AS FILED WITH THE COMMISSION ON OCTOBER 16, 1996 FILE NO. 333-
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DIGITAL POWER CORPORATION
(Name of small business issuer in its charter)
CALIFORNIA 3679 94-1721931
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
41920 Christy Street, Fremont, California 94538-3158; 510-657-2635
(Address and telephone number of principal executive offices)
41920 Christy Street, Fremont, California 94538-3158
(Address of principal place of business or intended principal place of
business)
Robert O. Smith, Chief Executive Officer
Digital Power Corporation
41920 Christy Street
Fremont, California 94538-3158
510-657-2635
(Name, address and telephone number of agent for service)
Copies to:
Daniel B. Eng, Esq. Charles B. Pearlman, Esq.
Bartel Eng Linn & Schroder Joel D. Mayersohn, Esq.
300 Capitol Mall, Suite 1100 Atlas, Pearlman, Trop & Borkson, P.A.
Sacramento, California 95814 New River Center, Suite 1900
Telephone: 916-442-0400 200 East Las Olas Boulevard
Fort Lauderdale, Florida 33302-4610
Telephone: 954-763-1200
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
the 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,
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
blocks 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. [ ]
CALCULATION OF REGISTRATION FEE
Proposed
Title of each Proposed maximum
class of maximum aggregate Amount of
securities to be Amount to be offering price(1) offering registration
registered registered price fee
Common Stock 1,150,000 $4.00 $4,600,000 $1,393.94
Common Stock Purchase Warrants 775,000 $.125 $96,875 29.36
Common Stock Underlying Warrants 775,000 $5.00 $3,875,000 $1,174.24
Total $2,597.54
(1) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457 of the Securities Act of 1933.
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 COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
DIGITAL POWER CORPORATION
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501 OF REGULATION S-B
Registration Statement
ITEM NUMBER AND CAPTION PROSPECTUS CAPTION
1. Front of Registration Statement
and Outside Front Cover Page of Outside Front Cover
Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus Inside Front and Outside Back
Cover Pages
3. Summary Information and Risk Prospectus Summary; Risk Factors
Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Underwriting
6. Dilution Dilution
7. Selling Security Holders Principal and Selling Stockholders
and Warrantholders
8. Plan of Distribution The Offering; Underwriting; Terms
of Offering
9. Legal Proceedings Legal Proceedings
10. Directors, Executive Officers,
Promoters and Control Persons Management; Principal and Selling
Shareholders
11. Security Ownership of Certain
Beneficial Owners and Principal and Selling Stockholders
Management and Warrantholders
12. Description of Securities Description of Securities
13. Interest of Named Experts and Experts; Legal Matters
Counsel
14. Disclosure of Commission
Position on Indemnification for Underwriting
Securities Act Liabilities
15. Organization Within Last Five Summary; Business
Years
16. Description of Business Summary; Business
17. Management's Discussion and
Analysis or Plan of Operation Management's Discussion and
Analysis
18. Description of Property Business
19. Certain Relationships and
Related Transactions Certain Transactions
20. Market for Common Equity and
Related Stockholder Matters Summary
21. Executive Compensation Management
22. Financial Statements Consolidated Financial Statements
23. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure Change in Accountants
Prospectus Subject to Completion
October 16, 1996
DIGITAL POWER CORPORATION
1,000,000 SHARES OF COMMON STOCK
NO PAR VALUE
700,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
_________________
Of the 1,000,000 shares of common stock, no par value ("Common Stock")
offered, 750,000 shares are being sold by Digital Power Corporation ("Digital
Power" or the "Company") and 250,000 shares are being sold by certain selling
stockholders of the Company (the "Selling Stockholders"). In addition, the
Company is selling 500,000 redeemable common stock purchase warrants
("Warrants"), and certain warrantholders may sell up to 200,000 Warrants,
entitling the holders thereof to purchase, during a three-year period from the
date of this Prospectus ("Exercise Period"), one share of Common Stock at an
exercise price of $5.00 per share, subject to adjustment. See "Principal and
Selling Stockholders and Warrantholders." The Company will not receive any
proceeds from the sale of shares by the Selling Stockholders or from the sale
of Warrants by certain warrantholders. Under certain conditions, the Company
shall have the right upon 30 days notice to call each Warrant for redemption at
$.125 per Warrant. See "Description of Securities." Further, the Company is
registering 700,000 shares of Common Stock that will be issued upon the
exercise of the Warrants. See "Management," "Certain Transactions," and
"Description Of Securities." Prior to this offering, there has been no public
market for the Common Stock or Warrants of the Company. It is currently
estimated that the initial public offering price per share of Common Stock will
be $4.00, and that the initial public offering price per Warrant will be $.125.
See "Underwriting" for the factors to be considered in determining the initial
public offering price.
SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR CERTAIN CONSIDERATIONS
RELEVANT TO AN INVESTMENT IN THE COMMON STOCK AND WARRANTS.
Application has been made for the listing of the Company's Common Stock
under the symbol "DPWR" and Warrants under the symbol "DPWRW" on the NASDAQ
SmallCap Market.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Price to Public Underwriting Discounts Proceeds to Proceeds to Selling
and Commissions(1) Company(2) Stockholders(3)
Per Share $4.00 $0.40 $3.60 $3.60
Per Warrant. . . . . $0.125 $0.0125 $0.1125 $0.1125
Total{(4)} $4,087,500 $408,750 $2,756,250 $922,500
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
See "Underwriting."
(2) Before deducting estimated expenses of $230,000 payable by the
Company, and additional compensation to be received by the
Underwriters in the form of a non-accountable expense allowance equal
to three percent (3%) of the proceeds from the offering of the Common
Stock and Warrants, or a total of $122,625 ($140,906 if the
Underwriters' over-allotment is exercised in full).
(3) Before expenses related to the Offering attributed to the Selling
Stockholder on a prorata basis.
(4) The Company has granted the Underwriters an option for 45 days to
purchase up to an additional 150,000 shares at the initial public
offering price per share, and up to additional 75,000 Warrants at
$.125 per Warrant solely to cover over-allotments, if any. If such
option is exercised in full, the total initial public offering price,
underwriting discount, and proceeds to Company will be $4,696,875,
$469,688, and $3,304,687, respectively.
The shares and Warrants offered hereby are offered by the
Underwriters, as specified herein, subject to receipt and acceptance by
them and subject to their right to reject any order in whole or in part.
It is expected that certificates for the shares of Common Stock and
Warrants will be ready for delivery in Boca Raton, Florida on or about
______________, 1996, against payment therefor immediately available funds.
WERBEL-ROTH SECURITIES, INC.
The date of this Prospectus is ___________, 1996.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK OR WARRANTS OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON
THE NASDAQ SMALLCAP STOCK MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Company intends to furnish its stockholders annual reports
containing consolidated financial statements audited by its independent
auditors and quarterly reports containing unaudited consolidated financial
information for the first three quarters of each fiscal year.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation, or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
[Pictures of Power Supplies]
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE
NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION, REPRESENTATIVES' WARRANTS, AND
OUTSTANDING OPTIONS AND WARRANTS WILL NOT BE EXERCISED. SEE "DESCRIPTION
OF SECURITIES" AND "UNDERWRITING."
THE COMPANY
Digital Power Corporation designs, develops, manufactures, and markets
switching power supplies for sale to manufacturers of computers and other
electronic equipment. Switching power supplies are critical components of
all computers and other electronic equipment. The electronic circuitry in
computers and other electronic equipment requires a steady and isolated
supply of direct current (DC) electrical power. In addition, the various
components and subassemblies within computers and other electronic
equipment often require different voltage levels of electrical power. The
power supply products of the Company satisfy these two requirements by
converting the alternating current (AC) electricity from a primary source,
such as a wall outlet, into the direct current required for the proper
functioning of electronic circuits, and by dividing the single electrical
current into as many as four discrete output voltages. The Company's power
supply products also monitor and regulate the DC output voltages being
delivered to protect the electronic equipment from harmful surges and drops
in voltage levels. Because the Company's products have a high "power-
density" (measured in watts per cubic inch), the power supply products of
the Company are generally smaller than those of competitors. Furthermore,
the Company's power supply products are extremely "flexible" in design.
This "flexibility" approach allows the Company to modify quickly and
inexpensively its base-design products to satisfy an OEM's specific power
supply needs, thereby enabling the Company to keep to a minimum its
expenses for non-recurring engineering ("NRE") of its base-design products.
As a result of the Company's "flexibility" approach, it has provided
samples of modified power supplies to OEM customers in as quickly as a few
days, an important capability given the increasing emphasis placed by OEMs
on "time-to-market". Digital Power's strategic objective is to exploit
this combination of power density, flexibility, and short time-to-market to
win an increasing share of the growing power supply market. Unless the
context otherwise indicates, the reference to "Digital Power" or the
"Company" herein shall mean Digital Power Corporation and its wholly owned
subsidiary Poder Digital, S.A. de C.V.
Micro-Tech Consultants of Santa Rosa, California reports that the
worldwide market for power supplies was about $15 billion in 1995, with
average projected sales growth of approximately 8.5% over the next five
years. This market is highly fragmented among power supply manufacturers.
The Company believes that there are over 400 different manufacturers
competing in the various market segments. The major segments of the
switching power supply market are typically characterized as either the
"captive market" or the "merchant market". The captive market represents
those original equipment manufacturers (OEMs) who design and manufacture
their own power supplies for use as a component in their own electronic
products, whereas the merchant market represents those OEMs who purchase
their power supplies from third-party manufacturers who specialize in the
development and production of power supplies. The Company believes the
merchant market is growing faster than any other segment of the entire
power supply market as OEMs increasingly buy their power supplies from
companies such as Digital Power rather than manufacturing their own power
supplies "in-house".
For the years ended December 31, 1994 and 1995, the Company had
revenues and income before income taxes of $6,249,333 and $144,976, and
$10,037,502 and $826,484, respectively. For the six months ended June 30,
1996, the Company had revenues and income before income taxes of $6,553,376
and $637,208.
RISK FACTORS
For a discussion of considerations relevant to an investment in the
Common Stock and Warrants, see "Risk Factors."
THE OFFERING
Common Stock Offered:
Offering(1)..............................................750,000 shares
Selling Stockholders.....................................250,000 shares
Total..................................................1,000,000 shares
Common Stock to be outstanding after the Offering......2,353,275 shares
Warrants(1) . . . . . Exercisable until December , 1999, with each Warrant
exercisable for one share of Common Stock at a price
of $5.00, subject to adjustment.
See "Description of Securities."
Use of Proceeds . . . Repayment of approximately $1 million of indebtedness
and general corporate purposes, including product
development, advertising, and working capital.
See "Use of Proceeds."
Proposed NASDAQ SmallCap Market Symbol - Common Stock..............DPWR
Proposed NASDAQ SmallCap Market Symbol - Warrants ................DPWRW
(1) Assumes that the Underwriters have not exercised an over-allotment
option to purchase up to an additional 150,000 shares and up to 75,000 Warrants.
SUMMARY CONSOLIDATED FINANCIAL DATA
The unaudited summary consolidated financial data presented below
should be read in conjunction with the more detailed financial statements
of the Company and notes thereto along with the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Years Ended Six Months Ended
DECEMBER 31 JUNE 30
1994 1995 1995 1996
Statement of Operations Data:
Revenues $6,249,333 $10,037,502 $4,947,952 $6,553,376
Income from operations 257,935 1,027,772 332,928 689,612
Income before Income
Taxes 144,976 826,484 270,511 637,208
Provision (Benefit) for 23,253 (277,400) 28,000 294,000
Income
Taxes 121,723 1,103,884 242,511 343,208
Net Income 0.02 0.80 0.16 0.24
Net Income per share $ 0.02 $ 0.66 $ 0.15 $ 0.20
Primary
Fully Diluted 1,226,208 1,258,858 1,242,395 1,276,778
Shares used in per share
calculation
As at
JUNE 30, 1996
ACTUAL AS ADJUSTED(1)
Balance Sheet Data:
Working Capital $2,426,022 $4,003,494
Total Assets 5,443,277 6,877,652
Long-term debt 1,471,361 614,458
Stockholders' equity $1,533,759 $3,968,134
(1) Adjusted to give effect to the estimated net proceeds of this
offering to be received by the Company based upon an assumed public
offering price of $4.00 per share and $.125 per Warrant.
THE COMPANY
Digital Power provides switching power supplies to original
equipment manufacturers (OEMs). The Company designs, develops,
manufactures, and markets 50 watt to 750 watt power supplies. Power
supplies are complex subassemblies or modules integral to virtually
every electronic product. They can have numerous different
features, but the most important functions of a power supply are to
receive alternating current (AC) electricity from a primary source,
such as a wall electrical outlet, convert that AC current into
direct current (DC), reduce the voltage of an output to the desired
level, and regulate and filter the DC output voltages required for
the operation of the various electronic circuits. The Company
believes that its power supply products are superior to those of its
competitors because the Company's products combine high power-
density (measured in watts per cubic inch) with a high degree of
design flexibility, allowing the Company to modify its power
supplies in order to satisfy the specific and unique needs of its
OEM customers. The Company has increased its revenues and income
before income taxes from $6,249,333 and $144,976 in fiscal year
1994, to $10,037,502 and $826,484 in fiscal year 1995. For the six
months ended June 30, 1996, revenues and net income before income
taxes were $6,553,376 and $637,208.
According to independent market surveys conducted by Micro-
Tech, the total world market for electronic power supplies is in
excess of $15 billion, with approximately 50% of this market being
the "captive market" and the balance being the "merchant market".
Growing at an average annual rate of 13%, the merchant market is the
fastest growing segment of the power supply market, as OEMs continue
to outsource their power supply requirements. This merchant market
is highly fragmented according to the power level, technology,
packaging, and application of a particular power supply. One
segment of the merchant market involves industrial and office
automation, industrial and portable computing, and networking
applications. This is the market targeted and served by Digital
Power. The Company believes that its focus on high-efficiency,
high-density, design-flexible power supplies is ideally suited to
the rapid growth opportunities existing in this market segment.
Digital Power's products are sold domestically and in Canada
through a network of 13 manufacturers' representatives. Digital
Power also has 28 stocking distributors in the United States and
Europe. In addition, the Company has formed strategic relationships
with three of its customers to private label its products. Digital
Power's customers can generally be grouped into three broad
industries, consisting of the computer, telecommunication, and
instrument industries. The Company has a current base of over 150
active customers, including companies such as Ascend Communications,
AT&T, Westinghouse, Telex, Storage Dimensions, Motorola, Retix,
Stanford Telecommunications, 3Com, and Centillion Business Unit, a
wholly-owned subsidiary of Bay Networks. See "Business-Breakdown of
Product Market".
The Company's strategy is to continue the trend of its sales
and profit growth by making increased sales to existing customers,
while simultaneously targeting sales to new customers. The Company
believes that its "flexibility" concept allows customers a unique
choice between its products and products offered by other power
supply competitors. OEMs have typically had to settle for a
standard power supply product with output voltages and other
features predetermined by the manufacturer. Alternatively, if the
OEM's product required a different set of power supply parameters,
the OEM was forced to design this modification in-house, or pay a
power supply manufacturer for a custom product. Since custom-
designed power supplies are development-intensive and require a
great deal of time to design, develop, and manufacture, only OEMs
with significant volume requirements can economically justify the
expense and delay associated with their production. Furthermore,
since virtually every power conversion product intended for use in
commercial application requires certain independent safety agency
testing, (e.g. by Underwriters Laboratories) at considerable
expense, an additional barrier is presented to the smaller OEM. By
offering the OEM customer a new choice with the Digital Power
"flexibility" series, the Company believes it has gained a
competitive advantage. The Company's "flexibility" series is
designed around a standardized power platform, but allows the
customer to specify output voltages tailored to its exact
requirements within specific parameters. Furthermore, OEMs are
seeking power supplies with greater power density (measured in watts
per cubic inch). Digital Power's strategy in responding to this
demand has been to offer increasingly smaller power supply units or
packages. For example, the Company believes that its US100 series
of products, mounted on a 3" x 5" printed circuit board, is the
industry's smallest 100 watt off-line (A/C input) power supply.
In addition to the line of proprietary products offered, and in
response to requests from OEMs, the Company has recently begun
providing "value-added services" along with its products. The term
"value-added services" refers to the Company's incorporation of an
OEM's selected electronic components, enclosures, and cable
assemblies with the Company's power supply products to produce a
power subassembly that is compatible with the OEM's own equipment
and is specifically tailored to meet the OEM's needs. The Company
purchases the parts and components that the OEM itself would
otherwise attach to or integrate with the Company's power supply,
and the Company provides the OEM with that integration and
installation service thus saving the OEM time and money. The
Company believes that this value-added service is well-suited to
those OEMs who wish to reduce their vendor base and minimize their
investment in fixed costs since the OEMs are not required to
manufacture their own power subassemblies and thus are not required
to purchase individual parts from many vendors or build assembly
facilities.
Currently, almost all of the Company's manufacturing, including
its value-added services, is done at a 16,000 square foot facility
operated by the Company's wholly-owned subsidiary, Poder Digital,
S.A. de C.V., located in Guadalajara, Mexico. However, the Company
has recently entered into an agreement with a manufacturer in China
to manufacture the Company's products. In its initial phase, the
Company believes that the facility in China will complement its
manufacturing facility in Guadalajara, Mexico since the facility in
China will allow the Company to produce power supplies with
sufficient lead time at lower costs, while the Guadalajara facility
will continue to manufacture power supplies that need a quick
turnaround or modification.
Through its predecessor, Digital Power was originally formed in
1969. The Company's executive offices are located at 41920 Christy
Street, Fremont, California 94538-3158, and the Company's telephone
number is 510-657-2635.
RISK FACTORS
In addition to the other information presented in this
Prospectus, the following risk factors should be considered
carefully in evaluating the Company and its business before
purchasing the Common Stock and Warrants offered hereby. This
Prospectus contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but
are not limited to, those discussed in "Risk Factors" and elsewhere
in this Prospectus.
CUSTOMER CONCENTRATION
For the six months ended June 30, 1996, one OEM accounted for
26.4% of the Company's total revenues, and for the fiscal year ended
December 31, 1995, three OEMs accounted for 18% in the aggregate of
total revenues. The one OEM account which accounted for 26.4% of
the Company's total revenues for the six months ended June 30, 1996
substantially contributed to the Company's increase in revenues for
such period. Recently, due to a decrease in market demand for its
products, this OEM has decreased the number of power supplies it has
purchased from the Company. In light of such decrease in demand, it
is unlikely that this OEM will continue to purchase power supplies
from the Company at the same rate that it had done during the first
six months of 1996. In addition during 1995, two distributors
accounted for 37% of revenues, and during 1994, one distributor
accounted for 16% of revenues. See "Risk Factors - Dependence on
Computer and Other Electronic Equipment Industries; Customers'
Product Obsolescence." The loss of any one of these OEM customers
would have an adverse effect on the Company's revenues. See
"Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON COMPUTER AND OTHER ELECTRONIC EQUIPMENT INDUSTRIES;
CUSTOMERS' PRODUCT OBSOLESCENCE
Substantially all of the Company's existing customers are in
the computer and other electronic equipment industries and produce
products which are subject to rapid technological change,
obsolescence, and large fluctuations in product demand. These
industries are characterized by intense competition and a demand on
OEMs serving these markets for increased product performance and
lower product prices. Given this industry environment in which they
operate, OEMs make similar demands on their suppliers, such as the
Company, for increased product performance and lower product prices.
