities, or other rights.
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 No. of
Shares No. of Shares
Beneficially Shares Owned
Name Owned Offered After Sale
---- ----- ------- ----------
<S> <C> <C> <C>
Raymond J. Meyers 22,500 22,500 22,500
Anaka Prakash 16,000 16,000 16,000
Manousos Maropakis 16,000 16,000 16,000
Veronica Leonard 4,000 4,000 4,000
John Benedetto 20,000 20,000 20,000
Panayiotis Manavis 16,000 16,000 16,000
Christine & Paul Kasabian, JTWROS 8,000 8,000 8,000
James Ippolito 12,000 12,000 12,000
Peter J. Pappas 16,000 16,000 16,000
Laury Pensa 32,000 32,000 32,000
Brian A. Brewer 4,000 4,000 4,000
Edward B. Wilkey 8,000 8,000 8,000
Andrew J. Begosh, Jr 4,000 4,000 4,000
LeChun & Maria Chen, JTWROS 4,000 4,000 4,000
Kit Ching, Inc. 4,000 4,000 4,000
Xiao Shan Ren 16,000 16,000 16,000
Simon and Raisa Fishman, JTWROS 4,000 4,000 4,000
Dickon Pownall-Gray 16,000 16,000 16,000
Kit Ching Wong 4,000 4,000 4,000
Victor Ippolito 16,000 16,000 16,000
Olga Ippolito 16,000 16,000 16,000
Sim & Ling Realty Corp. 4,000 4,000 4,000
Kent P. Spears 352,411 352,411 352,411
Mark G. Blanchard 352,411 352,411 352,411
Virginia M. Blanchard 45,472 45,472 45,472
Jeanne Jennings 81,850 81,850 81,850
SHA Cable Holdings 176,596 176,596 176,596
South Ocean, LLC 90,945 90,945 90,945
Theodore N. Triantafilu 66,735 66,735 66,735
William R. Cawley 40,925 40,925 40,925
Michael S. Quale 13,642 13,642 13,642
Jeffrey Beekhoo 9,094 9,094 9,094
Glen P. and Lisa H. Viera 4,547 4,547 4,547
John T. Jones 9,094 9,094 9,094
Rickey R. Becker 6,821 6,821 6,821
Robert Bradley 6,821 6,821 6,821
Guy L. Ashley II 4,420 4,420 4,420
George Teichner 4,274 4,274 4,274
Arthur Shinensky 4,274 4,274 4,274
Continental Capital & Equity Corporation 221,000 221,000 221,000
Seymour G. Siegel 7,500 7,500 7,500
Paul H. Rich 7,500 7,500 7,500
Michael A. Gales 15,000 15,000 15,000
Ira and Elizabeth Kanfer, JTWROS 2,434 2,434 2,434
Ira Kanfer and Stuart Rosenkrantz, Tenants in Common 1,309 1,309 1,309
James and Luciana Sette, JTWROS 7,302 7,302 7,302
James Sette 7,302 7,302 7,302
James Sette and Stuart Rosenkrantz, Tenants in Common 7,857 7,857 7,857
Denise and Stuart Rosenkrantz, JTWROS 48,666 48,666 48,666
</TABLE>
<PAGE>
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>
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. As of August 22, 2000 there
were 3,470,586 common shares issued and outstanding. The information set forth
in the table and accompanying footnotes has been furnished by the named
beneficial owners.
<TABLE>
<CAPTION>
Before Offering After Offering
------------------------------- ------------------------------
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) 5,300 * 5,300 *
Andrew Stathopoulos(4) 5,000 * 5,000 *
Michael A. Gales -- -- -- --
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% 176,596 3.8%
All officers and directors
as a group (7 persons) 502,379 14.4% 502,379 10.7%
</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 5,000 shares at $6.00
per share at any time until November 2003. Does not include shares issuable
upon exercise of 110,000 options that are not presently exercisable.
(4) Represents stock options to purchase 5,000 shares at $6.00 per share at any
time until November 2003.
(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 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 Andrew, Alexander, Wise & Company, Inc.
(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.
<PAGE>
DESCRIPTION OF CAPITAL STOCK
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 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 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.
<PAGE>
Loyalty Units
-------------
A purchaser of units pursuant to this offering (including units sold in any
over-allotment) who holds some or all of his or her units of ours continuously
from the completion of the offering until six months from the date hereof and
from the completion of the offering until one year from the date of this
prospectus will be entitled to receive, at no additional cost, one additional
loyalty unit of ours for every ten units continuously held for each respective
six month period. The loyalty units will be identical to the units being offered
pursuant to this prospectus.
In order to be entitled to receive loyalty units, a purchaser must comply
with the applicable requirements set forth below. Only securityholders who
purchase units in this offering are entitled to receive loyalty units. The legal
relationship between a purchaser of units hereunder and us with regard to
loyalty units is governed by the terms of this prospectus and there is no other
written agreement with respect thereto.
