SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 August 22, 2000 --------------- (Date of report) PROTOSOURCE CORPORATION ----------------------- (Exact Name of Registrant as Specified in Charter) CALIFORNIA 33-86242 77-0190772 ---------- -------- ---------- (State or Other Jurisdiction (Commission File Number) (IRS Employer of Incorporation) Identification No.) 2300 Tulare Street, Suite 210 Fresno, California 93721 (Address of Principal Executive Offices) (559)-490-8600 -------------- (Registrant's telephone number, including area code) ---------------------------------------- (Former name or former address, if changed since last report) ITEM 2. Acquisition or Disposition of Assets On August 22, 2000, effective as of August 1, 2000, Protosource Corporation ("Protosource" or the "Company") consummated their acquisition of all of the outstanding capital stock of Suncoast Automation, Inc., a Delaware corporation ("Suncoast"), in exchange for the issuance of 1,303,072 shares of Protosource Common Stock and the potential of an additional 1,000,000 shares of Common Stock based on certain performance criteria. The transaction was completed in accordance with the terms of the stock exchange agreement, dated as of August 22, 2000, and effective as of August 1,2000, between the Company, Suncoast and the shareholders of Suncoast. After the acquisition, Suncoast has become a wholly owned subsidiary of the Company. Suncoast operates as a Private Cable Operator ("PCO") that builds, upgrades and maintains cable systems as well as managing programming for the Multi-housing Industry. This market segment is largely composed of the lodging industry, specifically the time-share resort niche. As an additional part of the completed transaction, Protosource has hired Mark Blanchard, Suncoasts's former Chairman of the Board, as Vice President and General Manager and Theodore Triantafilu, Suncoast's former Chief Operating Officer, as Director of Protosource and COO of the Suncoast Division of Protosource. ITEM 5. Other Events. NONE ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements of Business Acquired (b) Pro Forma Financial Information (c) Exhibits Number Description ------ ----------- 10.1 Agreement, dated as of August 22, 2000 and effective as of August 1, 2000, by and among Protosouce Corporation, Suncoast Automation, Inc. and the Shareholders of Suncoast Automation, Inc. 10.2 Form of Employment Agreement, dated as of August 1, 2000, between Protosource Corporation and Theodore Triantafilu. 10.3 Form of Employment Agreement, dated as of August 1, 2000, between Protosource Corporation and Mark Blanchard. 10.4 Form of Employment Agreement, dated as of August 1, 2000, between Protosource Corporation and Kent Spears. 23.2 Consent of Cherry, Bekaert & Holland, L.L.P. SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the Undersigned, thereunto duly authorized. PROTOSOURCE CORPORATION ----------------------- (Registrant) Date: August 28, 2000 /s/ William Conis ----------------- William Conis, Chief Executive Officer SUNCOAST AUTOMATION, INC. Financial Statements December 31, 1999 and 1998 Contents -------- Page ---- Report of Independent Certified Public Accountants 2 Balance Sheets 3 Statements of Operations 4 Statements of Changes in Stockholders' Deficit 5 Statements of Cash Flows 6 Notes to Financial Statements 7 - 12 1 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 2 SUNCOAST AUTOMATION, INC. Balance Sheets December 31, June 30, ---------------------- 2000 1999 1998 --------- --------- --------- (unaudited) 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 3 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) 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 4 SUNCOAST AUTOMATION, INC. Statements of Changes in Stockholders' Deficit Preferred stock Common stock ---------------------- ---------------------- Paid in Accumulated Shares Amount Shares Amount Capital Deficit Total --------- --------- --------- --------- --------- --------- --------- 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 5 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 --------- --------- --------- --------- 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 6 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. 7 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. 8 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 ========= ========= 9 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. 10 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. 11 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. 12 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. Proforma Proforma ASSETS Proto Suncoast Adjustments Combined - ------ ----- -------- ----------- -------- 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-1 PROTOSOURCE CORPORATION UNAUDITED PROFORMA COMBINED CONDENSED BALANCE SHEET JUNE 30, 2000 Proforma Proforma LIABILITIES AND STOCKHOLDERS' EQUITY Proto Suncoast Adjustments Combined - ------------------------------------ ----- -------- ----------- -------- 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-2 PROTOSOURCE CORPORATION UNAUDITED PROFORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 The following unaudited proforma combined statement of operations and per share data gives effect to the acquisition of Suncoast by Proto in a transaction accounted for as a purchase. The proforma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the acquisition had been consummated nor is it necessarily indicative of future operating results or financial position. The unaudited proforma statement of operations gives effect to the acquisition as if it had occurred on January 1, 2000. This proforma statement of operations should be read in conjunction with the accompanying notes and related historical financial statements and notes thereto of Proto and Suncoast. Proforma Proforma Proto Suncoast Adjustments Combined ----- -------- ----------- -------- 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-3 PROTOSOURCE CORPORATION UNAUDITED PROFORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 The following unaudited proforma combined statement of operations and per share data gives effect to the acquisition of Suncoast by Proto in a transaction accounted for as a purchase. The proforma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the acquisition had been consummated nor is it necessarily indicative of future operating results or financial position. The unaudited proforma statement of operations gives effect to the acquisition as if it had occurred on January 1, 1999. This proforma statement of operations should be read in conjunction with the accompanying notes and related historical financial statements and notes thereto of Proto and Suncoast. Proforma Proforma Proto Suncoast Adjustments Combined ----- -------- ----------- -------- 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-4 PROTOSOURCE CORPORATION NOTES TO UNAUDITED PROFORMA COMBINED CONDENSED FINANCIAL STATEMENTS 1. Basis of Presentation - ------------------------ On August 15, 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-5