Thus, in order to be successful, the Company must properly assess
developments in the computer and other electronic equipment
industries and identify product groups and customers with the
potential for continued and future growth. Factors affecting the
computer and other electronic equipment industries, in general, or
any of the Company's major customers or their products, in
particular, could have a material adverse effect on the Company's
results of operations. In addition, the computer industry is
inherently volatile. Recently, certain segments of the computer and
other electronic industries have experienced a softening in demand
for their products. Although this has not materially affected the
Company's customers, in the event that it affects all segments of
the computer and other electronic industries, the growth of the
Company could be adversely affected.
COMPETITION
The design, manufacture, and sale of power supplies is a highly
competitive industry. The Company's competition includes
approximately 400 companies located throughout the world, some of
whom have advantages over the Company in terms of labor and
component costs, and some of whom may offer products comparable in
quality to those of the Company. Certain of the Company's
competitors, including Computer Products, Inc., ASTEC America, Zytec
Corporation and Lambda Electronics, have substantially greater
fiscal and marketing resources and geographic presence than does the
Company. In addition, in light of the Company's limited revenues in
comparison to the total power supply market, many competitors may be
unaware or indifferent to the Company and its products. If the
Company continues to be successful in increasing its revenues, other
competitors may notice and increase competition for the Company's
customers. The Company also faces competition from current and
prospective customers who may decide to design and manufacture
internally the power supplies needed for their products. To remain
competitive, management believes that the Company must continue to
compete favorably on the basis of value by providing advanced
manufacturing technology, offering superior customer service and
design engineering services, continuously improving quality and
reliability levels, and offering flexible and reliable delivery
schedules. There can be no assurance that the Company will continue
to compete successfully in this market.
DILUTION
The initial public offering price is greater than the book
value per outstanding share of Common Stock. Accordingly,
purchasers in the offering will suffer an immediate and substantial
dilution of $2.31 in the net tangible book value per share of the
Common Stock from the initial public offering price. Additional
dilution will occur upon exercise of outstanding options granted by
the Company. See "Dilution."
DEPENDENCE ON GUADALAJARA, MEXICO FACILITY; FOREIGN CURRENCY
FLUCTUATIONS
The Company produces substantially all of its products at its
facility located in Guadalajara, Mexico. The products are then
delivered to Fremont, California for testing and distribution. The
Company believes that it has a good working relationship with its
employees in Guadalajara, Mexico and has recently signed a five-year
contract with the union representing the employees. Recently, the
Company has entered into a "turnkey" manufacturing contract with a
manufacturer located in China to produce its products in an attempt
to reduce its dependence on its Mexican facility. At this time the
purchase of products from the manufacturer located in China is
minimal and requires advance scheduling which affects the Company's
ability to produce products quickly. However, if the Company's
revenues grow as anticipated, the Company intends to manufacture
more of its products utilizing the Chinese manufacturer. In the
event that there is an unforeseen disruption at the Guadalajara
production plant or with the Chinese manufacturer, such disruption
may have an adverse effect on the Company's ability to deliver its
products and may adversely affect the Company's financial
operations.
Further, the Guadalajara, Mexico, facility conducts its
financial operations using the Mexican peso. Therefore, due to
financial conditions beyond the control of the Company, the Company
is subject to monetary fluctuations between the U.S. dollar and
Mexican peso. During fiscal 1995, the Mexican peso was devalued
against the U.S. dollar resulting in an approximate $85,000 loss to
the Company. See "Management's Discussion and Analysis and Results
of Operations."
SECURITY INTEREST IN THE COMPANY'S ASSETS
The Company has entered into a $1.5 million revolving credit
facility. As of June 30, 1996, the amount outstanding under the
credit facility and other loans was $1,614,458. Although the
Company intends to use part of the proceeds raised hereby to reduce
the credit facility, the credit facility is secured by substantially
all of the Company's assets. Therefore, in the event the Company is
unable to repay the credit facility, the bank will hold a first-
priority security interest in the Company's assets upon default.
See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
NECESSITY TO MAINTAIN CURRENT PROSPECTUS; STATE BLUE SKY
REGISTRATION REQUIRED TO EXERCISE WARRANTS
The shares of Common Stock issuable on exercise of the Warrants
(except the Warrants issuable upon exercise of the Representatives'
Warrants) have been registered with the Commission. The Company
will be required, from time to time, to file post-effective
amendments to its registration statement in order to maintain a
current prospectus covering the issuance of such shares upon
exercise of the Warrants. The Company has undertaken to make such
filings and use its best efforts to cause such post-effective
amendments to become effective. If for any reason a required post-
effective amendment is not filed, it does not become effective or is
not maintained, the holders of the Warrants may be prevented from
exercising their Warrants. Holders of the Warrants have the right
to exercise the Warrants only if the underlying Shares of Common
Stock are qualified, registered or exempt from registration under
applicable securities laws of the state in which the various holders
of the Warrants reside. The Company cannot issue shares of Common
Stock to holders of the Warrants in states where such shares are not
qualified, registered or exempt. See "Description of Securities."
DEPENDENCE UPON KEY PERSONNEL; NEED TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL
The Company's performance is substantially dependent on the
performance of its executive officers and key personnel, and on its
ability to retain and motivate such personnel. The loss of any of
the Company's key personnel, particularly Robert O. Smith or Claude
Adkins, could have a material adverse effect on the Company's
business, financial condition, and operating results. The Company
has "key person" life insurance policies on Mr. Smith in the
aggregate amount of $2 million. The Company also has an employment
agreement with Mr. Smith.
The Company's future success also depends on its continuing
ability to identify, hire, train, and retain other highly-qualified
creative, technical, and managerial personnel. Competition for
highly qualified personnel is intense. There can be no assurance
that the Company will be successful in attracting, assimilating, and
retaining such personnel, and the failure to do so could have a
material adverse effect on the Company's business, financial
condition, and operating results. Moreover, in the event of the
loss of any such personnel, there can be no assurance that the
Company would be able to prevent the unauthorized disclosure or use
of its proprietary technology, practices, procedures, or customer
lists.
CONCENTRATION OF STOCK OWNERSHIP
Upon the completion of the offering, the present directors,
executive officers, and stockholders owning more than 5% of the
outstanding Common Stock and their respective affiliates will
beneficially own approximately 28.49% of the outstanding Common
Stock of the Company (27.02% of the outstanding Common Stock if the
Underwriters' over-allotment option is exercised in full). As a
result of their ownership, the directors, executive officers, and
more than 5% stockholders and their respective affiliates
collectively will have substantial control of all matters requiring
stockholder approval, including the election of directors and
approval of significant corporate transactions. Under California
law, however, shareholders are entitled to cumulative voting. Such
concentration of ownership may also have the effect of delaying or
preventing a change in control of the Company. See "Principal
Stockholders" and "Description of Securities."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF SECURITIES PRICES
Prior to the offering, there has been no public market for the
Company's Common Stock or Warrants, and there can be no assurance
that an active public market for the Company's Common Stock or
Warrants will develop or be sustained after the offering. The
initial offering price will be determined by negotiations between
the Company and the representative of the Underwriters based upon
several factors. The trading price of the Company's Common Stock or
Warrants could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements of
technological innovations or new products by the Company or its
competitors, changes in financial estimates by securities analysts,
the operating and stock price performance of other companies that
investors may deem comparable to the Company, and other events or
factors. Moreover, in some future quarter the Company's operating
results may fall below the expectations of securities analysts and
investors. In such event, the market price of the Company's Common
Stock or Warrants would likely be materially and adversely affected.
In addition, the stock market in general, and the market prices for
high-tech related companies in particular, have experienced extreme
volatility that often has been unrelated to the operating
performance of such companies. These broad market and industry
fluctuations may adversely affect the trading price of the Company's
Common Stock or Warrants, regardless of the Company's operating
performance. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALES; NO PRIOR TRADING MARKET;
REGISTRATION RIGHTS
Sales of a substantial number of shares of the Company's Common
Stock in the public market could have the effect of depressing the
prevailing market price of its Common Stock. Upon the completion of
the offering, the Company will have outstanding 2,353,275 shares of
Common Stock (assuming no exercise of outstanding options and
Warrants of 1,459,900). Of these shares, the 1,000,000 shares sold
in the offering will be freely transferable without restriction or
further registration under the Securities Act of 1933 (the
"Securities Act") unless purchased by "affiliates" of the Company as
that term is defined in Rule 144 of the Securities Act
("Affiliates"), which shares will be subject to the resale
limitations of Rule 144 adopted under the Securities Act. The
remaining 1,353,275 shares will be "restricted securities" as that
term is defined under Rule 144 ("Restricted Shares"). Restricted
Shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144
promulgated under the Securities Act, which rule is summarized
below. As a result of the contractual restrictions described below
and the provisions of Rule 144, additional shares will be available
for sale in the public market as follows: (i) 1,272,458 currently
outstanding shares will be eligible for sale upon expiration of
lock-up agreements 12 months after the date of this Prospectus; (ii)
1,459,900 additional shares will be issuable upon the exercise of
stock options and Warrants, to the extent exercisable as of such
date; and (iii) 80,817 currently outstanding shares will be eligible
for sale from time to time thereafter pursuant to Rule 144. See
"Shares Eligible for Future Sale."
Certain stockholders of the Company have entered into lock-up
agreements with Werbel-Roth Securities, Inc. providing that, with
certain limited exceptions, such stockholders will not offer, sell,
contract to sell, grant an option to purchase, make a short sale, or
otherwise dispose of or engage in any hedging or other transaction
that is designed or reasonably expected to lead to a disposition of
any shares of Common Stock for a period of 12 months after the date
of this Prospectus without the prior written consent of the
Underwriters. Other than the (i) 1,000,000 shares being offered
hereby, (ii) 1,459,900 shares subject to options and Warrants, and
(iii) 80,817 shares subject to Rule 144, as of the date of this
Prospectus, no shares of Common Stock of the Company will be
eligible for immediate sale in the public market until the
expiration of the 12 month lock-up agreements with the
representative of the Underwriters. The Underwriters may, in their
sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements.
Prior to the offerings, there has been no public market for the
Common Stock of the Company, and no predictions can be made as to
the effect, if any, that the sale or availability for sale of shares
of additional Common Stock will have on the trading price of the
Common Stock. Nevertheless, sales of substantial amounts of such
shares in the public market, or the perception that such sales could
occur, could adversely affect the trading price of the Common Stock
and could impair the Company's future ability to raise capital
through an offering of its equity securities. See "Description of
Securities."
DEPENDENCE ON SUPPLIERS
In order to reduce dependence on any one supplier, the Company
attempts to obtain two suppliers for each component of its products.
However, for two line transformers in three of its products, the
Company is dependent on single suppliers. Currently, these products
account for approximately 10% of the Company's total sales.
Although the Company will seek to find other manufacturers of
transformers for these three products, unanticipated shortages or
delays in these parts may have an adverse effect on the Company's
results of operations.
NO PATENTS
The Company's products are not subject to any U.S. or foreign
patents. The Company believes that because its products are being
continually updated and revised, obtaining patents would not be
beneficial. Therefore, there can be no assurance that other
competitors or former employees will not obtain the Company's
proprietary information and develop it.
POSSIBLE DILUTION FROM WARRANTS AND OPTIONS
On completion of this Offering, options and Warrants to
purchase an aggregate of 1,459,900 shares of common stock will be
outstanding, including 700,000 shares underlying the Warrants,
150,000 shares underlying the Representatives' Warrants and 609,900
shares underlying the options issued to employees of the Company.
Holders of such options and Warrants will be able to purchase shares
of Common Stock at a price less than the offering price of the
Common Stock with a resulting dilution of the interests to the other
stockholders. Because of this potential dilutive effect, the
options and Warrants may have a detrimental impact on the terms
under which the Company may obtain financing through a sale of its
Common Stock in the future. For these reasons, any evaluation of
the favorability of market conditions for a subsequent stock
offering by the Company must take into account any outstanding
options or Warrants. See "Dilution," "Management-Stock Plans" and
"Description of Securities."
REDEEMABLE WARRANTS AND IMPACT ON INVESTORS
Provided that the closing bid price of the Common Stock has
been at least $6.00 per share for thirty (30) consecutive trading
days, the Warrants are subject to redemption by the Company. The
Company's exercise of this right would force the holder of the
Warrants to exercise the Warrants and pay the exercise price at a
time when it may be disadvantageous for the holder to do so, to sell
the Warrants at the then current market price when the holder might
otherwise wish to hold the Warrants for possible additional
appreciation, or to accept the redemption price. Holders who do not
exercise their Warrants prior to redemption by the Company will
forfeit their right to purchase the Shares of Common Stock
underlying the Warrants. See "Description of Securities."
NO DIVIDENDS
The Company has not paid cash dividends on its Common Stock
since its inception and does not anticipate any cash dividends on
the Common Stock in the foreseeable future. For the foreseeable
future, the Company intends to reinvest earnings of the Company, if
any, on the development and expansion of its business. See
"Dividend Policy."
AUTHORIZATION OF PREFERRED STOCK; POSSIBLE ANTI-TAKEOVER EFFECTS
The Board of Directors is authorized to issue shares of
preferred stock and to determine the dividend, liquidation,
conversion, redemption and other rights, preferences, and limitation
of such shares without further vote or action of the stockholders.
Accordingly, the Board of Directors is empowered, without
stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, or other rights which could adversely
effect the voting power or the rights of the holders of the Common
Stock. In the event of such issuance, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging
and delaying or preventing a change in control of the Company. The
Company has no present intention to issue any shares of its
preferred stock, although there can be no assurance that the Company
will not do so in the future. See "Description of Securities."
SUBSTANTIAL FLEXIBILITY IN USE OF PROCEEDS
The Company has not designated any specific use for the net
proceeds from the sale by the Company of the Common Stock offered
hereby, except for the application of approximately $1.0 million of
such net proceeds for the repayment of the Company's line of credit.
Rather, the Company intends to use the remaining net proceeds
primarily for general corporate purposes, including product
development, advertising and working capital. Accordingly,
management will have significant flexibility in applying the net
proceeds of the offering. See "Use of Proceeds."
PENNY STOCK REGULATION
The Commission has adopted rules that regulate broker-dealer
practices in connection with transactions in "penny stocks." Penny
stocks generally are equity securities with a price of less than
$5.00 (other than securities registered on certain national
securities exchanges or quoted on the NASDAQ system, provided that
current price and volume information with respect to transactions in
such securities is provided by the exchange or system). The penny
stock rules require a broker-dealer, prior to a transaction in a
penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document that provides information
about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the
transaction, and monthly account statements showing the market value
of each penny stock held in the customer's account. The bid and
offer quotations, and the broker-dealer and salesperson compensation
information, must be given to the customer orally or in writing
prior to effecting the transaction and must be given to the customer
in writing before or with the customer's confirmation. In addition,
the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from such rules, the broker-dealer must
make a special written determination that the penny stock is a
suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the
secondary market for a stock that becomes subject to the penny stock
rules. While the shares of Common Stock offered hereunder will not
initially be subject to penny stock regulation rules by virtue of
the fact that such registered securities will be quoted on the
NASDAQ SmallCap Market, there can be no assurance that the Company
will be able to continuously meet the NASDAQ SmallCap Market
maintenance criteria. See "Risk Factor-Maintenance Criteria for
NASDAQ Securities."
MAINTENANCE CRITERIA FOR NASDAQ SECURITIES
The National Association of Securities Dealers, Inc. (the
"NASD"), which administers the NASDAQ SmallCap Market, maintains
criteria for continued eligibility on the NASDAQ SmallCap Market.
In order to be included in the NASDAQ SmallCap Market, a company
must maintain $2,000,000 in total assets, a $200,000 market value of
the public float and $1,000,000 in total capital and surplus. In
addition, continued inclusion requires two market-makers and a
minimum bid price of $1.00 per share, provided however, that if a
company falls below such minimum bid price, it will remain eligible
for continued inclusion on the NASDAQ SmallCap Market if the market
value of the public float is at least $1,000,000 and the company has
$2,000,000 in capital and surplus. The failure to meet these
maintenance criteria in the future may result in the discontinuance
of the inclusion of the Company's securities on the NASDAQ SmallCap
Market. In such event, the Company's securities will be subject to
being delisted, and trading, if any, in the Common Stock of the
Company would thereafter be conducted in the over-the-counter market
in the so-called "pink sheets," or the NASD's OTC Bulletin Board.
Consequently, an investor may find it more difficult to dispose of,
or to obtain accurate quotations as to the price of, the Company's
securities.
If the Company's securities were subject to the regulations on
penny stocks, the market liquidity for the Company's securities
could be severely and adversely affected by limiting the ability of
broker-dealers to sell the Company's securities and the ability of
purchasers in this offering to sell their securities in the
secondary market at a time and price acceptable to them.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 750,000
shares of Common Stock and 500,000 Warrants offered by the Company
hereby are estimated to be approximately $2,434,375 ($2,983,469 if
the Underwriters' over-allotment option is exercised in full) at an
assumed initial public offering price of $4.00 per share and $.125
per Warrant and after deducting the estimated underwriting discount
and offering expenses.
The Company intends to use approximately $1 million of such net
proceeds for the repayment of the Company's revolving credit
facility with San Jose National Bank, which bears interest at prime
plus 1% and is due in October, 1997. Proceeds from the revolving
credit facility were used for working capital. In addition, the
Company will use the net proceeds for general corporate purposes
including product development, product advertising, and working
capital. The amounts and timing of the Company's actual
expenditures will depend upon numerous factors, including the status
of the Company's product development efforts, competition, and
marketing and sales activities. Pending use of the net proceeds of
the sale of the shares of Common Stock and Warrants offered hereby,
the Company intends to invest such funds in short term, interest
bearing, investment grade obligations. Any additional proceeds
received upon the exercise of the Warrants, the Underwriters' over-
allotment option or the Representatives' Warrants, as well as income
from investments, if any, will be added to working capital.
As a forward looking statement based on its current operations,
the Company believes that the proceeds raised hereby will be
sufficient to meet the Company's financial needs for at least twelve
months following the date of the offering, and that no additional
financing will be required in the near future.
The Company will not receive any proceeds from the sale of
shares by the Selling Shareholders or the Warrants by certain
Warrantholders.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends since
its inception. The Company currently intends to retain future
earnings for use in the operation and expansion of the business.
The Company does not intend to pay any cash dividends in the
foreseeable future. The declaration of dividends in the future will
be at the discretion of the Board of Directors and will depend upon
the earnings, capital requirements, and financial position of the
Company.
On May 31, 1996, the Company issued a stock dividend in the
form of Common Stock valued at $1.80 per share on the cumulative
accrued but unpaid dividends on the Series A Preferred Stock. Since
such stock dividend, all of the Series A Preferred Stock has been
converted into Common Stock.
CAPITALIZATION
The following table sets forth the capitalization of the
Company at June 30, 1996, as adjusted to give effect to the sale of
750,000 shares of Common Stock and 500,000 Warrants offered by the
Company hereby assuming an initial public offering price per share
of $4.00 and per Warrant price of $.125 and net proceeds of
approximately $2,434,375, and the application of the net proceeds
therefrom.