In order to be entitled to receive the loyalty units, a person who
purchases Units in this offering must certify to us, in writing, that such units
were purchased for the account of the purchaser. The purchaser's certification
must be signed by the purchaser and, if applicable, by the purchaser's
qualifying nominee. The purchaser's certification must state that he or she is a
qualifying securityholder as described below, and must be accompanied by the
certification of a qualifying nominee (1) that such nominee purchased a
specified number of Units in the offering for such securityholder, (2)
specifying such securityholder's name, address, internal account number with
such qualifying nominee and social security or tax identification number, and
(3) that we or our representatives may review such nominee's records showing the
foregoing, and that we or our representatives must be reasonably satisfied with
the accuracy of such records. Purchasers acquiring units in the name of a
nominee should determine in advance that such nominee plans to cooperate with
the purchaser in exercising its rights to receive Loyalty units since such
nominee may not have any legal obligation to assist the purchaser in this
regard.
To be entitled to receive loyalty units, a securityholder must hold units
continuously for the required period, either through the purchaser's original
nominee or directly in the purchaser's own name on the register of the Transfer
Agent ("qualifying securityholder"). In the case of joint purchasers, the
surviving qualifying securityholder will remain eligible to receive loyalty
units. A qualifying securityholder will lose all rights to loyalty units in the
event that we receive more than one certification on behalf of such
securityholder. In the event a qualifying securityholder dies prior to the six
months or one year from the date of this prospectus, the decedent qualifying
securityholder's estate will be entitled to the loyalty units which the
qualifying securityholder would have been entitled to receive, provided the
decedent qualifying securityholder's estate complies with the other requirements
applicable to purchasers of the units. The number of units which will qualify
for loyalty units will be changed pro rata (ignoring fractions) if there is any
recapitalization, consolidation, subdivision or other similar changes in our
securities except for recapitalizations contemplated or disclosed by or in this
Prospectus.
Two blank forms for a qualifying securityholder's certification to us are
included within the back front cover page of this Prospectus. A copy of said
form must be postmarked and mailed not later than March __, 2001 and September
__, 2001, respectively, to ProtoSource Corporation, 2300 Tulare Street, Suite
210, Fresno, California, 93721 in order for a qualifying securityholder to
receive Loyalty units with regard to the six month and twelve month holding
periods. Additional blank forms may be obtained directly from us by a written
request made at our executive offices located at 2300 Tulare Street, Suite 210,
Fresno, California, 93721. We are under no obligation to send any further
notices to purchasers of units in this offering. INVESTORS WILL NOT BE ENTITLED
TO RECEIVE LOYALTY UNITS UNLESS THEY TRANSMIT EXECUTED CERTIFICATION FORMS PRIOR
TO THE CERTIFICATION DEADLINES PROVIDED ABOVE.
<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, 2000. 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
<PAGE>
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.
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.
<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 Earnout 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 the Company 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 one hundred million dollars
($100,000,000) and the acquiring party shall not agree to honor the earnout
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
<PAGE>
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.
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.
<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.
<PAGE>
TABLE OF CONTENTS
Section Page Number
------- -----------
Prospectus Summary ................................................... 6
Use of Proceeds ...................................................... 8
Risk Factors ......................................................... 9
Price Range of Common Stock .......................................... 13
Dividend Policy ...................................................... 14
Dilution ............................................................. 15
Capitalization ....................................................... 16
Selected Financial Data .............................................. 17
Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................. 18
Business ............................................................. 21
Management ........................................................... 30
Summary Compensation Table ........................................... 32
Selling Stockholders ................................................. 36
Plan of Distribution ................................................. 37
Security Ownership of Management and Certain Beneficial Owners ....... 38
Description of Capital Stock ......................................... 39
Shares Eligible for Future Sale ...................................... 43
Experts .............................................................. 44
Additional Information ............................................... 45
Index to Financial Statements ........................................ F-1
<PAGE>
================================================================================
1,858,702
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
========
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.
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<PAGE>
On April 28, 2000, Raymond Meyers exercised his option for 21,667 shares of our
Common Stock.
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 March 31, 2000, we issued 240,000 shares of our Common Stock to various
investors in connection with a Bridge Loan.
Each of the foregoing issuances of securities as 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)
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 Form of Severance Agreement with Raymond Meyers (3)
10.03 Form of Consulting Agreement with Raymond Meyers (3)
10.04 Form of Employment Agreement with William Conis (3)
10.05 Form of 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)
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<PAGE>
10.12 Form of Master Agreement for Construction between Suncoast
Automation, Inc. and Walt Disney World
10.13 Form of Exclusive Cable Development and Programming Services
Agreement between Suncoast Automation, Inc. and Sunterra
Communications Corporation for Scottsdale Village Mirage
10.14 Form of Exclusive Cable Development and Programming Services
Agreement between Suncoast Automation, Inc. and Sunterra
Communications Corporation for Greenspring Plantation and Powhatan
Plantation
10.15 Form of 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
23.01 Consent of Angell & Deering
23.02 Consent of Cherry, Bekaert & Holland, L.L.P.
----------
* To be filed by amendment.
(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.
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<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.
(6) 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.
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<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
September 11, 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 September 11, 2000
------------------------- Financial Officer, President,
William Conis Director [Principal Executive
and Accounting Officer]
/s/ THEODORE TRIANTAFILU Director, Chief Operating Officer September 11, 2000
------------------------- - Suncoast Division and Director
Theodore Triantafilu
/s/ ANDREW STATHOPOULOS Director September 11, 2000
-------------------------
Andrew Stathopoulos
/s/ MICHAEL A. GALES Director September 11, 2000
-------------------------
Michael A. Gales
/s/ SEYMOUR G. SIEGEL Director September 11, 2000
-------------------------
Seymour G. Siegel
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