June 30, 1996
ACTUAL AS ADJUSTED
Current portion of long-term debt $ 143,097 $ -0-
Long-term debt, less current portion 1,471,361 614,458
Stockholders' Equity
Series A Preferred stock, no par value;
500,000 shares authorized; no shares
issued and outstanding ---- ----
Common stock, no par value 5,000,000
shares authorized; 1,603,275 shares
issued and outstanding; 2,353,275
shares issued and outstanding as
adjusted(1) $5,539,115 $7,973,490
Accumulated deficit (3,505,356) (3,505,356)
Unearned ESOP plan shares (500,000) (500,000)
Total stockholders' equity 1,533,759 3,968,134
Total capitalization $3,148,217 $4,582,592
__________________________________________
(1) The above calculations do not include 609,900 shares of Common
Stock issuable upon the exercise of stock options. Of such
609,900 options, (i) 96,900 are immediately exercisable at an
exercise price of $0.50, (ii) 178,125 are immediately
exercisable at an exercise price of $1.80, (iii) 59,375 are
exercisable in May 1997 at an exercise price of $1.80, and (iv)
275,500 are exercisable in May 1998 at an exercise price of
$1.80.
DILUTION
At June 30, 1996, the net tangible book value of the Company
was $1,533,759, or $0.96 per share. Net tangible book value per
share is determined by dividing the net tangible book value
(tangible assets less liabilities) of the Company at June 30, 1996,
by the number of shares of Common Stock outstanding. Without taking
into account any changes in net tangible book value after June 30,
1996, other than to give effect to the sale of the Company of
750,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $4.00 per share and 500,000 Warrants at an
assumed initial public offering price of $0.125 per Warrant, and
after deducting underwriting discounts and commissions and estimated
offering expenses payable to the Company, the pro forma net tangible
book value at June 30, 1996 would have been approximately
$3,968,134, or $1.69 per share. This amount represents an immediate
dilution to new investors of $2.31 per share and an immediate
increase in net tangible book value per share to existing
stockholders of $0.73 per share. The following table illustrates
this dilution per share:
Assumed public offering price per share $4.00
Net tangible book value per share at June 30, 1996 $0.96
Increase per share attributable to new investors .73
Pro forma net tangible book value per share after
the offering 1.69
Net tangible book value dilution per share to new
investors $2.31
The foregoing information assumes no exercise of outstanding
stock options. At June 30, 1996, there were outstanding options to
purchase 96,900 shares of Common Stock at an exercise price of $.50
per share, and outstanding options to purchase 513,000 shares of
Common Stock at an exercise price of $1.80 per share (of which
options 178,125 are immediately exercisable and 334,875 are subject
to vesting). To the extent outstanding options are exercised, there
will be further dilution to new investors.
The following table sets forth, as of the date of this
Prospectus, the number of shares of Common Stock purchased, the
percentage of shares of Common Stock purchased, the total gross
consideration paid, the percentage of total consideration paid, and
the average price per share paid by the existing shareholders and by
the investors purchasing shares of Common Stock in this offering:
SHARES PURCHASED TOTAL CONSIDERATION
Average Price
NUMBER PERCENT NUMBER PERCENT PER SHARE
Existing 1,603,275 68.13% $5,539,115 64.87% $ 3.45
shareholders
New investors 750,000 31.87% $3,000,000 35.13% $ 4.00
Total 2,353,275 100.00% $8,539,115 100.00% $ 3.63
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data
presented below for the years ended December 31, 1995 and 1994, are
derived from and should be read in conjunction with the more
detailed financial statements of the Company and the notes thereto,
which have been audited by Hein + Associates LLP, independent
auditors, whose report is included elsewhere in this Prospectus.
The selected consolidated statements of operations data for the six
months ended June 30, 1996 and 1995 and consolidated balance sheet
data as of June 30, 1996 are derived from the unaudited consolidated
financial statements of the Company. In the opinion of the Company,
such unaudited consolidated financial statements include all
necessary adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of results for such
periods. The selected consolidated financial data presented below
should be read along with the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" which follows this section.
YEARS ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
1994 1995 1995 1996
Statement of Operations Data:
Revenues: $6,249,333 $10,037,502 $4,947,952 $6,553,376
Cost and expenses:
Cost of sales 4,663,124 7,494,427 3,885,875 4,975,557
Engineering and product
development 408,966 481,475 243,048 314,659
Sales and marketing 500,338 452,654 234,066 240,621
General and administrative 418,970 581,174 252,035 332,927
Total operating expenses 1,328,274 1,515,303 729,149 888,207
Income from operations 257,935 1,027,772 332,928 689,612
Interest expense, net 102,509 116,030 55,566 52,198
Translation loss (10,450) (85,258) (6,851) (206)
Income before income taxes 144,976 826,484 270,511 637,208
Provision (Benefit) for income
taxes 23,253 (277,400) 28,000 294,000
Net income 121,723 1,103,884 242,511 343,208
Net income per share:
Primary 0.02 0.80 0.16 0.24
Fully diluted $0.02 $0.66 $0.15 $0.20
Shares used in per share
calculations 1,226,208 1,258,858 1,242,395 1,276,778
Balance Sheet Data:
Working capital $2,426,022
Total assets 5,443,277
Long-term debt 1,471,361
Stockholders' equity $1,533,759
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATION
The following discussion and analysis should be read in
connection with the Company's Consolidated Financial Statements and
the notes thereto and other financial information included elsewhere
in the Prospectus.
OVERVIEW
The Company designs, develops, manufactures, and markets
electronic power supplies for use in converting electric power into
a form suitable for the operation of electronic circuitry. Revenues
are generated from the sale of the Company's power supplies to OEMs
in the computer and other electronic equipment industries.
RESULTS OF OPERATIONS
The table below sets forth certain statements of operations
data as a percentage of revenues for the six months ended June 30,
1996 and 1995 and the years ended December 31, 1995 and 1994.
YEARS ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
1994 1995 1995 1996
Revenues 100% 100% 100% 100%
Cost of goods sold 74.62 74.66 78.54 75.92
Gross margin 25.38 25.34 21.46 24.08
Selling, general and
administrative 14.71 10.30 9.82 8.75
Engineering and product
development 6.54 4.8 4.91 4.8
Total operating expense 21.25 15.1 14.73 13.55
Operating income 4.13 10.24 6.73 10.53
Net interest expense 1.64 1.16 1.12 .8
Translation loss .17 .85 .14 .0
Income before income taxes 2.32 8.23 5.47 9.73
Provision (Benefit) for .37 (2.76) .57 4.49
Income taxes
Net Income 1.95% 10.99% 4.9% 5.24%
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO JUNE 30, 1995.
REVENUES
Revenues for the six months ended June 30, 1996 increased by
$1,605,424, or 32.45% over the six months ended June 30, 1995. This
increase in revenues was due primarily to substantially increased
sales to a single OEM and, to a lesser extent, to increased sales to
the Company's 28 stocking distributors.
Due to market conditions, sales of the OEM's products have
slowed which in turn has affected the sales of the Company's power
supplies to the OEM. In light of such decrease in purchases, it
will be unlikely that the OEM will purchase the same number of power
supplies it purchased during the first six months of the year. See
"Risk Factors - Customer Concentration."
GROSS MARGINS
Gross margins were 24.08% for the six months ended June 30,
1996 compared to 21.46% for the six months ended June 30, 1995. The
improvement in gross margins can primarily be attributed to greater
capacity utilization as fixed overhead costs declined on a per unit
basis.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased by
$87,447, from $486,101 for the six months ended June 30, 1995, to
$573,548 for the six months ended June 30, 1996. The increase
primarily related to one-time bonuses to certain employees which
increased employee compensation expense. As a percentage of
revenues, however, selling, general and administrative expenses
decreased from 9.82% for the six months ended June 30, 1995 to 8.75%
for the six months ended June 30, 1996 since the increase in
revenues during this period was greater than the increase in
selling, general and administrative expenses.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were 4.80% of
revenues for the six months ended June 30, 1996, and 4.91% of
revenues for the six months ended June 30, 1995. This slight
decrease as a percentage of revenues was due to a greater increase
in revenues than the increase in engineering and product development
expenses.
INTEREST EXPENSE
Interest expense was 0.8% of revenues for the six months ended
June 30, 1996 and 1.12% of revenues for the six months ended June
30, 1995. This decrease was primarily due to a one percentage point
reduction in interest rate of the line of credit loan which took
place in September 1995.
TRANSLATION LOSS
The primary currency of the Company's subsidiary, Poder
Digital, is the Mexican peso. During 1995, the Mexican peso was
devalued against the United States dollar. As a result of such
devaluation, the Company experienced a translation loss of $6,851
for the six months ended June 30, 1995 related to Poder Digital's
operations using Mexican pesos. The Company did not experience a
similar loss for the six months ended June 30, 1996.
INCOME BEFORE INCOME TAXES
Income before income taxes for the six months ended June 30,
1996 was $637,208 compared to $270,511 for the same period during
1995. This increase of $366,697 was primarily due to the
substantial increase in revenues over expenses during the six months
ended June 30, 1996.
INCOME TAX
The Company's income tax expense was 4.49% of revenues for the
six months ended June 30, 1996 and 0.57% of revenues for the six
months ended June 30, 1995. Through December 31, 1995, the Company
had net operating loss tax carry-forwards (NOLs) which resulted in
minimal federal tax liability for the Company in 1995. Through June
30, 1996, the Company began providing for year-end tax liability at
an estimated average annual rate of approximately 40%.
NET INCOME
Net income was $343,208 for the six months ended June 30, 1996
and $242,511 for the six months ended June 30, 1995. The increase
in net income was due to increased revenues and a decreased cost of
goods sold as a percentage of sales. As previously discussed,
during the fourth quarter of 1995, the Company recognized a one-time
tax benefit of $277,400 due to its prior net operating losses.
Because of the tax benefit recognized during the fourth quarter of
1995, it is unlikely that the Company's net income for 1996 will
exceed the Company's 1995 net income.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31,
1994
REVENUES
Revenues in 1995 increased by $3,788,169, or 60.62%. The
majority of this increase, $1,957,293 (51.67%) was due to increased
sales through the Company's stocking distributors who resell the
Company's products to OEMs. Direct sales by the Company to OEMs
accounted for $1,294,886 (34.18%) of the increase in sales and the
balance of $535,990 (14.15%) was generated by the Company's three
private label customers.
GROSS MARGINS
Gross margins were 25.34% of revenues during 1995 and 25.38% of
revenues during 1994. This slight decrease in gross margins was due
to increased costs to the Company. These increased costs primarily
resulted from increased sheet metal costs and increased costs
associated with certain Japanese-sourced materials, such as
capacitors. Japanese-sourced materials became more expensive
because of the weakening of the Japanese yen against the dollar. In
addition, the Company's administrative costs of its Mexican facility
increased due to the appointment of a new plant manager and several
other key management personnel to strengthen the operations of that
facility. These increases in costs were offset by an approximate 5%
increase in selling prices instituted during 1995.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were 10.30% of
revenues in 1995 and 14.71% of revenues in 1994. Selling, general
and administrative expenses declined during 1995 primarily due to
the Company's decision to terminate its relationship with its
manufacturer's representative in the Northern California territory
and to manage sales directly, resulting in a decrease in commissions
to 1.42% of revenues in 1995 from 3.87% of revenues in 1994.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were 4.80% of
revenues in 1995, and 6.54% of revenues in 1994. During 1994, the
Company had entered into several custom product development
contracts which were engineering-intensive but did not result in the
expected revenues. In 1995, the Company directed its engineering
resources to a greater degree on the development of modifiable
standard products with a resulting decline in engineering expenses
as a percentage of revenues.
INTEREST EXPENSE
Interest expense was 1.16% of revenues during 1995 and 1.64% of
revenues during 1994. Interest expense relates primarily to a line
of credit and two equipment term loans with San Jose National Bank.
The two term loans in the aggregate principal amount of $170,000,
and the line of credit, are secured by the Company's accounts
receivables and the Company's assets. Proceeds from the two term
loans were used to acquire equipment, and proceeds from the line of
credit were used for working capital. Because the Company's
borrowings did not increase in 1995, interest expense, as a
percentage of revenues, decreased in 1995. In addition, the
interest rate on the line of credit loan decreased by one percentage
point in September 1995.
TRANSLATION LOSS
The primary currency of the Company's subsidiary, Poder
Digital, is the Mexican peso. During the fiscal year ended 1995,
the Mexican peso was devalued against the United States dollar. As
a result of the devaluation, the Company incurred a $85,258
translation loss related to Poder Digital's operations. During
1994, the Company experienced a translation loss of $10,450.
INCOME BEFORE INCOME TAXES
Income before income taxes increased by $681,508 from $144,976
during 1994 to $826,484 in 1995. This substantial increase was
primarily due to the increase in revenues from the sale of the
Company's power supplies.
INCOME TAX
During the fourth quarter of 1995, the Company recognized an
income tax benefit of $277,400 as compared to a tax provision of
$23,253 during 1994. The recognition of the tax benefit during 1995
is due to the Company's utilization of its prior net operating loss
carryforward.
NET INCOME
Net income was $1,103,884 in 1995 and $121,723 in 1994, an
increase of $982,161, or 807%. The increase in net income was due
to a substantial increase in sales without a corresponding increase
in expenses related to such sales, and due to a $277,400 tax
benefit.
The Company does not believe that its business is seasonal.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996 and December 31, 1995, the Company's
working capital was $2,426,022 and $2,211,358, respectively. For
the past two fiscal years and the six months ended June 30, 1996,
the Company has relied on cash flows from operations supplemented by
bank borrowings to finance working capital and capital improvements.
The Company's bank borrowings consist of a $120,000 promissory note
bearing interest at 10% per annum and due December 8, 1998, a
$50,000 promissory note bearing interest at 10.5% per annum and due
May, 1999, and a $1.5 million line of credit bearing interest at
prime plus 1% and due October 15, 1997. Proceeds from the
promissory notes were used to acquire equipment, and the line of
credit is used to supplement the Company's working capital. The
promissory notes and line of credit are secured by substantially all
of the Company's assets. The Company does not anticipate any
material capital expenditures during 1997. As of June 30, 1996 and
December 31, 1995, the Company's bank borrowings totalled $1,614,458
and $1,054,145, respectively. See Note 6 of Notes to Consolidated
Financial Statements. Part of the proceeds raised hereby will be
used to reduce the Company's borrowings by approximately $1 million.
In addition, the Company is a guarantor of a $500,000 term loan
granted to the Company's employee stock ownership plan ("ESOP").
The $500,000 term loan is included in the total amount of the
Company's bank borrowings as of June 30, 1996 stated in the
preceding paragraph. The $500,000 is due in June 2001 and bears
interest at 10.5% per annum. Proceeds from the loan were used to
acquire the Company's Common Stock by the ESOP. Principal and
interest on the loan will be paid by the ESOP through contributions
made by the Company to the ESOP in the amount of approximately
$10,750 per month. This amount will be a monthly deduction against
revenues through June 2001.
NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS
The requirements of the Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets," issued in March 1995 ("FAS 121") and the Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," issued in October 1995 ("FAS 123"), are effective for
financial statements for years that begin after December 15, 1995.
The Company adopted FAS 121 effective January 1, 1996. The adoption
had no effect on the Company's financial position.
FAS 123 encourages, but does not require, companies to
recognize compensation expense based on fair value for grants of
stock, stock options, and other equity instruments granted to
employees. Companies that do not adopt the fair value accounting
rules must disclose the impact of adopting the new method in the
notes to the financial statements. The Company currently does not
intend to adopt the fair value accounting prescribed by FAS 123 and
will be subject only to the disclosure requirements prescribed by
FAS 123.
BUSINESS
OVERVIEW
Digital Power Corporation designs, develops, manufactures, and
markets switching power supplies for sale to manufacturers of
computers and other electronic equipment. Switching power supplies
are critical components of all computers and other electronic
equipment. The electronic circuitry in computers and other
electronic equipment requires a steady and isolated supply of direct
current (DC) electrical power. In addition, the various components
and subassemblies within computers and other electronic equipment
often require different voltage levels of electrical power. The
power supply products of the Company satisfy these two requirements
by converting the alternating current (AC) electricity from a
primary source, such as a wall outlet, into the direct current
required for the proper functioning of electronic circuits, and by
dividing the single electrical current into as many as four discrete
output voltages. The Company's power supply products also monitor
and regulate the DC output voltages being delivered to protect the
electronic equipment from harmful surges and drops in voltage
levels. Because the Company's products have a high "power-density"
(measured in watts per cubic inch), the power supply products of the
Company are generally smaller than those of competitors. For
example, the Company believes that its US100 series of power
supplies, on a 3"x 5" printed circuit board, is the smallest 100
watt off-line (AC input) power supply available in the industry.
Furthermore, the Company's power supply products are extremely
"flexible" in design. This "flexibility" approach allows the
Company to modify quickly and inexpensively its base-design products
to satisfy an OEM's specific power supply needs, thereby enabling
the Company to keep to a minimum its expenses for non-recurring
engineering ("NRE") of its base-design products. Because of this
reduced NRE expense related to the "flexibility" line of switching
power supplies, the Company does not charge its customers for its
NRE expenses incurred in tailoring a power supply to a customer's
specific requirements. However, many competitors of the Company do
charge their customers for NRE expenses. As a result of the
Company's "flexibility" approach, it has provided samples of
modified power supplies to OEM customers in as quickly as a few
days, an important capability given the increasing emphasis placed
by OEMs on "time-to-market". Digital Power's strategic objective is
to exploit this combination of power density, flexibility, and short
time-to-market to win an increasing share of the growing power
supply market.
THE INDUSTRY
The market for power supplies is large, as all electronic
systems require a steady supply of low voltage electrical power.
Almost all of these systems require direct current (DC) voltages,
not the alternating current (AC) voltages provided by utility
companies. Furthermore, the voltage levels produced by standard
power sources must be significantly lowered in order to allow proper
functioning of an electronic component. For example, internal
computer microprocessors, as well as memory and logic circuitry in
telecommunications systems, generally operate on a voltage level of
5 volts DC or less. However, most electrical outlets produce at
least 115 volts AC. Therefore, the incoming voltage of 115 volts AC
must be both converted to DC and reduced to 5 volts. This is the
function performed by a typical power supply. Those products which
accept and convert alternating current from a primary power source
into the direct current required by electronic systems are generally
referred to as "power supplies". Those products which convert one
level of DC voltage into a higher or lower level of DC voltage as
required by a particular electronic device are generally referred to
as "DC/DC converters".
Electronic systems are sensitive to variations in voltage, and
therefore require protection from the surges and drops in the AC
voltage which commonly occur over electrical lines. Power supplies
perform this essential function by regulating or maintaining the
output voltages within a narrow range of values.
Finally, power supplies divide a charge of electricity into
multiple lower voltage outputs. Most electronic systems have a
number of subsystems, each of which may require a different incoming
operating voltage. Power supplies can provide multiple outputs of
different voltage levels. Certain voltage levels are common in the
electronics field. Increasingly, Digital Power has received
requests from OEMs for "non-standard" voltage outputs. Digital
Power believes that its "flexibility" series of power supplies are
ideally suited for these non-standard voltage applications.
THE MARKET
According to Micro-Tech, the worldwide market for electronic
power supplies was estimated to be $15 billion in 1995. The power
supply manufacturing industry is highly fragmented and Digital Power
believes there are approximately 400 power supply competitors in the
world. The electronic power supply market is typically split into
captive and merchant segments. The captive segment of the market,
that portion represented by OEMs who design and manufacture power
supplies for use in their own products, is estimated to account for
50% of the total market according to Micro-Tech. The balance of the
power supply market is served by merchant power supply manufacturers
such as Digital Power that design and manufacture power supplies for
sale to OEMs. Micro-Tech forecasts that the merchant segment of the
market will experience the greatest rate of growth, increasing from
52.5% of the total market in 1996 to 62.8% of the total market in
2000. The Company believes that the increase is due, in part, to
the fact that power supplies are becoming an increasingly complex
component to the OEMs, with constantly changing requirements such as
power factor correction (PFC) and filtering specifications to
minimize electromagnetic interference (EMI).
POWER FACTOR CORRECTION. The alternating current electricity
delivered by utility companies over power lines is delivered in
smooth waves, known as harmonic waves, or sine waves. This smooth
harmonic wave form of AC electricity that reaches a power supply is
known as "apparent power", and it is measured in watts (watts equal
volts multiplied by amperes). Although the electricity reaches a
switching power supply in a smooth harmonic wave form, the switching
power supply does not draw on the electricity in a smooth harmonic
fashion. Rather, in the process of "rectifying" the alternating
current into direct current form, a switching power supply will draw
current off the AC harmonic wave form in short bursts, each of which
is shorter in duration than the wave frequency. The amount of power
drawn off the line by the switching power supply in these short
bursts is known as the "real input power". The real input power
cannot be greater than the apparent power, and in fact is almost
always less than the apparent power. Therefore, a percentage, or
factor, can be arithmetically determined by dividing the real input
power by the apparent power, giving a coefficient known as the
"power factor" of the power supply. Ideally, a switching power
supply would have a power factor of one, where all the apparent
power is drawn off by the power supply, resulting in the real input
power equaling the apparent power. In practice, however, this is
not possible. In fact, most switching power supplies without the
special feature known as "power factor correction" have an
approximate power factor of only .60.
The reason why power factor of less than one can be a
significant problem relates to the power that is not drawn off the
power line, or the differential amount between one and the power
factor (1 - .60 = .40 in the example given above). This
differential of missing power is reflected back onto the power line
in a harmonically distorted fashion, since the originally smooth
harmonic wave form has now been disrupted by the power that has been
drawn off by the power supply and exhibits a kind of "ripple" in the
wave form. The harmonically distorted wave form circulates as
wasted heat energy in the power line, as well as in wall sockets,
electrical wiring in the building, and in distribution transformers
along the power line. This problem of harmonic distortion and
wasted heat energy grows as additional switching power supplies are
connected to and draw power from a power line. A large enough
number of switching power supplies drawing power from a line without
power factor correction will result in: (i) a significant
uncompensated loss of electrical power (in the form of heat) to the
electrical utility company; (ii) potential damage to power lines and
transformers caused by excessive heat; and (iii) "dirty" electrical
power for "downstream" consumers of electricity. A low power factor
is generally not a problem for the piece of electronic equipment
itself served by the switching power supply.
In response to these problems, manufacturers of power supplies
have developed certain circuitry within power supplies known as
"power factor correction", or PFC. With PFC, most power supplies
can be improved to perform at a power factor of approximately .99.
Historically, PFC has only been installed in high wattage switching
power supplies because of the comparatively greater amount of
harmonic distortion reflected back onto the line by these power
supplies. However, PFC is rapidly becoming critical at all power
levels, not only because it allows equipment designers to power more
circuits from a standard outlet, but also because of regulatory
requirements established in the European Union, such as European
Normatives EN61000-3-2 and EN61000-3-3. These two normative
standards, known more fully as "Limits For Harmonic Current
Emissions," and "Limitation Of Voltage Fluctuations And Flicker On
Low Voltage Supply Systems For Equipment With Rated Current <16A
[less than 16 amperes]," respectively, upgrade the former generic
standard IEC555.2 and place pressure on manufacturers of power
supplies to develop products with PFC at lower and lower power
levels.
ELECTROMAGNETIC INTERFERENCE (EMI). EMI is universally
undesirable because it potentially interferes with the operation of
other electronic equipment. In the United States, the Federal
Communications Commission ("FCC") has mandated certain EMI limits
which cannot be exceeded by OEM equipment. The European Union (EU)
has issued an electromagnetic compatibility (EMC) directive that
applies certain requirements to products sold in Europe beginning
January 1, 1996. The EU created these directives to insure
conformity with safety and quality standards and to assess product
compliance throughout its jurisdiction. One of these requirements
involves Conformity European ("CE") marking. OEMs may add the "CE"
mark to their equipment if it meets the requirements for radiated
and conducted noise emissions and for noise susceptibility. The
power supply, if part of an OEM system, does not itself need CE
certification. However, since it is one of the major noise
generators within an OEM system, there is a growing demand for the
power supply to have the CE mark. A pre-approved power supply
provides added assurance that the OEM will meet the applicable
standards with little trouble.
Digital Power plans to address the market demands discussed
above for PFC and EMI features by developing and introducing a line
of power supply products which incorporate PFC and provide filtering
from EMI which meets or exceeds the requirements for "CE" marking.
The power supply market can be further segmented between custom
and standard power supplies. Power supplies designed and
manufactured by an OEM for use in its own equipment are an example
of a custom design, as the product is not intended for resale.
However, custom power supplies are also common in the merchant
market, as certain OEMs contract with power supply manufacturers to
design a product that meets the form, fit, and function requirements
of their specific application. Standard, "off-the-shelf" power
supplies are intended for sale to many customers whose electronic
equipment can operate from "standard" output voltages, such as 5
volts, 12 volts or 24 volts DC. A subset of the standard segment of
the market has evolved, commonly known as "modified", comprising
power supply products which have the performance characteristics of
a standard power supply, but need certain, usually minor,
modifications. These modifications may include slight mechanical
changes to the sheet metal chassis, but more typically involve an
adjustment to the output voltages from one of the "standard" output
voltages (e.g. 5 volts to 7 volts, or 15 volts to 18.5 volts).
Digital Power primarily serves the North American power
electronics market with AC/DC power supplies and DC/DC converters
ranging from 50 watts to 750 watts of total output power. AC/DC
power supplies represent the largest part of the merchant power
electronics market with sales in North America alone expected to
grow from about $4.9 billion in 1996 to $6.7 billion in 2000.
During the same period, DC/DC converter sales in North America are
forecasted to grow from $1.5 billion in 1996 to $2.1 billion in
2000.
STRATEGY
Digital Power's strategy is to be the supplier of choice to
OEMs requiring a high quality power solution where size, rapid
modification, and time-to-market are critical to their business
success. Target market segments would include telecommunications,
networking, switching, mass storage, and industrial and office
automation products. While many of these segments would be
characterized as computer-related, the Company does not participate
in the personal computer (PC) power supply market. The power supply
market for PCs is very competitive with standard power supplies
producing low margins.
PRODUCT STRATEGY
Digital Power has eight series of base designs from which
thousands of individual models can be produced. Each series has its
own printed circuit board (PCB) layout that is common to all models
within the series regardless of the number of output voltages
(typically one to four) or the rating of the individual output
voltages. A broad range of output ratings, from 3.3 volts to 48
volts, can be produced by simply changing the power transformer
construction and a small number of output components. Designers of
electronic systems can determine their total power requirements only
after they have designed the system's electronic circuitry and
selected the components to be used in the system. Since the
designer has a finite amount of space for the system and may be
under competitive pressure to further reduce its size, a burden is
placed on the power supply manufacturer to maximize the power
density of the power supply. A typical power supply consists of a
PCB, electronic components, a power transformer and other
electromagnetic components, and a sheet metal chassis. The larger
components are typically installed on the PCB by means of
pin-through-hole assembly where the components are inserted into
pre-drilled holes and soldered to electrical circuits on the PCB.
Other components can be attached to the PCB by surface mount
interconnection technology (SMT) which allows for a reduction in
board size since the holes are eliminated and components can be
placed on both sides of the board. The Company's US100 series is an
example of a product using this manufacturing technology.
PRODUCTS
Digital Power's "flexibility" concept applies to all of the
Company's US, UP/SP, and DP product series. A common printed
circuit board is shared by each model in a particular family,
resulting in a reduction in parts inventory while allowing for rapid
modifiability into thousands of output combinations. The following
is a description of the Company's products.
US50/DP50 SERIES
The US50 series of power supplies are compact, economical, high
efficiency, open frame switchers that deliver up to 50 watts of
continuous or 60 watts of peak power from one to four outputs. The
90-264 VAC universal input allows them to be used worldwide without
jumper selection. Flexibility options include chassis and cover,
power good signal, an isolated V4 output, and UL544 (medical) safety
approval. All US50 series units are also available in 12VDC, 24VDC,
or 48VDC inputs. This optional DC input unit (DP50 series)
maintains the same pin-out, size, and mounting as the US50 series.
US70/DP70 SERIES
The US70 series of power supplies is similar to the US50
series, a compact, economical, highly efficient, open frame switcher
that delivers up to 65 watts with a 70 watt peak. This unit is
offered with one to four outputs, a universal input rated from 90 to
264 VAC, and is only slightly larger than the US50 series. The US70
series is differentiated from competitive offerings by virtue of its
smaller size, providing up to four outputs while competitors
typically are limited to three outputs. Flexibility options include
cover, power good signal, an isolated V4 output, and UL544 (medical)
safety approval. The DP70 is the same as the US70 except the input
is 48 volts DC. The Company also offers 12 & 24 VDC DC input on
this series where the model series changes to DN&DM. This type of
product is ideal for low profile systems with the power supply
measuring 3.2" x 5" x 1.5".
US100/DP100 SERIES
The US100/DP100 is the industry's smallest 100 watt switcher.
Measuring only 5" x 3.3" x 1.5", this series delivers up to 100
watts of continuous or 120 watt peak power from one to four outputs.
The 90-264VAC universal input allows them to be used worldwide.
This product is ideal in applications where OEMs have upgraded their
systems, requiring an additional 30-40 watts of output power but
being unable to accommodate a larger unit. The US100 fits in the
same form factor and does not require any tooling or mechanical
changes by the OEM. Flexibility options include a cover and
adjustable post regulators on V3 and/or V4 outputs. Fully custom
models are also available. All US100 series units are also
available with 12VDC, 24VDC, or 48 VDC inputs. This optional DC
input unit (DP100) maintains the same pin-out, size, and mounting as
the US100 series.
UP300 SERIES
The UP300 series are economical, high efficiency, open frame
switchers that deliver up to 300 watts of continuous, 325 watt, peak
power from one to two outputs. The 115/230VAC auto-selectable input
allows them to be used worldwide. On-board EMI filtering is a
standard feature. Flexibility options include a cover, power
fail/power good signal, and an isolated 2nd output. The UP300 is
also available as the SP300 series, which is jumper selectable
between 115 and 230VAC and provides the OEM an even more economical
solution. This product can be used in network switching systems or
other electronic systems where a lot of single output current, such
as 5, 12, 24, 48 volt current might be required.
US250/DP250 SERIES
The US250 series are economical, high efficiency, open frame
switchers that deliver up to 250 watts of continuous or 300 watts of
peak power from one to four outputs. The 115/230VAC auto-selectable
input allows them to be used worldwide. Flexibility options include
cover, power fail/power good signal, enable/inhibit, and an isolated
V3 output. All US250 series units are also available with 12VDC,
24VDC, or 48VDC inputs. This optional DC input unit (DP250)
maintains the same pin-out, size, and mounting as the US250 series.
US350 SERIES
The US350 series is a fully-featured unit that has active power
factor correction and was designed to be field-configurable by the
Company's international and domestic sales channels. This feature
allows the stocking distributor to lower its inventory costs but
still maintain the required stock to rapidly provide power supplies
with the unique combination of output voltages required by an OEM.
This unit delivers 350 watts from one to four outputs modules and
meets the total harmonic distortion spec IEC 555.2. The US350 has
an on-board EMI filter and operates from 90-264 VAC input. This
unit measures 9" x 5" x 2.5" and can operate without any minimum
loads and has an optional internal fan and power fail/power good
signal.
US750 SERIES
The newest product under development by the Company is the
US750 series. The US750 is a fully modular power supply measuring
3" x 10.25" x 5" and delivers 750 watts from one to four power
outputs. This product can be configured to meet many different
applications. It comes with optional N+1 parallelability, hot
swapability, frequency synching, power good/power fail, and remote
on/off. The Company anticipates that this product will be available
for sale during the first quarter of 1997.
The Company also produces two products designated as the KD
series in a 150 watt and 200 watt product. These designs were
acquired in 1987 under a licensing agreement with KDK Electronics.
They are still offered for sale but are expected to continue to
decline as a percentage of Digital's revenues. The licensing
agreement with KDK Electronics, as amended, provides that in the
event total historical sales of KD products reaches $20 million,
then KDK Electronics will be granted a stock option to purchase
100,000 shares of Digital's Common Stock for $3.50 per share with
Digital paying the exercise price. Due to changing market
conditions, the KD series is expected to be phased out prior to
reaching the $20 million sales level. Therefore, no common stock is
anticipated to be granted to KDK Electronics under the licensing
agreement. In addition, KDK Electronics will be paid a royalty
equal to 5% on the first $20 million total sales of the KD series
products with the royalty decreasing on sales over that amount. KD
products accounted for 23%, 14%, and 9% of revenues in 1994, 1995,
and for the six months ended June 30, 1996, respectively. Total
cumulative sales of KD products were $14,211,423 as of June 30,
1996.
VALUE-ADDED SERVICE
Digital Power offers its customers various types of value-added
services, which may include the following additions to its standard
product offerings.
Electrical (power): Paralleled power supplies for (N+1)
redundancy, hot swapability, output OR'ing diodes, AC input
receptacle with fuse, external EMI filter, on/off switch, cabling
and connectors, and battery backup with charger.
Electrical (control and monitoring): AC power fail detect
signal, DC output(s) OK signal, inhibit, output voltage margining,
and digital control interface.
Mechanical: Custom hot-plug chassis for (N+1) redundant
operation, locking handle, cover, and fan.
These services incorporate one of the Company's base products
along with additional enclosures, cable assemblies, and other
electronic components to arrive at a power subassembly. This
strategy matches perfectly with those OEMS wishing to reduce their
vendor base, as the turnkey sub-assembly allows customers to
eliminate other vendors.
QUALITY MANAGEMENT METHODS
Digital Power's emphasis on quality begins with the initial
design stage and continues through the production processes to the
end product. To execute this strategy, the Company utilizes
sophisticated design techniques including computer modeling and
computer aided design combined with advanced management methods such
as just-in-time (JIT) manufacturing, statistical process control
(SPC), and total quality commitment (TQC). The Company believes
that these techniques lower production costs while simultaneously
improving production efficiencies and the quality of the end-
product.
SAFETY AND REGULATORY AGENCIES
All of the Company's power supplies meet or exceed established
international safety standards including Underwriters Laboratory
Incorporated (UL) in the United States; Canadian Standards
Associations (CSA) in Canada, or the UL equivalent (cUL); and
Technischer Uberwachungs-Verein (TUV) or Verband Deutscher
Electrotechniker (VDE) in Germany. In addition the Company has been
site-approved by the British Approval Board for Telecommunications
(BABT) in the United Kingdom. The Company plans to achieve ISO 9001
certification, a European model for quality assurance, by the second
quarter of 1997.
SUPPLIERS
Other than certain fabricated parts such as printed circuit
boards and sheet metal chassis which are readily available from many
suppliers, the Company uses no custom components. Typically, two
suppliers are qualified for every component, with the exception
being two line transformers, one manufactured by Tamura and the
second one manufactured by Spitznagel. These transformers are
designed into three of the Company's products, which products
accounted for approximately 10% of the Company's sales in 1995.
MANUFACTURING STRATEGY
Consistent with its product flexibility strategy, the Company
aims to maintain a high degree of flexibility in its manufacturing
processes in order to respond to rapidly changing market conditions.
With few exceptions, the competitive nature of the power supply
industry has placed continual downward pressure on selling prices.
In order to achieve low cost manufacturing with a labor-intensive
product, manufacturers have the option of automating much of the
labor out of their product, or producing their product in a low
labor cost environment. Given the high fixed costs of automation
and the resistance this places on making major product changes,
Digital Power believes that its flexible manufacturing strategy is
best achieved through a highly variable cost of operation. In 1986,
the Company established a wholly-owned subsidiary in Guadalajara,
Mexico to assemble its products. This manufacturing facility
performs materials management, sub-assembly, final assembly, and
test functions for the majority of the Company's power supply
products. In addition, Digital has entered into an agreement with
Fortron/Source Corp. to manufacture Digital's products at a facility
located in China on a turnkey basis. Purchases from Fortron/Source
will be made pursuant to purchase orders and the agreement may be
terminated upon 120 days notice. Although the Company has just
recently begun to manufacture its products through Fortron/Source,
the Company believes that it will be able to produce high volume
power supplies through Fortron/Source at a cost lower than at its
Guadalajara, Mexico, facility.
SALES, MARKETING AND CUSTOMERS
Digital Power markets its products domestically through a
network of 13 independent manufacturers representatives. Each
representative organization is responsible for managing sales in a
particular geographic territory. Generally, the representative has
exclusive access to all potential customers in the assigned
territory and is compensated by commissions at 5% of net sales after
the product is shipped, received, and paid for by the customer.
Typically, either the Company or the representative organization may
terminate the agreement with 30 days written notice.
In certain territories, the Company has entered into agreements
with 28 stocking distributors who buy and resell the Company's
products. For the six months ended June 30, 1996, and for the years
ended December 31, 1995 and 1994, distributor sales accounted for
38.9%, 39.7%, and 32.4%, respectively, of the Company's total sales.
Over this same period, one distributor accounted for 23.1%, 27%, and
16%, respectively, of total sales. In addition, international sales
through stocking distributors accounted for less than 5% of the
Company's sales. In general, the agreements with stocking
distributors are subject to annual renewal and may be terminated
upon 90 day's written notice. Although these agreements may be
terminated by either party in the event a stocking distributor
decides to terminate its agreement with the Company, the Company
believes that it would be able to continue the sale of its products
through direct sales to the customers of the stocking distributor.
Further, and in general, stocking distributors are eligible to
return 25% of their previous six-month's sales for stock rotation.
For the past three years, stock rotations have not exceeded one
percent of total sales.
The Company has also entered into agreements with three private
label customers who buy and resell the Company's products. Under
these agreements, the Company sells its products to the private
label company who then resells the products with its label to its
customers. The Company believes that these private label agreements
expand its market by offering the customer a second source for the
Company's products. The private label agreements may be terminated
by either party. Further, the private label agreement requires that
any product subject to a private label be available for 5 years.
For the six months ended June 30, 1996, and for the years ended
December 31, 1995 and 1994, private label sales accounted for 8.4%,
10.2%, and 7.8%, respectively, of total sales.
The Company's promotional efforts to date have included product
data sheets, feature articles in trade periodicals, and trade shows.
Part of the proceeds raised hereby will be used for future
promotional activities, including space advertising in
industry-specific publications, a full line product catalog,
application notes, and direct mail to an industry-specific mail
list.
The Company's products are warranted to be free of defects for
a period ranging from one to two years from date of shipment. No
significant warranty returns have been experienced. As of June 30,
1996, the Company's warranty reserve was $149,125.
BREAKDOWN OF PRODUCT MARKET
The table below sets forth the percentage of Digital Power's
revenues generated by particular market segments served by Digital
Power's customers, and indicates representative customers within
those market segments.
PRODUCT OR MARKET SERVED BY CUSTOMER PERCENTAGE OF REVENUES REPRESENTATIVE CUSTOMERS
Communications 28% Westinghouse
STM Wireless
Stanford Telecommunications
Multipoint Networks
ADC
AT&T
Network Switches, Routers, Hubs 24% Bay Networks
Ascend Communications
Digital Link
Whitetree
3COM
Computer Peripheral/Mass Storage 12% Storage Dimensions
Motorola
Photography/Visual Equipment 9% N View
Photometrics
Optivision
Semiconductor Mfg. Equipment 7% Applied Materials
Asyst Technologies
Enclosures 6% Elma
Sigma/Trimm
Broadcast Equipment 5% Leitch Video
Office Automation 4% Quartet Ovonics
Patapsco
Medical Equipment 3% OEC Diasonics
Test Equipment 2% Analogic
Orion Instruments
BACKLOG
Digital Power typically does not build finished goods for
stock. Upon receipt of a purchase order from a customer, a work
order is issued to the Company's production department to build a
specified quantity of a model to be delivered on a specified
shipment date. Backlog consists of purchase orders on-hand
generally having a scheduled delivery date within the next six
months. The Company's backlog was $5,810,098 at June 30, 1996, and
$3,276,498 at December 31, 1995. Variations in the magnitude and
duration of purchase orders received by the Company and customer
delivery requirements may result in substantial fluctuations in
backlog from period to period. Although the Company may have a
binding purchase order, customers may cancel or reschedule
deliveries and backlog may not be a meaningful indicator of future
financial results.
COMPETITION
The merchant power supply manufacturing industry is highly
fragmented and serviced by approximately 400 competitors worldwide.
Many of the Company's competitors are located in low cost
environments where they may have advantages in terms of labor and
component costs. In addition, they may offer products comparable in
quality to those of Digital Power and have significantly greater
financial and marketing resources. Representative examples of the
Company's competitors are Computer Products, Inc., ASTEC America,
Zytec Corporation, and Lambda Electronics. The Company believes it
has a competitive position with its targeted customers who need a
high-quality, compact product which can be readily modified to meet
the customer's unique requirements. To remain competitive, the
Company must continue to offer innovative products at competitive
prices while demonstrating flexibility in meeting the customer's
requirements for rapid time-to-market.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are primarily
directed toward the development of new standard power supply
platforms which may be readily modified to provide a broad array of
individual models. Improvements are constantly sought in power
density, modifiability, and efficiency, while the Company attempts
to anticipate changing market demands for increased functionality,
such as PFC and improved EMI filtering. Internal research is
supplemented through the utilization of consultants who specialize
in various areas, including component and materials engineering, and
electromagnetic design enhancements to improve efficiency, while
reducing the cost and size of the Company's products. Product
development is performed at Digital Power's headquarters in
California by three engineers who are supported and assisted by five
technicians. The Company's total expenditures for research and
development were $408,966, $481,475, and $314,659 for the years
ended December 31, 1994, 1995, and the six month period ended June
30, 1996, respectively, and represented 6.54%, 4.8%, and 4.8% of the
Company's total revenues for the corresponding periods.
EMPLOYEES
As of June 30, 1996, the Company had approximately 345 full-
time employees with 300 of these employed at its wholly-owned
subsidiary Poder Digital located in Guadalajara, Mexico. The
employees of Digital Power's Mexican operation are members of a
national labor union, as are most employees of Mexican companies.
The Company has not experienced any work stoppages at either of its
facilities and believes its employee relations are good.
FACILITIES
The Company's headquarters are located in approximately 9,500
square feet of leased office, research and development space in
Fremont, California. The Company pays $5,890 per month, subject to
adjustment, and the lease expires on January 31, 2001. The
Company's manufacturing facility is located in 16,000 square feet of
leased space in Guadalajara, Mexico. The Company pays approximately
$3,500 per month, subject to adjustment, and the lease expires in
February, 2001. The Company believes that its existing facilities
are adequate for the foreseeable future and has no plans to expand
them.
LEGAL PROCEEDINGS
The Company knows of no material litigation or claims pending,
threatened, or contemplated to which the Company is or may become a
party.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names and ages of the Executive Officers and Directors of
the Company as of September 30, 1996, and certain information about
such persons, are set forth below. The Company's Bylaws provide for
a Board of Directors of not less than five nor more than nine
members, with the actual number to be set by resolution of the
Board. Each of the Company's Directors is elected at the annual
meeting of shareholders of the Company and serves until the next
annual meeting until such person's successor is elected and
qualified, or until such person's earlier death, resignation, or
removal.
As part of the Underwriting Agreement, the Underwriters shall
have the option to designate a member to the Board of Directors, or,
at the Underwriters' option, designate an individual to attend the
Board's meetings for a period of five years. At this time, the
Underwriters have not indicated whether they intend to exercise such
right. See "Underwriting."
Executive Officers are appointed by, and serve at the
discretion of, the Board of Directors. Except as discussed below,
the Company has no employment agreements with any of its Executive
Officers or Directors. The Company has not paid any fees or other
remuneration to the Directors for their services as Directors. The
Directors do, however, receive stock options and Warrants from the
Company for their services. In August of 1996, each Director
received Warrants to purchase 20,000 shares of Common Stock at $5.00
per share for services as a Director. See "Principal and Selling
Stockholders and Warrantholders." The Company has agreed to
register the Common Stock underlying such options and Warrants. No
family relationship exists between any of the Officers or Directors.
Name Age Position
Edward L. Lammerding 66 Chairman of the Board
Philip M. Lee 72 Director
Thomas W. O'Neil, Jr. 67 Director
Robert O. Smith 52 Director, Chief Executive
Officer, and President
Claude Adkins 54 Director, Executive Vice President,
and Vice President-Engineering
Philip G. Swany 46 Chief Financial Officer and
Vice President-Finance
BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS.
EDWARD L. LAMMERDING. Mr. Lammerding is Chairman of the Board of
the Company and has been a Director since 1989. Since November,
1995, Mr. Lammerding has also served as Chairman of the Board of
3Net Systems, and since 1983 he has served as Chairman of the Board
of Sierra Resources Corporation, a venture capital investment firm.
Currently, Mr. Lammerding is serving as a director or trustee of
three other organizations, including Public Affairs Information,
Inc., a legislative bill reporting service, Unicube U.S.A., Inc., a
hospital curtain manufacturer, and Fulton Water Co., a domestic
water supply company. Mr. Lammerding also serves on the board of
the California State Lottery Commission, St. Mary's College, and the
Marine Corps Historical Foundation. Mr. Lammerding received an A.B.
in Economics from St. Mary's College.
PHILIP M. LEE. Mr. Lee has served as a Director of the Company
since 1991. He has over 40 years experience in supermarket
management and is a general partner of J & P Properties, a real
estate management and investment company. Mr. Lee is also a
director of Sierra Resources Corporation. He received a certificate
in management from American River College.
THOMAS W. O'NEIL, JR. Mr. O'Neil has served as a Director of the
Company since 1991. He is a certified public accountant and has
been a partner of Schultze, Wallace and O'Neil, CPAs, since 1991.
Mr. O'Neil is a retired partner of KPMG Peat Marwick. Mr. O'Neil is
also a director of the California Exposition and State Fair,
Chairman of the Board of the Regional Credit Association, and a
director of 3Net Systems, Inc.
ROBERT O. SMITH. Mr. Smith joined the Company in November 1989 as
its Chief Executive Officer and as a Director, and in May 1996 he
was also made President of the Company. From 1980 through 1989, Mr.
Smith held various executive positions with Computer Products, Inc.,
a manufacturer of power conversion products and industrial
automation systems (including positions as Vice President/Group
Controller of the Power Conversion Group, General Manager of the
Compower Division, and President of the Boschert subsidiary). From
1978 to 1980, Mr. Smith was Cost Accounting Manager at Harris
Computer Systems. Mr. Smith received a B.S. in Business
Administration from the Ohio University and completed numerous
courses in the M.B.A. program at Kent State University.
CLAUDE ADKINS. Mr. Adkins was the Company's President from
September 1987 to May 1996, and Executive Vice President and Vice
President of Engineering from May 1996 to the present. Mr. Adkins
has been responsible for marketing power supplies and for new
product development for the Company since the inception of the power
supply line of products. From August 1975 to January 1978, Mr.
Adkins was a technical sales representative for Richards Associates,
a manufacturer's representative organization in San Jose,
California. He received an A.A. degree from El Camino Junior
College, and a B.S. degree in Industrial Technology and Electronics
from California State University at Long Beach.
PHILIP G. SWANY. Mr. Swany joined the Company as its Controller in
1981. In February 1992, he left the Company to serve as the
Controller for Crystal Graphics, Inc., a 3-D graphics software
development company. In September 1995, Mr. Swany returned to the
Company where he was made Vice President-Finance. In May 1996, he
was named Chief Financial Officer and Secretary of the Company. Mr.
Swany received a B.S. degree in Business Administration - Accounting
from Menlo College, and attended graduate courses in business
administration at the University of Colorado.
COMMITTEES OF THE BOARD.
The Board has an Audit Committee and a Compensation Committee.
The Audit Committee consists of Messrs. Lammerding and O'Neil, and
the Compensation Committee consists of Messrs. O'Neil and Lee.
The primary functions of the Audit Committee are to review the
scope and results of audits by the Company's independent auditors,
the Company's internal accounting controls, the non-audit services
performed by the independent accountants, and the cost of accounting
services.
The Compensation Committee administers the Company's 1996 Stock
Option Plan and approves compensation, remuneration, and incentive
arrangements for officers and employees of the Company.
EXECUTIVE COMPENSATION.
The following table sets forth the Compensation of the
Company's president and chief executive officer during the past
three years. No other officer received annual compensation in
excess of $100,000.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
Securities All Other
Name and Other Annual Restricted Underlying LTIP Compensation
Principal Position Year Salary ($) Compensation ($) Stock Options (#) Payouts
Award(s) ($)
($)
Robert O. Smith 1995 $ 105,000 $0 $0 0 $0 $0
President and CEO 1994 $ 100,000 $0 $0 0 $0 $0
1993 $ 100,000 $0 $0 104,922(1) $0 $0
(1) During fiscal year 1993, Mr. Smith received a ten year
option to acquire 104,922 shares of Common Stock at $.50 per
share. During fiscal year 1996, Mr. Smith exercised his
option to acquire 8,022 shares of Common Stock.
The Company and Mr. Smith entered into an
employment contract which terminates on December
31, 1999. Under the terms of Mr. Smith's
employment contract, Mr. Smith shall serve as
president and chief executive officer of the
Company and his salary shall be $150,000 per
annum effective January 1, 1997, increasing in an
amount to be determined by Mr. Smith and the
Board such that Mr. Smith shall receive $200,000
per annum by January 1, 1999. Mr. Smith's
current salary for 1996 is $110,000. In
addition, pursuant to Mr. Smith's contract, he
shall have the right to receive on the first
business day of each January during the term of
his contract options to acquire 100,000 shares of
Common Stock at the market value as of such date.
Finally, pursuant to Mr. Smith's employment
contract, in the event there is a change in
control, Mr. Smith shall be granted a five year
consulting contract at $200,000 per year.
LIMITATION OF LIABILITY AND INDEMNIFICATION
MATTERS
Sections 204 and 317 of the California
General Corporation Law permit indemnification of
directors, officers, and employees of
corporations under certain conditions subject to
certain limitations. Article V of the Company's
Amended and Restated Articles of Incorporation
states that the Company may provide
indemnification of its agents, including its
officers and directors, for breach of duty to the
Company in excess of the indemnification
otherwise permitted by Section 317 of the
Corporations Code, subject to the limits set
forth in Section 204 of the Corporations Code.
Article VI of the Bylaws provides that the
Company shall, to the maximum extent and in the
manner permitted in the Corporations Code,
indemnify each of its agents, including its
officers and directors, against expenses,
judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection
with any proceeding arising by reason of the fact
that any such person is or was an agent of the
Company.
Pursuant to Section 317 of the California
Corporations Code, the Company is empowered to
indemnify any person who was or is a party or is
threatened to be made a party to any proceeding
(other than an action by or in the right of the
Company to procure a judgment in its favor) by
reason of the fact that such person is or was an
officer, director, employee, or other agent of
the Company or its subsidiaries, against
expenses, judgments, fines, settlements, and
other amounts actually and reasonably incurred in
connection with such proceeding, if such person
acted in good faith and in a manner such person
reasonably believed to be in the best interests
of the Company and, in the case of a criminal
proceeding, the Company has no reasonable cause
to believe the conduct of such person was
unlawful. In addition, the Company may
indemnify, subject to certain exceptions, any
person who was or is a party or is threatened to
be made a party to any threatened, pending, or
completed action by or in the right of the
Company to procure a judgment in its favor by
reason of the fact that such person is or was an
officer, director, employee, or other agent of
the Company or its subsidiaries, against expenses
actually and reasonably incurred by such person
in connection with the defense or settlement of
such action if such person acted in good faith
and in a manner such person believed to be in the
best interest of the Company and its
shareholders. The Company may advance expenses
incurred in defending any proceeding prior to
final disposition upon receipt of an undertaking
by the agent, officer, director, or employee to
repay that amount if it shall be determined that
the agent is not entitled to indemnification as
authorized by Section 317. In addition, the
Company is permitted to indemnify its agents in
excess of Section 317.
Insofar as indemnification for liabilities
arising under the Securities Act may be permitted
to directors, officers, and controlling persons
of the Company pursuant to the foregoing
provisions, or otherwise, the Company 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.
STOCK PLANS
EMPLOYEE STOCK PURCHASE PLAN. The Company
adopted an Employee Stock Ownership Plan ("ESOP")
in conformity with ERISA requirements. As of
September 30, 1996, the ESOP owns, in the
aggregate, 173,333 shares of the Company's Common
Stock. In June 1996, the ESOP entered into a
$500,000 loan with San Jose National bank to
finance the purchase of shares. The Company has
guaranteed the repayment of the loan, and it is
intended that Company contributions to the ESOP
will be used to pay off the loan. See
"Management's Discussion and Analysis." The
Company intends to make a monthly contribution of
approximately $10,750 per month to the ESOP. All
employees of the Company participate in the ESOP
on the basis of level of compensation and length
of service. Participation in the ESOP is subject
to vesting over a six-year period. The shares of
the Company's Common Stock owned by the ESOP are
voted by the ESOP trustees. Mr. Smith, President
and Chief Executive Officer of the Company, is
one of two trustees of the ESOP.
1996 STOCK OPTION PLAN. The Company has
established a 1996 Stock Option Plan (the "1996
Plan"). The purpose of the 1996 Plan is to
encourage stock ownership by employees, officers,
and directors of the Company to give them a
greater personal interest in the success of the
business and to provide an added incentive to
continue to advance in their employment by or
service to the Company. A total of 513,000
shares of Common Stock are authorized to be
issued under the Plan, of which 275,500 shares
have been issued pursuant to the 1996 Plan at an
exercise price of $1.80 per share. In connection
with the issuance of the stock options, the
Company obtained a letter from its investment
banker that the value of the stock options do not
exceed $1.80 per share. The stock options to
acquire 275,500 shares vest after two years. The
1996 Plan provides for the grant of incentive or
non-statutory stock options. The exercise price
of any incentive stock option granted under the
1996 Plan may not be less than 100% of the fair
market value of the Common Stock of the Company
on the date of grant. The fair market value for
which an optionee may be granted incentive stock
options in any calendar year may not exceed
$100,000. Shares subject to options under the
1996 Plan may be purchased for cash. Unless
otherwise provided by the Board, an option
granted under the 1996 Plan is exercisable for
ten years. The 1996 Plan is administered by the
Compensation Committee which has discretion to
determine optionees, the number of shares to be
covered by each option, the exercise schedule,
and other terms of the options. The 1996 Plan
may be amended, suspended, or terminated by the
Board, but no such action may impair rights under
a previously granted option. Each option is
exercisable, during the lifetime of the optionee,
only so long as the optionee remains employed by
the Company. No option is transferrable by the
optionee other than by will or the laws of
descent and distribution. Pursuant to the 1996
Plan, Messrs. Smith, Adkins, and Swany received
options to acquire 61,500, 29,500, and 24,250
shares of Common Stock, respectively.
401(K) PLAN
The Company has adopted a tax-qualified
employee savings and retirement plan (the "401(k)
Plan"), which generally covers all of the
Company's full-time employees. Pursuant to the
401(k) Plan, employees may make voluntary
contributions to the 401(k) Plan up to a maximum
of six percent of eligible compensation. These
deferred amounts are contributed to the 401(k)
Plan. The 401(k) Plan permits, but does not
require, additional matching and Company
contributions on behalf of Plan participants.
The Company matches contributions at the rate of
$.25 for each $1.00 contributed. The Company can
also make discretionary contributions. The
401(k) Plan is intended to qualify under Sections
401(k) and 401(a) of the Internal Revenue Code of
1986, as amended. Contributions to such a
qualified plan are deductible to the Company when
made and neither the contributions nor the income
earned on those contributions is taxable to Plan
participants until withdrawn. All 401(k) Plan
contributions are credited to separate accounts
maintained in trust.
CERTAIN TRANSACTIONS
SIERRA RESOURCES CORPORATION
Sierra Resources Corporation is a venture
capital company registered as a business
development company under the Securities Act of
1933. Edward L. Lammerding, Chairman of the
Company, is the founder of Sierra Resources
Corporation and, since 1983, has served as its
chairman of the board. Sierra Resources
Corporation is a principal shareholder of the
Company. Previously, but not within the past two
fiscal years, Sierra Resources has assisted the
Company in financing through loans. In August
1996, Sierra Resources received Warrants to
purchase 100,000 shares of common stock at $5.00
per share for providing certain administrative
and financial advice to the Company.
PRINCIPAL AND SELLING STOCKHOLDERS AND
WARRANTHOLDERS
The following table sets forth certain
information with respect to the beneficial
ownership of the Company's Common Stock as of
September 30, 1996, and as adjusted to reflect
the sale of the Common Stock offered by the
Company and the Selling Stockholders, for (i)
each director, (ii) all directors and officers of
the Company as a group, (iii) each person known
to the Company to own beneficially five percent
(5%) or more of the outstanding shares of the
Company's Common Stock, and (iv) all other
Selling Stockholders.
Shares Beneficially Owned Shares Beneficially Owned
Prior To Offering(1) After Offering(2)
Name of Selling Shareholder Number Percent Shares To Be Number Percent
Sold
Edward L. Lammerding
629 J Street
Sacramento, CA 95814 422,131(3) 24.4 40,136 381,995 15.3
Philip M. Lee
41920 Christy Street
Fremont, CA 94538 410,178(4) 23.7 6,000 404,178 15.0
Thomas W. O'Neil, Jr.
455 Capitol Mall
Sacramento, CA 95814 63,100(5) 3.9 14,600 48,500 2.0
Robert O. Smith
41920 Christy Street
Fremont, CA 94538 154,400(6) 8.8 10,000 144,400 5.8
Claude Adkins
41920 Christy Street
Fremont, CA 94538 136,500(7) 5.7 15,000 121,500 5.0
Alaric Corporation 10,500 * 5,500 5,000 *
Callopy, Christine N. 2,000 * 600 1,400 *
Castillo, Joaquin 4,000 * 2,000 2,000 *
Davis, Devere J. & Lois M. 9,700 * 1,000 8,700 *
Flores, Louis 48,700 2.9 20,000 28,700 1.2
Gong, Sherman 3,000 * 1,000 2,000 *
Greenslate, Norman C. & Dolores 6,300 * 2,000 4,300 *
Harris, Patricia A. 2,000 * 500 1,500 *
Haug, Bruce 1,500 * 1,500 0 0
Kai, Jimmy T. 6,500 * 1,900 4,600 *
Lammerding Assoceights (A & S
Part) 27,766(8) 1.6 9,366 18,400 *
Lammerding, Claire M. 2,000(8) * 600 1,400 *
Lammerding, Jerome C. 2,000(8) * 600 1,400 *
Lammerding, Joseph E. 2,000(8) * 600 1,400 *
Lammerding, Mary C. 2,000(8) * 600 1,400 *
Lee Family Trust 86,266 5.1 30,266 56,000 2.3
Lucas, David 8,000 * 3,000 5,000 *
Marquez, Jose 72,200 5.0 10,000 62,200 2.5
Moore, Elizabeth 63,366 3.7 20,366 43,000 1.8
Muir, Sharon 2,700 * 2,700 0 0
Mulhern, Iva Trust 17,933 1.0 6,933 11,000 *
Mulhern, James M. 17,933 1.0 6,933 11,000 *
Old Timers, Ltd. 18,700 1.1 6,000 12,700 *
Retzer, William K. & Mary J. 62,500 3.7 16,500 46,000 1.9
Rushford Hintz, Florence 750 * 750 0 0
Catherine
Rushford, Daniel Lee 750 * 750 0 0
Rushford, James William 750 * 750 0 0
Rushford, Michael Dennis 750 * 750 0 0
Sierra Resources Corp. 180,412 10.6 1,800 178,612 7.3
Skinner, Marjorie V. 7,200 * 2,200 5,000 *
Takehara, Kenji 6,300 * 3,000 3,300 *
Takehara, Rusby F. 6,300 * 3,000 3,300 *
Taricco, Richard P. & Peggy L. T. 5,700 * 800 4,900 *
Officers and Directors as a group
(6 persons) 904,897(9) 45.0 117,802 787,095 28.5
Footnotes to table:
* Less than 1%.
(1) The persons named in the table have sole
voting and investment power with respect to
all of the Common Stock shown as
beneficially owned by them, subject to
community property laws where applicable and
the information contained in the footnotes
to the table.
(2) Assuming no exercise of the Underwriters'
over-allotment option.
(3) Includes 27,500 shares subject to options
and Warrants exercisable within 60 days.
Also includes 180,412 shares and 100,000
shares subject to Warrants exercisable
within 60 days owned by Sierra Resources
Corporation of which Mr. Lammerding is
president and chairman of the board and has
dispositive and voting power.
(4) Includes 27,500 shares subject to options
and Warrants exercisable within 60 days.
Also includes 86,266 shares held by a family
trust for which Mr. Lee serves as a trustee
and 180,412 shares and 100,000 shares
subject to Warrants exercisable within 60
days held by Sierra Resources Corporation
for which Mr. Lee serves as a director and
has dispositive and voting power.
(5) Includes 27,500 shares subject to options
and Warrants exercisable within 60 days.
(6) Includes 154,400 shares subject to options
and Warrants exercisable within 60 days.
(7) Includes 57,500 shares subject to options
and Warrants exercisable within 60 days.
(8) Represents shares to Mr. Lammerding's adult
children and shares of a family corporation
to which Mr. Lammerding disclaims beneficial
ownership.
(9) Includes a total of 409,400 shares subject
to options and Warrants exercisable within
60 days.
The following table sets forth certain
information with respect to the beneficial
ownership of the Company's Warrants as of
September 30, 1996, and as adjusted to reflect
the sale of the Warrants offered by the Company
and the Selling Stockholders, for each director
and all other selling Warrantholders. The
selling Warrantholders may sell all or none of
their Warrants.
Warrants Beneficially Owned
Warrants Beneficially Owned
Prior to Offering(1)
After Offering(2)
Warrants
Name of Warrantholder Number Percent to be Sold Number Percent
Edward L. Lammerding
629 J Street
Sacramento, CA 95814 120,000(3) 60.0 20,000 100,000 0
Philip M. Lee
41920 Christy Street
Fremont, CA 94538 120,000(3) 60.0 20,000 100,000 0
Thomas W. O'Neil
455 Capitol Mall
Sacramento, CA 95814 20,000 10.0 20,000 0 0
Robert O. Smith
41920 Christy Street
Fremont, CA 94538 20,000 10.0 20,000 0 0
Claude Adkins
41920 Christy Street
Fremont, CA 94538 20,000 10.0 20,000 0 0
Sierra Resources Corp. 100,000 50.0 100,000 0 0
Footnotes to table:
(1) The persons named in the table have sole
voting and investment power with respect to
all of the Common Stock shown as
beneficially owned by them, subject to
community property laws where applicable
and the information contained in the
footnotes to the table.
(2) Assuming no exercise of the Underwriters'
over-allotment option.
(3) Includes Warrants to acquire 100,000 shares
of Common Stock owned by Sierra Resources
Corporation for which Messrs. Lammerding
and Lee are directors and may have
dispositive and voting power.
DESCRIPTION OF SECURITIES
The Company's authorized capital stock
consists of 10,000,000 shares of Common
Stock, no par value, and 2,000,000 shares of
Preferred Stock, no par value. As of June
30, 1996, there were outstanding 1,603,275
shares of Common Stock held of record by
stockholders and no shares of Preferred Stock
outstanding.
COMMON STOCK
Each stockholder is entitled to one vote
for each share of Common Stock held on all
matters submitted to a vote of stockholders.
Each holder of Common Stock has the right to
cumulate his votes, which means each share
shall have the number of votes equal to the
number of directors to be elected and all of
which votes may be cast for any one nominee.
Subject to such preferences as may apply to
any Preferred Stock outstanding at the time,
the holders of outstanding shares of Common
Stock are entitled to receive dividends out
of assets legally available therefor at such
times and in such amounts as the Board of
Directors may from time to time determine.
The Common Stock is not entitled to
preemptive rights and is not subject to
conversion or redemption. Upon the
liquidation, dissolution, or winding up of
the Company, the holders of Common Stock and
any participating Preferred Stock outstanding
at that time would be entitled to share
ratably in all assets remaining after the
payment of liabilities and the payment of any
liquidation preferences with respect to any
outstanding Preferred Stock. Each
outstanding share of Common Stock now is, and
all shares of Common Stock that will be
outstanding after completion of the offering
will be, fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors is authorized,
subject to any limitations prescribed by
California law, to provide for the issuance
of shares of Preferred Stock in one or more
series, to establish from time to time the
number of shares to be included in each such
series, to fix the powers, designations,
preferences, and rights of the shares of each
wholly-unissued series and any
qualifications, limitations, or restrictions
thereon, and to increase or decrease the
number of shares of any such series (but not
below the number of shares of such series
then outstanding) without any further vote or
action by the stockholders. The Board of
Directors may authorize the issuance of
Preferred Stock with voting or conversion
rights that could adversely affect the voting
power or other rights of the holders of
Common Stock. Thus, the issuance of
Preferred Stock may have the effect of
delaying, deterring, or preventing a change
in control of the Company. The Company has
no current plans to issue any shares of
Preferred Stock.
WARRANTS
The Company is offering 500,000 Warrants
at a price of $.125 per Warrant entitling the
holder of each Warrant to purchase,
commencing during a three-year period from
the effective date of this Prospectus, a
share of Common Stock at an exercise price of
$5.00 per share. The Company shall have the
right to call each Warrant for redemption
upon not less than thirty (30) days written
notice for a redemption price of $.125 per
Warrant provided that the closing bid price
of the Common Stock has been at least $6.00
per share for thirty (30) consecutive trading
days ending within three (3) trading days of
the date on which notice of redemption is
given.
Further, the Company has issued Warrants
to purchase 200,000 shares, in the aggregate,
to its Directors and an affiliate of the
Company. The Warrants have the same term,
exercise price, and are subject to
redemption, as the Warrants offered through
this offering.
In addition, the Underwriters shall
receive Warrants ("Representatives'
Warrants") which shall entitle the holder to
purchase an aggregate of 100,000 shares of
Common Stock and 50,000 Warrants, similar but
not identical to, the Warrants. The
Representatives' Warrants are not exercisable
for a one year period. See "Underwriting."
STOCK OPTIONS
In addition to the stock options to
purchase 275,500 shares of Common Stock
issued pursuant to the 1996 Plan, the Company
issued options in 1993 to purchase 237,500
shares of Common Stock at $1.80 per share.
The options expire in 2003 and were issued to
employees and directors of the Company. Of
the options to purchase 237,500 shares,
options to purchase 178,125 shares are
immediately exercisable and the remaining
options to purchase 59,375 vest in May 1997.
In addition, Mr. Smith was issued an
option in 1993 that expires in 2003 to
acquire 104,922 shares of Common Stock at
$0.50 per share of which 96,900 options are
currently outstanding.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the
Company's Common Stock and Warrants is
American Securities Transfer, Inc., located
at 1825 Lawrence Street, Suite 444, Denver,
Colorado, 80202-1817, phone number (303) 298-
5370.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares
of the Company's Common Stock in the public
market could have the effect of depressing
the prevailing market price of its Common
Stock. Upon the completion of the offerings,
the Company will have outstanding 2,353,275
shares of Common Stock. Of these shares, the
1,000,000 shares sold in the offering will be
freely transferable without restriction or
further registration under the Securities Act
of 1933 (the "Securities Act") unless
purchased by "affiliates" of the Company as
that term is defined in Rule 144 of the
Securities Act ("Affiliates"), which shares
will be subject to the resale limitations of
Rule 144 adopted under the Securities Act.
Of the other shares outstanding upon the
completion of the offering, 1,353,275 shares
will be "restricted securities" as that term
is defined under Rule 144 ("Restricted
Shares"). Restricted Shares may be sold in
the public market only if registered or if
they qualify for an exemption from
registration under Rule 144 promulgated under
the Securities Act, which rule is summarized
below. As a result of the contractual
restrictions described below, and the
provisions of Rule 144, additional shares
will be available and eligible for sale in
the public market as follows: (i) 1,272,458
currently outstanding shares upon expiration
of lock-up agreements 12 months after the
date of this Prospectus, (ii) 1,459,900
additional shares issuable upon the exercise
of stock options and Warrants, to the extent
exercisable as of such date, and (iii) 80,817
currently outstanding shares from time to
time thereafter pursuant to Rule 144.
Certain stockholders of the Company have
entered into lock-up agreements with the
representative of the Underwriters providing
that, with certain limited exceptions, such
stockholders will not offer, sell, contract
to sell, grant an option to purchase, make a
short sale, or otherwise dispose of or engage
in any hedging or other transaction that is
designed or reasonably expected to lead to a
disposition of any shares of Common Stock for
a period of 12 months after the date of this
Prospectus without the prior written consent
of Werbel-Roth Securities, Inc. Other than
(i) the 1,000,000 shares being offered
hereby, (ii) 1,459,900 shares subject to
stock options and Warrants, and (iii) 80,817
shares owned by holders owning 5,000 or less
shares of Common Stock as of the date of this
Prospectus, no shares of Common Stock of the
Company will be eligible for immediate sale
in the public market until the expiration of
the 12 month lock-up agreement with the
representative of the Underwriters. Werbel-
Roth Securities, Inc., may, in its sole
discretion and at any time without notice,
release all or any portion of the securities
subject to lock-up agreements.
In general, under Rule 144 as currently
in effect, a person (or persons whose shares
are aggregated) who has beneficially owned
Restricted Shares for at least two years will
be entitled to sell in any three-month period
a number of shares that does not exceed the
greater of (i) 1% of the then outstanding
shares of the Company's Common Stock
(approximately 23,532 shares immediately
after the offering), or (ii) the average
weekly trading volume of the Company's Common
Stock in the NASDAQ SmallCap Market during
the four calendar weeks immediately preceding
the date on which notice of the sale is filed
with the Commission. Such sales pursuant to
Rule 144 are subject to certain requirements
relating to manner of sale, notice, and
availability of current public information
about the Company. The Commission has
recently proposed to reduce the two year
holding periods under Rule 144 to one year.
If enacted, such modification will have a
material effect on the timing of when certain
shares of Common Stock become eligible for
resale.
Prior to the offerings, there has been
no public market for the Common Stock of the
Company, and no predictions can be made of
the effect, if any, that the sale or
availability for sale of shares of additional
Common Stock will have on the trading price
of the Common Stock. Nevertheless, sales of
substantial amounts of such shares in the
public market, or the perception that such
sales could occur, could adversely affect the
trading price of the Common Stock, and could
impair the Company's future ability to raise
capital through an offering of its equity
securities. See "Description of Securities."
UNDERWRITING
Subject to the terms and conditions of
the Underwriting Agreement, the Underwriters
named below (the "Underwriters"), through
their representative, Werbel-Roth Securities,
Inc., have severally agreed to purchase from
the Company and the Selling Stockholders the
following respective numbers of shares of
Common Stock and Warrants at the initial
public offering price less the underwriting
discounts and commissions set forth on the
cover page of this Prospectus:
UNDERWRITERS NUMBER OF SHARES NUMBER OF WARRANTS
Werbel-Roth Securities, Inc.
Total 1,000,000 500,000
The Underwriting Agreement provides that
the obligations of the Underwriters are
subject to certain conditions precedent and
that the Underwriters will purchase all
shares of Common Stock and Warrants offered
hereby if any of such shares or Warrants are
purchased.
The Company and the Selling Stockholders
have been advised by the representative of
the Underwriters that the Underwriters
propose to offer the shares of Common Stock
and Warrants to the public at the initial
public offering prices set forth on the cover
page of this Prospectus and to certain
dealers at such price less a concession not
in excess of $______ per share and $______
per Warrant. The Underwriters may allow, and
such dealers may re-allow, a concession not
in excess of $______ per share and $_______
per Warrant to certain other dealers. After
the initial public offering, the public
offering price and other selling terms may be
changed by the representative of the
Underwriters. Further, the Company has
agreed to reimburse the Underwriters on a
non-accountable basis for their expenses in
the amount of 3% of the gross proceeds from
the offering.
At the closing of the sale of Shares
being offered hereby, the Company will sell
to the Underwriters Representatives'
Warrants, for nominal consideration,
entitling the Underwriters to purchase an
aggregate of 100,000 shares of Common Stock
and 50,000 Warrants, similar but not
identical to, the Warrants. The
Representatives' Warrants shall be non-
exercisable and non-transferable (other than
a transfer to affiliates of the Underwriters
or members of the selling group) for a period
of twelve months following the date of this
Prospectus. The Representatives' Warrants
and the underlying securities shall contain
the usual anti-dilution provisions and shall
not be redeemable. The Representatives'
Warrants will be exercisable after twelve
months from the effective date of this
Prospectus and for a period of four years
thereafter; and if the Representatives'
Warrants are not exercised during this term,
they shall, by their own terms, automatically
expire. The exercise price of each of the
Representatives' Warrants shall be 120% of
the public offering price per Share and price
per Warrant. In addition, the Company has
granted to the Underwriters a single demand
registration right and unlimited piggy back
registration rights, related to the Common
Stock and Warrants underlying the
Representatives' Warrants.
The Underwriters may designate that the
Representatives' Warrants be issued in
varying amounts directly to their officers,
directors, shareholders, employees, and other
proper persons and not to the Underwriters;
however, such designation will only be made
by the Underwriters if they determine and
represent to the Company that such issuance
would not violate the interpretation of the
Board of Governors of the NASD relating to
the review of corporate financing
arrangements and would not require
registration of the Representatives' Warrants
or underlying securities.
Upon written request of the then
holder(s) of a majority of the total
Representatives' Warrants and the underlying
securities issued upon the exercise of the
Representatives' Warrants, at any time within
the period commencing on the date of the
definitive Prospectus and ending five years
thereafter, the Company will file, not more
than once, a registration statement under the
Act, registering or qualifying, as the case
may be, the Representatives' Warrants and/or
the underlying securities. The filing shall
be made within sixty (60) days of such
notice, and the Company agrees to use its
best efforts to cause the above filing to
become effective. All expenses of such
registration or qualification, including, but
not limited to, legal, accounting, printing,
and mailing fees, will be borne by the
Company.
In addition to the above, the Company
understands and agrees that if, at any time
during the term of the Representatives'
Warrants and for a period of five years
thereafter, it should file a registration
statement with the SEC pursuant to the
Securities Act for a public offering of
securities, either for the account of the
Company or for the account of any other
person, the Company, at its own expense, will
offer to said holder(s) the opportunity to
register or qualify the Representatives'
Warrants and the underlying securities for
public offering. The Company shall give such
holder(s) notice by registered mail at least
thirty (30) days prior to filing any such
registration statement with the Commission.
In addition, the Company has granted to
the Underwriters an over-allotment option,
exercisable not later than 45 days after the
date of this Prospectus, to purchase up to
150,000 additional shares of Common Stock and
75,000 Warrants at the initial public
offering price less the underwriting
discounts and commissions set forth on the
cover page of this Prospectus. To the extent
that the Underwriters exercise such option,
each of the Underwriters shall have a firm
commitment to purchase approximately the same
percentage thereof that the number of shares
of Common Stock and Warrants to be purchased
by it shown in the above table bears to
1,000,000, and the Company will be obligated,
pursuant to the option, to sell such shares
to the Underwriters. The Underwriters may
exercise such option only to cover over-
allotments made in connection with the sale
of Common Stock and Warrants hereby. If
purchased, the Underwriters will offer such
additional shares on the same terms as those
on which the 1,000,000 shares are being
offered.
The Company and the Selling Stockholder
have agreed to indemnify the Underwriters
against certain liabilities, including
liabilities under the Securities Act.
Stockholder's of the Company owning more
than 5,000 shares of Common Stock not being
sold in the initial public offering have
agreed not to offer, sell, or otherwise
dispose of any of such Common Stock for a
period of 12 months after the date of this
Prospectus without the prior written consent
of the representative of the Underwriters.
See "Shares Eligible for Future Sale."
The representative of the Underwriters
has advised the Company and the Selling
Stockholders that the Underwriters do not
intend to confirm sales to any accounts over
which they exercise discretionary authority.
As part of the Underwriting Agreement,
the Underwriters shall have the right to
designate a member of the Board of Directors,
or at the Underwriters' option, to designate
one individual to attend the meetings of the
Company's Board of Directors for a period of
five years. Further, for a period of five
years, the Underwriters shall have a right of
first refusal to sell the Company's
securities in a public or private offering.
The preceding is a brief summary of the
Underwriting Agreement and is qualified in
its entirety by the Underwriting Agreement
itself which has been filed as an exhibit to
the Registration Statement of which this
Prospectus is a part.
Prior to this offering, there has been
no public market for the Common Stock or
Warrants of the Company. Consequently, the
initial public offering price for the Common
Stock has been determined by negotiations
between the Company, the Selling
Stockholders, and the representative of the
Underwriters. Among the factors considered
in such negotiations were the prevailing
market conditions, the results of operations
of the Company in recent periods, the market
capitalization, the stage of development of
other companies which the Company and the
representative of the Underwriters believes
to be comparable to the Company, estimates of
the business potential of the Company, the
present state of the Company's development,
and other factors deemed relevant.
LEGAL MATTERS
The validity of the shares of Common
Stock and Warrants offered by the Company and
Common Stock offered by the Selling
Stockholders will be passed upon by Bartel
Eng Linn & Schroder, Sacramento, California.
Certain legal matters in connection with this
offering will be passed upon for the
Underwriters by Atlas, Pearlman, Trop, and
Borkson, P.A., Fort Lauderdale, Florida.
EXPERTS
The audited consolidated financial
statements of the Company as of December 31,
1995, and for each of the two years in the
period ended December 31, 1995, have been
included in this Prospectus and Registration
Statement in reliance upon the report of Hein
+ Associates LLP, independent certified
public accountants, appearing elsewhere
herein and in the Registration Statement, and
upon the authority of such firm as experts in
accounting and auditing.
CHANGE IN ACCOUNTANTS
In June 1996, the Company decided to
retain Hein + Associates LLP as the Company's
independent accountants and dismissed
Villanueva, Purcell & Co., the Company's
former accountants. The decision to change
independent accountants was ratified and
approved by the Company's Board of Directors
in June 1996. During the relationship
between the Company and Villanueva, Purcell &
Co., there were no disagreements regarding
any matters with respect to accounting
principles or practices, financial statement
disclosure, or audit scope or procedure,
which disagreements, if not resolved to the
satisfaction of the former accountants, would
have caused Villanueva, Purcell & Co. to make
reference to the subject matter of the
disagreement in connection with its report.
The former accountants' reports for the years
ended December 31, 1994 and 1993 are not a
part of the financial statements of the
Company included in this Prospectus. Such
reports did not contain an adverse opinion or
disclaimer of opinion or qualification of
modifications as to uncertainty, audit scope
or accounting principles. Prior to retaining
Hein + Associates LLP, the Company had not
consulted with Hein + Associates LLP
regarding accounting principles.
ADDITIONAL INFORMATION
A Registration Statement on Form SB-2,
including amendments thereto, relating to the
shares of Common Stock and Warrants offered
hereby, has been filed by the Company with
the Commission under the Securities Act.
This Prospectus does not contain all of the
information set forth in the Registration
Statement and the exhibits thereto.
Statements contained in this Prospectus as to
the contents of any contract or other
document referred to are not necessarily
complete and, in each instance, reference is
made to the copy of such contract or other
document filed as an exhibit to the
Registration Statement, each such statement
being qualified in all respects by such
reference. For further information with
respect to the Company and the Common Stock
and Warrants offered hereby, reference is
made to such Registration Statement and
exhibits. A copy of the Registration
Statement may be inspected by anyone without
charge at the public reference facilities
maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and at the regional
offices of the Commission located at Room
1228, 75 Park Place, New York 10007, and
Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661.
Copies of all or any part of the Registration
Statement and the exhibits thereto may be
obtained from those offices upon the payment
of certain fees prescribed by the Commission.
In addition, the Commission maintains a Web
site (http://www.sec.gov) that contains
reports proxy and information statements and
other information regarding issuers that file
electronically with the Commission.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
INDEPENDENT AUDITOR'S REPORT F-2
CONSOLIDATED BALANCE SHEETS - December 31, 1995
and June 30, 1996 (unaudited) F-3
CONSOLIDATED STATEMENTS OF INCOME - For the Years Ended
December 31, 1994 and 1995 and for the six months ended
June 30, 1995 and 1996 (unaudited) F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY -
For the Years Ended December 31, 1994 and December 31, 1995
and for the six months ended June 30, 1996 (unaudited) F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Years Ended
December 31, 1994 and 1995 and for the six months ended
June 30, 1995 and 1996 (unaudited) F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
Digital Power Corporation and Subsidiary
Fremont, California
We have audited the accompanying consolidated balance sheet of Digital Power
Corporation and Subsidiary as of December 31, 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended December 31, 1994 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 Digital Power Corporation and
Subsidiary as of December 31, 1995, and the results of their operations and
their cash flows for the years ended December 31, 1994 and 1995 in conformity
with generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
August 31, 1996
DIGITAL POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1995 1996
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 202,917 $ 84,614
Temporary investment 100,000 107,173
Accounts receivable - trade, net of allowance for
doubtful accounts of $120,000 and $120,000 (unaudited) 1,616,497 2,249,457
Other receivables 57,858 52,262
Inventory, net 1,557,226 2,142,454
Prepaid expenses and deposits 27,792 62,480
Deferred income taxes 240,856 139,000
Total current assets 3,803,146 4,837,440
PROPERTY AND EQUIPMENT, net 357,680 546,013
DEPOSITS 18,364 30,643
DEFERRED OFFERING COSTS - 29,181
DEFERRED INCOME TAXES 139,000 -
TOTAL ASSETS $ 4,318,190 $ 5,443,277
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 46,014 $ 143,097
Current portion of capital lease obligations 11,925 12,474
Debenture payable 5,000 -
Accounts payable 1,131,586 1,486,381
Accrued liabilities 397,263 769,466
Total current liabilities 1,591,788 2,411,418
LONG-TERM DEBT, less current portion 1,008,131 1,471,361
OBLIGATIONS UNDER CAPITAL LEASE, less current 31,690 26,739
portion
Total liabilities 2,631,609 3,909,518
COMMITMENTS AND CONTINGENCIES (Notes 6, 7 and 9)
STOCKHOLDERS' EQUITY:
Series A cumulative redeemable convertible
preferred stock, no par value, 1,000,000 shares
authorized, 415,302 and 0 (unaudited) shares issued and 747,569 -
outstanding (Aggregate liquidation preference of
$1,100,000)
Common stock, no par value, 5,000,000 shares
authorized, 963,722 and 1,603,275 (unaudited)
shares issued and outstanding 4,398,322 5,539,115
Accumulated deficit (3,459,310) (3,505,356)
Unearned employee stock ownership plan shares - (500,000)
Total stockholders' equity 1,686,581 1,533,759
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,318,190 $ 5,443,277
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
DIGITAL POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1994 1995 1995 1996
(unaudited) (unaudited)
REVENUES $ 6,249,333 $ 10,037,502 $ 4,947,952 $ 6,553,376
COST OF GOODS SOLD 4,663,124 7,494,427 3,885,875 4,975,557
Gross Margin 1,586,209 2,543,075 1,062,077 1,577,819
OPERATING EXPENSES:
Engineering and product
development 408,966 481,475 243,048 314,659
Marketing and selling 500,338 452,654 234,066 240,621
General and 418,970 581,174 252,035 332,927
administrative
Total operating 1,328,274 1,515,303 729,149 888,207
expenses
INCOME FROM OPERATIONS 257,935 1,027,772 332,928 689,612
OTHER INCOME (EXPENSE):
Interest income 523 3,116 2,967 7,339
Interest expense (103,032) (119,146) (58,533) (59,537)
Translation loss (10,450) (85,258) ( 6,851) (206)
Other income (112,959) (201,288) (62,417) (52,404)
(expense)
INCOME BEFORE INCOME TAXES 144,976 826,484 270,511 637,208
PROVISION (BENEFIT) FOR INCOME
TAXES 23,253 (277,400) 28,000 294,000
NET INCOME $ 121,723 $1,103,884 $ 242,511 $ 343,208
NET INCOME APPLICABLE TO
COMMON SHAREHOLDERS $ 30,357 $1,012,518 $ 196,828 $ 305,139
NET INCOME PER COMMON
SHARE:
Primary $ 0.02 $ 0.80 $ 0.16 $ 0.24
Fully diluted $ 0.02 $ 0.66 $ 0.15 $ 0.20
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 1,226,208 1,258,858 1,242,395 1,276,778
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
DIGITAL POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
UNEARNED
EMPLOYEE
STOCK TOTAL
PREFERRED STOCK COMMON STOCK ACCUMULATED OWNERSHIP STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT DEFICIT PLAN SHARES EQUITY
BALANCES, January 1, 1994 415,302 $ 747,569 963,722 $ 4,398,322 $ (4,684,917) $ - $ 460,974
Net income - - - - 121,723 - 121,723
BALANCES, December 31, 1994 415,302 747,569 963,722 4,398,322 (4,563,194) - 582,697
Net income - - - - 1,103,884 - 1,103,884
BALANCES, December 31, 1995 415,302 747,569 963,722 4,398,322 (3,459,310) - 1,686,581
Net income (unaudited) - - - - 343,208 - 343,208
Dividend on preferred stock - - 216,229 389,213 (389,254) - (41)
(unaudited)
Conversion of preferred stock (415,302) (747,569) 415,302 747,569 - - -
(unaudited)
Exercise of stock options - - 8,022 4,011 - - 4,011
(unaudited)
ESOP loan and share purchases - - - - - (500,000) (500,000)
(unaudited)
BALANCES, June 30, 1996 - - 1,603,275 $ 5,539,115 $ (3,505,356) $ (500,000) $ 1,533,759
(unaudited)
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
DIGITAL POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1994 1995 1995 1996
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 121,723 $ 1,103,884 $ 242,511 $ 343,208
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation and
amortization 60,334 70,140 5,077 44,238
Deferred income taxes - (374,689) - 240,856
Warranty expense 15,000 30,000 - 89,125
Inventory reserve 140,000 195,000 260,000 240,496
Bad debt expense 17,521 55,000 15,000 -
Interest income - - - (7,173)
Foreign currency translation
adjustment
10,450 85,258 6,851 206
Changes in operating assets
and liabilities:
Accounts receivable (622,302) (465,047) (340,388) (632,960)
Other receivables (9,895) (39,855) (101,036) 5,596
Inventory (475,396) (594,983) (242,599) (825,724)
Prepaid expenses 6,620 (17,879) (6,987) (34,688)
Other assets - - (1,316) (12,279)
Accounts payable 344,826 266,721 241,826 354,795
Other accrued liabilities
6,452 5,485 12,562 283,078
Net adjustments (506,390) (784,849) (151,010) (254,434)
Net cash provided by (used
in) operating activities
(384,667) 319,035 91,501 88,774
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment (71,682) (254,530) (52,301) (232,571)
Purchase of temporary
investment (100,000) - - -
Net cash used in investing
activities (171,682) (254,530) (52,301) (232,571)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred offering costs - - - (29,181)
Proceeds from exercise of
stock options - - - 4,011
Payments of preferred stock dividend - - - (41)
Proceeds from notes payable 1,762,768 120,000 - 50,000
Principal payments on notes
payable (1,620,750) (1,276) (1,276) (17,552)
Principal payments on capital
lease obligations (4,478) (9,054) (4,035) (4,402)
Payment of debenture - - - (5,000)
Proceeds from line of credit 4,039,000 9,422,788 4,509,788 5,795,000
Principal payments on line of
credit (3,801,750) (9,344,924) (4,492,310) (5,767,135)
Net cash provided by
financing 374,790 187,534 12,167 25,700
activities
EFFECT OF EXCHANGE RATE
CHANGES ON CASH (10,450) (85,258) (6,851) (206)
NET INCREASE (DECREASE) IN CASH (192,009) 166,781 44,516 (118,303)
CASH AND CASH EQUIVALENTS,
beginning of period 228,145 36,136 36,136 202,917
CASH AND CASH EQUIVALENTS,
end of period $ 36,136 $ 202,917 $ 80,652 $ 84,614
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash payments for:
Interest $ 105,634 $ 121,931 $ 57,880 $ 58,383
Income taxes $ 31,498 $ 55,803 $ 10,000 $ 69,500
Non-cash investing and
financing transactions:
Property and equipment
acquired with capital lease $ 46,368 $ 10,779 $ 2,814 $ -
Conversion of preferred stock
to common stock $ - $ - $ - $ 747,569
Preferred stock dividend of
common stock $ - $ - $ - $ 389,213
Notes payable for unearned
employee stock ownership plan
shares $ - $ - $ - $ 500,000
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
1. NATURE OF OPERATIONS:
Digital Power Corporation ("DPC"), and its wholly owned subsidiary
Poder Digital, S.A. de C.V. ("PD") which is located in Guadalajara,
Mexico, (collectively referred to as the "Company") are engaged in
the design, manufacture and sale of switching power supplies.
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its subsidiary. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
STATEMENT OF CASH FLOWS - For purposes of the statements of cash
flows, the Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be
cash equivalents.
INVENTORY - Inventory is stated at the lower of cost (first-in,
first-out) or market.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation of equipment and furniture is calculated using the
straight-line method over the estimated useful lives (ranging from
5 to 10 years) of the respective assets. Leasehold improvements
are amortized over the shorter of the estimated useful life or the
term of the lease. The cost of normal maintenance and repairs is
charged to operating expense as incurred. Material expenditures
which increase the life of an asset are capitalized and depreciated
over the estimated remaining useful life of the asset. The cost of
fixed assets sold, or otherwise disposed of, and the related
accumulated depreciation or amortization are removed from the
accounts, and any gains or losses are reflected in current
operations.
DEFERRED OFFERING COSTS - Direct costs incurred by the Company in
connection with its proposed initial public offering of common
stock have been deferred, and will be charged against the proceeds
of the offering when completed. Should the offering not be
completed such costs will be expensed.
INCOME TAXES - The Company accounts for income taxes under the
liability method, which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns.
Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statements
and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
reverse.
REVENUE RECOGNITION - Sales revenue is recognized when the products
are shipped to customers, including distributors. Customers
receive a one or two year product warranty and sales to
distributors are subject to a right of return. The Company
provides a reserve for estimated warranty costs and a reserve for
estimated product returns.
FOREIGN CURRENCY TRANSLATION - Gains and losses from the effects of
exchange rate fluctuations on transactions denominated in foreign
currencies are included in results of operations. Assets and
liabilities of the Company's foreign subsidiary are translated into
U.S. dollars at period-end exchange rates, and their revenues and
expenses are translated at average exchange rates for the period.
Translation adjustments are accumulated in a separate component of
stockholders' equity until such time as the foreign subsidiary is
sold or substantially liquidated. Deferred taxes have not been
allocated to the cumulative foreign currency translation adjustment
included in stockholders' equity because there is no intent to
repatriate earnings of the foreign subsidiary.
NET INCOME PER COMMON SHARE - Net income per common share is
calculated upon net income applicable to common shareholders, which
represents net income adjusted for cumulative preferred dividends
applicable to the period.
The weighted average common shares is based upon actual common
stock and common stock equivalents outstanding. Additionally,
common stock equivalents issued during the prior year at less than
the $4.00 proposed initial public offering price have been included
for all periods presented in the computation using the "treasury
stock method" and the anticipated public offering price.
Fully diluted net income per common share is computed using the "if
converted" method for preferred stock.
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and the accompanying
notes. The actual results could differ from those estimates.
The Company's financial statements are based upon a number of
significant estimates, including the allowance for doubtful
accounts, technological obsolescence of inventories, the estimated
useful lives selected for property and equipment, realizability of
deferred tax assets, allowance for sales returns, and warranty
reserve. Due to the uncertainties inherent in the estimation
process, it is at least reasonably possible that these estimates
will be further revised in the near term and such revisions could
be material.
IMPAIRMENT OF LONG-LIVED ASSETS - Effective January 1, 1996, the
Company adopted Financial Accounting Standards Board Statement 121
(FAS 121) entitled "Accounting for Impairment of Long-Lived
Assets."
In the event that facts and circumstances indicate that the cost of
assets or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine
if a write-down to market value or discounted cash flow value is
required. Adoption of FAS 121 had no effect on the unaudited June
30, 1996 financial statements.
STOCK-BASED COMPENSATION - In October 1995, the Financial
Accounting Standards Board issued a new statement titled
"Accounting for Stock-Based Compensation" (FAS 123) which the
Company adopted January 1, 1996. FAS 123 encourages, but does not
require, companies to recognize compensation expense for grants of
stock, stock options and other equity instruments to employees
based on fair value. Companies that do not adopt the fair value
accounting rules must disclose the impact of adopting the new
method in the notes to the financial statements. Transactions in
equity instruments with non-employees for goods or services must be
accounted for on the fair value method. The Company has elected
not to adopt the fair value accounting prescribed by FAS 123 for
employees, but is subject to the disclosure requirements prescribed
by FAS 123.
ACCRUED WARRANTY COSTS - Estimated warranty costs are provided for
at the time of sale of the warranted product. The Company
generally extends warranty coverage for one year from the time of
sale.
CONCENTRATIONS OF CREDIT RISK - Credit Risk represents the
accounting loss that would be recognized at the reporting date if
counterparties failed completely to perform as contracted.
Concentrations of credit risk (whether on or off balance sheet)
that arise from financial instruments exist for groups of customers
or groups counterparties when they have similar economic
characteristics that would cause their ability to meet contractual
obligations to be similarly effected by changes in economic or
other conditions described below. In accordance with FASB
Statement No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL
INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS
WITH CONCENTRATIONS OF CREDIT RISK, the credit risk amounts shown
do not take into account the value of any collateral or security.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair values for
financial instruments under SFAS No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, are determined at discrete points
in time based on relevant market information. These estimated
involve uncertainties and cannot be determined with precision. The
estimated fair values of the Company's financial instruments, which
includes all cash, accounts receivables, accounts payable, long-
term debt, and other debt, approximates the carrying value in the
consolidated financial statements at December 31, 1995.
INTERIM FINANCIAL INFORMATION - The June 30, 1995 and 1996
financial statements have been prepared by the Company without
audit. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary for a fair presentation of the
Company's financial position as of June 30, 1996, and the results
of their operations and cash flows for the six month periods ended
June 30, 1995 and 1996. The results of operations for the six
month periods ended June 30, 1995 and 1996 are not necessarily
indicative of those that will be obtained for the entire fiscal
year.
DIGITAL POWER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED)
3. INVENTORY:
Inventory consists of the following:
December 31, 1995 JUNE 30, 1996
Raw Materials $ 110,318 $ 114,260
Work-in-process 1,718,952 2,573,864
Finished goods 127,956 94,826
Allowance for obsolescence (400,000) (640,496)
$ 1,557,226 $ 2,142,454
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
December 31, 1995 JUNE 30, 1996
Machinery and equipment $ 1,004,955 $ 1,182,785
Office equipment and furniture 272,614 314,663
Leasehold improvements 23,409 11,177
1,300,978 1,508,625
Accumulated Depreciation (943,298) (962,612)
$ 357,680 $ 546,013
5. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
December 31, 1995 JUNE 30, 1996
Accrued payroll and benefits $ 87,712 $ 292,875
Accrued commissions and royalties 58,665 68,000
Accrued warranty expense 60,000 149,125
Accrued income taxes 46,000 50,500
Other 144,886 208,966
$ 397,263 $ 769,466
6. LONG-TERM DEBT:
Long-term debt consists of the following:
December 31, 1995 JUNE 30, 1996
$1,500,000 line of credit bearing
interest at the bank's prime rate
plus one percent (total of 9.5% at
December 31, 1995), maturing October
15, 1997, collateralized by
substantially all assets of DPC $ 924,145 $ 952,010
Unsecured note payable, due on demand,
interest at 12% 10,000 10,000
Note payable, due in monthly
installments of $3,881 including
interest at 10%, due December 1998,
collateralized by substantially
all assets of DPC 120,000 152,448
Employee stock ownership plan loan
See Note 11 - 500,000
1,054,145 1,614,458
Less current portion (46,014) (143,097)
$ 1,008,131 $ 1,471,361
Aggregate maturities of long-term debt are due as follows:
YEARS ENDING
DECEMBER 31, AMOUNT
1996 $ 46,014
1997 964,020
1998 44,111
$ 1,054,145
7. CAPITAL LEASE OBLIGATIONS:
The Company leases certain equipment under agreements classified as
capital leases. Equipment under these leases has a cost of $61,680 and
accumulated amortization of $15,420 at December 31, 1995. Following is a
schedule of future minimum lease payments under capital leases at
December 31, 1995:
YEARS ENDING
DECEMBER 31, AMOUNT
1996 $ 16,787
1997 16,696
1998 14,689
1999 5,375
Total future minimum lease payments 53,547
Less, amount representing interest (9,932)
Present value of net minimum lease payments 43,615
Less current portion (11,925)
$ 31,690
8. STOCKHOLDERS' EQUITY:
PREFERRED STOCK
The preferred stock has one series authorized, Series A cumulative
redeemable convertible preferred stock ("Series A"), and an
additional 500,000 shares of preferred stock has been authorized,
but the rights, preferences, privileges and restrictions on these
shares has not been determined. DPC's Board of Directors is
authorized to create new series of preferred stock and fix the
number of shares as well as the rights, preferences, privileges and
restrictions granted to or imposed upon any series of preferred
stock.
The holders of Series A are entitled to one vote for each share of
common stock into which the Series A can be converted, and vote
together with the common shareholders as a single class. Dividends
on Series A are at an annual rate of $.22 per share and are
cumulative from the date of issuance, and shall be paid prior to
dividends on common stock. The Company had never declared a
dividend through December 31, 1995, and the accumulated dividends
on Series A were approximately $483,000 at December 31, 1995.
Shares of Series A are convertible into common stock at any time at
the option of the holder at a rate of one share of common stock for
each share of Series A. The conversion rate is subject to
adjustment under certain circumstances. Additionally, conversion
is automatic on the effective date of a firm commitment for an
underwritten public offering of $1,000,000 or more.
The Company may redeem the Series A in whole or in part, by paying
$1.80 per share plus any dividends in arrears. Partial
redemptions shall be pro-rata among all Series A holders.
In the event of a liquidation, dissolution, or winding up of the
Company, Series A holders are entitled to receive a liquidation
preference of $1.80 per share of Series A plus all dividends in
arrears. The liquidation preference on the Series A was
approximately $1,100,000 at December 31, 1995.
Additionally, see Note 13.
STOCK OPTIONS
The Company has issued non-qualified options covering 104,922
shares exercisable at $.50 per share. Upon issuance, the Company
recorded compensation expense for the difference between the
exercise price and the fair market value of the underlying common
stock of $1.80 per share. Such options expire in 2003. Subsequent
to December 31, 1995, 8,022 of such option were exercised.
In May 1993 the Company issued options to purchase 237,500 shares
of its common stock at $1.80 per share. Such options are subject
to a four year vesting plan. The exercise price of $1.80 per share
approximated the fair market value at the date of grant.
In May 1996, the Company adopted the 1996 Stock Option Plan
covering 513,000 shares. Under the plan, the Company can issue
either incentive or non-statutory stock options. Immediately
thereafter, the Company issued options to purchase 275,500 shares
of its common stock at $1.80 per share. Such options become 100%
vested two years after issuance. The exercise price was based upon
a letter from its investment banker as to the fair market value
of such options based upon their terms, conditions and
restrictions.
The following table sets forth activity for all options:
EXERCISE PRICE
NUMBER PER SHARE
BALANCES
January 1, 1994,
December 31, 1994 and
December 31, 1995 342,422 $ .50 - $ 1.80
ISSUED 275,500 $ 1.80
EXERCISED (8,022) $ .50
BALANCE, JUNE 30, 1996 609,900 $ .50 - $ 1.80
AT DECEMBER 31, 1995 AND JUNE 30, 1996 OPTIONS TO PURCHASE 223,672
AND 275,025 SHARES RESPECTIVELY AT PRICES RANGING FROM $.50 TO $1.80
PER SHARE WERE EXERCISABLE.
9. COMMITMENTS:
The Company leases office space in California, and a manufacturing
facility in Guadalajara, Mexico under the terms of operating leases.
The total future minimum lease payments are as follows:
YEARS ENDING
DECEMBER 31, AMOUNT
1996 $ 118,423
1997 105,640
1998 108,880
1999 109,174
2000 112,579
Thereafter 10,378
$ 565,074
Lease payments on the manufacturing facility in Mexico are to be made in
Mexican Pesos. The above schedule was prepared using the conversion rate
in effect at December 31, 1995. Changes in the conversion rate will have
an impact on the Company's required minimum payments and its operating
results. Additionally, lease payments on the facility in Mexico will
increase on an annual basis in proportion to the increase in the minimum
wage in the Guadalajara, Mexico area.
Rent expense was $116,337 and $116,699 for 1994 and 1995, respectively.
The Company has a royalty agreement with a third party on various
products, and any derivatives from the base design of these products.
Commitments under this agreement are as follows:
5% of first $20,000,000 in sales of these products
4% of next $25,000,000 in sales of these products
3% of next $33,333,333 in sales of these products
2% of next $50,000,000 in sales of these products
1% of next $100,000,000 in sales of these products
As of December 31, 1995, the Company had sold approximately $13,630,000
of product subject to this agreement.
If the Company sells an additional $6,370,000 of these products after
December 31, 1995, the Company is required to grant 100,000 shares of
common stock to the third party in the royalty agreement. Due to
changing market demand, the Company's management currently expects to
replace these products with products it is in the process of designing,
and Company's management believes the Company will therefore not have to
grant the 100,000 shares of common stock.
The Company sold approximately $1,448,000 and $1,453,000 of these
products in 1994 and 1995, respectively, and had royalty expenses of
approximately $72,400 and $72,600 for 1994 and 1995, respectively.
The Company has an employment contract with its President/CEO which
terminates on December 31, 1999. Under the terms of the employment
contract, he shall serve as president and chief executive officer of the
Company and his salary shall be $150,000 per annum effective January 1,
1997, increasing in an amount to be determined by the employee and the
Board such that he shall receive $200,000 per annum by January 1, 1999.
His current salary for 1996 is $110,000. In addition, pursuant to the
contract, he shall have the right to receive on the first day of each
January during the term of his contract options to acquire 100,000 shares
of Common Stock at the market value as of such date. Finally, pursuant
to the employment contract, in the event there is a change in control,
the employee shall be granted a five year consulting contract at $200,000
per year.
10. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK, MAJOR CUSTOMERS AND OTHER
RISKS AND UNCERTAINTIES:
Sales to unaffiliated customers which represent more than 10% of the
Company's net sales for 1994 and 1995 were as follows (both customers are
distributors):
CUSTOMER 1994 1995
A 16% 27%
B - % 10%
The Company operates primarily in one industry segment: the manufacture
and sale of switching power supplies. Additionally, most of the
Company's sales are to customers located in California. Financial
instruments that subject the Company to credit risk consist primarily of
accounts receivable. The Company frequently sells large quantities of
inventory to its customers. At December 31, 1995, approximately
$1,053,000 or 65% of the Company's net accounts receivable were due from
five customers.
As of December 31, 1995, the Company maintained cash in a bank that was
approximately $352,000 in excess of the federally insured limit.
11. EMPLOYEE BENEFIT PLANS:
The Company has a 401(k) profit sharing plan (the "Plan") covering
substantially all employees of DPC. Eligible employees may make
voluntary contributions to the Plan, which are matched by the Company at
a rate of $.25 for each $1.00 contributed, up to a maximum of six percent
of eligible compensation. The Company can also make discretionary
contributions. The Company made matching contributions to the Plan of
$5,593 and $9,594 for 1994 and 1995, respectively. The Board of
Directors of DPC elected not to make a discretionary contribution to the
Plan for 1994 or 1995.
The Company also has an employee stock ownership plan (the "ESOP")
covering substantially all employees of DPC. The Company can make
discretionary contributions of cash or company stock (as defined in the
ESOP plan document) up to deductible limits prescribed by the Internal
Revenue Code. The Board of Directors of DPC elected to make no
contributions to the ESOP for 1994 or 1995.
Effective June 13, 1996, the ESOP obtained a $500,000 loan guaranteed by
the Company for the purpose of acquiring common stock of Company from
existing stockholders. The loan bears interest at 10.5% per annum
requires monthly payments of principle and interest of $10,784 through
July 2001. Immediately upon the funding of the loan, the ESOP purchased
approximately 154,000 shares of the Company's common stock from existing
shareholders.
In accordance with the AICPA Statements of Position 93-6 entitled
"Employers Accounting for Employee Stock Ownership Plans", the Company
has recorded the $500,000 loan as a debt on its books with a
corresponding charge to stockholder's equity.
12. INCOME TAXES:
Income tax expense is comprised of the following:
FOR YEARS ENDED DECEMBER 31,
1994 1995
Federal $ - $ (351,150)
State 23,253 73,750
Foreign - -
$ 23,253 $ (277,400)
The components of the net deferred tax asset at December 31, 1995 are as
follows:
Net book value of fixed assets $ (3,695)
Net operating loss carryforward 383,551
Total deferred tax asset $ 379,856
As of December 31, 1995, DPC has net operating loss carryforwards for
federal income tax purposes of approximately $1,044,000 which begin to
expire in 2002. As of December 31, 1995, PD has a net operating loss
carryforward of approximately $58,000 which expires in 1999.
Total income tax expense differed from the amounts computed by applying
the U.S. federal statutory tax rates to pre-tax income as follows:
FOR YEARS ENDED DECEMBER 31,
1994 1995
Total expense computed by
applying $ 49,292 $ 281,005
the U.S. statutory rate
State income taxes 23,253 73,750
Effect of income taxable in 27,197 (14,857)
Mexico
Utilization of temporary (76,489) (261,135)
difference
Effect of valuation allowance - (356,163)
$ 23,253 $ (277,400)
13. SUBSEQUENT EVENTS:
On May 31, 1996, DPC signed a letter of intent for a proposed public
offering of 1,000,000 shares of DPC common stock at $4.00 per share. Of
the 1,000,000 shares, 750,000 are being sold by the Company and 250,000
shares are being sold by certain existing shareholders.
On May 31, 1996, all of the 415,302 issued and outstanding shares of
Series A preferred stock were converted into 415,302 shares of common
stock. Additionally, the Company declared a dividend on the Series A
preferred stock for all unpaid dividends through the conversion date and
issued an aggregate of 216,229 shares of common stock to holders of
Series A preferred stock effective immediately prior to such conversion.
On August 19, 1996, the shareholders of the Company approved an amendment
to the Company's articles of incorporation increasing the number of
authorized shares of common stock from 5,000,000 shares to 10,000,000
shares and preferred stock from 1,000,000 to 2,000,000.
In addition, on August 19, 1996, the Company issued 200,000 Common Stock
purchase warrants to certain Company directors and affiliates. Each
warrant entitles the holder to purchase one share of common stock at
$5.00.
TABLE OF CONTENTS
Prospectus Summary ............................................3
The Company ...................................................6
Risk Factors...................................................7
Use of Proceeds...............................................14
Dividend Policy...............................................14
Capitalization................................................15
Dilution......................................................16
Selected Consolidated Financial Data .........................17
Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................18
Business......................................................23
Management....................................................32
Certain Transactions..........................................36
Principal and Selling Stockholders and Warrantholders.........36
Description of Securities.....................................39
Shares Eligible For Future Sale...............................41
Underwriting..................................................42
Legal Matters.................................................44
Experts.......................................................44
Change in Accountants.........................................44
Additional Information........................................44
Index To Consolidated Financial Statements...................F-1
UNTIL ___________, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, 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 AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
Digital Power Corporation
1,000,000 shares of Common Stock
No Par Value
700,000 Redeemable Common Stock Purchase Warrants
Werbel-Roth Securities, Inc.
________________, 1996
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Sections 204 and 317 of the California Corporations Code ("Corporations
Code") permit indemnification of directors, officers, and employees of
corporations under certain conditions subject to certain limitations. Article
IV of the Company's Amended and Restated Articles of Incorporation ("Articles")
provides that the liability of the directors for monetary damages shall be
eliminated to the fullest extent permissible under California Law. Article V
of the Company's Articles states that the Company may provide indemnification
of its agents, including its officers and directors, for breach of duty to the
Company in excess of the indemnification otherwise permitted by Section 317 of
the Corporations Code, subject to the limits set forth in Section 204 of the
Corporations Code. Article VI of the Bylaws provides that the Company shall,
to the maximum extent and in the manner permitted in the Corporations Code,
indemnify each of its agents, including its officers and directors, against
expenses, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact any such person is or was an agent of the Company.
Pursuant to Section 317 of the Corporations Code, the Company is
empowered to indemnify any person who was or is a party or is threatened to be
made a party to any proceeding (other than an action by or in the right of the
Company to procure a judgment in its favor) by reason of the fact that such
person is or was an officer, director, employee, or other agent of the Company
or its subsidiaries, against expenses, judgments, fines, settlements, and other
amounts actually and reasonably incurred in connection with such proceeding, if
such person acted in good faith and in a manner such person reasonably believed
to be in the best interests of the Company and, in the case of a criminal
proceeding, has no reasonable cause to believe the conduct of such person was
unlawful. In addition, the Company may indemnify, subject to certain
exceptions, any person who was or is a party or is threatened to be made a
party to any threatened, pending, or completed action by or in the right of the
Company to procure a judgment in its favor by reason of the fact that such
person is or was an officer, director, employee, or other agent of the Company
or its subsidiaries, against expenses actually and reasonably incurred by such
person in connection with the defense or settlement of such action if such
person acted in good faith and in a manner such person believed to be in the
best interest of the Company and its shareholders. The Company may advance
expenses incurred in defending any proceeding prior to final disposition upon
receipt of an undertaking by the agent to repay that amount if it shall be
determined that the agent is not entitled to indemnification as authorized by
Section 317. In addition, the Company is permitted to indemnify its agents in
excess of Section 317.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses payable by the
Company in connection with the issuance and distribution of the securities
being registered hereunder. No expenses shall be borne by the Selling
Stockholders except for commissions and expenses related to the sale of their
shares. All of the amounts shown are estimates, except for the SEC and NASD
registration fees.
SEC registration fee $2,597.54
NASD registration fee $1,357.19
Printing and engraving expenses * $________
Accounting fees and expenses * $________
Legal fees and expenses * $________
Transfer agent and registrar fees * $________
Fees and expenses for qualification
under state securities laws $________
Miscellaneous * $________
TOTAL $________
*estimated
Item 26. Recent Sales of Unregistered Securities.
(a) On May 21, 1996, the board approved the issuance of stock options to
acquire 275,500 shares of Common Stock at $1.80 per share to employees and
directors pursuant to a stock option plan. The stock option plan was approved
by the shareholders on August 19, 1996. The Company believes that the issuance
of the stock options is exempt from registration pursuant to section 4(2) of
the Securities Act and Regulation D promulgated thereunder.
(b) On May 31, 1996, the Company sold 8,022 shares of Common Stock at
$.50 per share to one employee upon the exercise of an outstanding option. The
Company believes that the issuance of Common Stock is exempt from registration
pursuant to section 4(2) of the Securities Act.
(c) On August 19, 1996, the board granted Warrants to acquire 200,000
shares of Common Stock at $5.00 per share to the directors and an affiliate of
the Company. The Company believes that the issuance of the Warrants is exempt
from registration pursuant to section 4(2) of the Securities Act.
Item 27. Exhibits.
1.1 Underwriting Agreement between Digital Power Corporation and
Werbel Roth Securities, Inc.
3.1 Amended and Restated Articles of Incorporation for Digital Power
Corporation
3.2 Amendment to Articles of Incorporation
3.3 Bylaws of Digital Power Corporation
4.1 Specimen Stock Certificate*
4.2 Specimen Warrant
4.3 Representatives' Warrant
5.1 Opinion of Bartel Eng Linn & Schroder re Legality*
10.1 Revolving Credit Facility with San Jose National Bank
10.2 KDK Contract
10.3 Agreement with Fortron/Source Corp.
10.4 Employment Agreement with Robert O. Smith*
10.5 1996 Stock Option Plan
16.1 Letter on change of certifying accountant
21.1 Subsidiary of the small business issuer
23.1 Consent of Hein + Associates LLP is contained on page II-6
23.2 Consent of Bartel Eng Linn & Schroder is contained in Exhibit 5
23.3 Consent of Micro-Tech Consultants
24.1 Power of attorney is contained on signature page
*To be filed by Amendment
Item 28. Undertakings
The Company hereby undertakes 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.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company 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 Company of expenses incurred or paid
by a director, officer, or controlling person of the Company 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 Company 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.
The Company hereby undertakes that:
(1) 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 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The Company undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information 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) 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) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities offered,
and the offering of the securities at that time to be the initial bona fide
offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Digital Power Corporation and Subsidiary:
We hereby consent to the use in this Registration Statement on Form SB-2 of our
report dated August 31, 1996, relating to the consolidated financial statements
of Digital Power Corporation and Subsidiary. We also consent to the reference
to our firm under the caption "Experts" in the Prospectus.
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
October 15, 1996
SIGNATURE
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Fremont, California on October 10, 1996.
DIGITAL POWER CORPORATION,
A CALIFORNIA CORPORATION
/S/ ROBERT O. SMITH
Robert O. Smith,
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert O. Smith or Edward L. Lammerding
as his true and lawful attorney-in-fact and agent, with full power of
substitution and re-substitution, 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, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agent, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent or any of them, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
In accordance with to the requirements of the Securities Act of 1933,
this registration statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURES DATE
/S/ ROBERT O. SMITH October 10, 1996
Robert O. Smith, Chief Executive Officer
(Principal Executive Officer)
/S/ PHILIP G. SWANY October 10, 1996
Philip G. Swany, Chief Financial Officer
(Principal Accounting and
Financial Officer)
/S/ EDWARD L. LAMMERDING October 10, 1996
Edward L. Lammerding,
Chairman of the Board
/S/ THOMAS W. O'NEIL October 10, 1996
Thomas W. O'Neil, Jr., Director
/S/ PHILIP M. LEE October 10, 1996
Philip M. Lee, Director
/S/ CLAUDE ADKINS October 10, 1996
Claude Adkins, Director
DIGITAL POWER CORPORATION
REGISTRATION STATEMENT ON
FORM SB-2
EXHIBITS
DATED OCTOBER 16, 1996