As filed with the Securities and Exchange Commission on February 22, 2000
Registration No. 333-93341
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
PRE-EFFECTIVE AM. NO. 3
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
ONLINE POWER SUPPLY, INC.
--------------------
(Exact name of small business issuer as specified in its charter)
Nevada _______ 84-1176494
- ------------------------------- ---------------------------- -------------------
(State or other jurisdiction of (Primary standard industrial (I.R.S. Employer
incorporation or organization) classification code number) Identification No.)
6909 S. Holly Circle, Suite 200, Englewood, Colorado 80112; Tel. 303.741.5641
(Address, including zip code, and telephone number, including area code,
of small business issuer's principal executive offices)
Larry G. Arnold, 6909 S. Holly Circle, Suite 200
Englewood, CO 80112; Tel. 303.741.5641
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to: Stephen E. Rounds, Esq.
The Law Office of Stephen E. Rounds
4635 East 18th Ave., Denver, CO 80220
Tel: 303.377.6997; Fax: 303.377.0231
---------------
Approximate date of commencement and end of proposed sale to the public: As soon
as practicable after the registration statement becomes effective and concluding
120 days later.
If this Form is a post-effective amendment filed pursuant to Rule 429(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. [ ]
1
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Amount to Proposed Proposed Maximum Amount of
Title of Each Class of Securities be Registered Maximum Aggregate Registration
to be Registered in the Offering Offering Price(1) Fee
Price Per
Security(1)
Common Stock 1,243,151 $5.00 $6,215,755 $1,727.00
Shares
Total Fee $1,727.00
<FN>
(1) This statement will register the registrant's rescission offer under
section 12(1) of the Act. Under rule 457(f), the registration fee is
estimated based on the market value of the registrant's common stock
(average of the bid and asked prices as of December 13, 1999) which is
within 5 business days prior to the initial filing of this statement.
The rate is based on $278.00 per $1,000,000 of securities offered.
</FN>
Delaying amendment under rule 473(a): 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 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.
2
CROSS REFERENCE SHEET PURSUANT TO RULE 404(A)
Cross reference between Item of Part I of Form SB-2 and the prospectus
filed by the Company as part of the registration statement.
Registration Statement Form
Item Number Heading in Prospectus
1. Forepart of the Registration Statement FRONT COVER and OUTSIDE
FRONT COVER PAGE
2. Inside Front and Outside Back Cover INSIDE FRONT COVER
and Pages of Prospectus OUTSIDE BACK COVER
3. Summary Information and Risk Factors PROSPECTUS SUMMARY and
RISK FACTORS
4. Use of Proceeds NOT APPLICABLE
5. Determination of Offering Price THE RESCISSION OFFER
6. Dilution DILUTION AND COMPARATIVE
DATA
7. Selling Security Holders NOT APPLICABLE
8. Plan of Distribution THE RESCISSION OFFER
9. Legal Proceedings LITIGATION
10. Directors, Executive Officers, Promoters MANAGEMENT
11. Security Ownership of Certain Beneficial SECURITY OWNERSHIP OF
Owners and Management CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
12. Description of Securities DESCRIPTION OF SECURITIES
13. Interest of Named Experts and Counsel NOT APPLICABLE
14. Disclosure of Commission Position on MANAGEMENT -
Indemnification for Securities Act Liabilities INDEMNIFICATION
3
15. Organization Within Five Years PROSPECTUS SUMMARY and
BUSINESS
16. Description of Business BUSINESS OF ONLINE
17. Management's Discussion and Analysis MANAGEMENT'S DISCUSSION
of Financial Condition and Results of AND ANALYSIS OF FINANCIAL
Operations CONDITION AND RESULTS OF
OPERATIONS
18. Description of Property BUSINESS OF ONLINE
19. Certain Relationships and Related CERTAIN TRANSACTIONS
Transactions
20. Market for Common Equity and Related MARKET FOR COMMON STOCK
Stockholder Matters RELATED STOCKHOLDER
MATTERS
21. Executive Compensation MANAGEMENT - EXECUTIVE
COMPENSATION
22. Financial Statements FINANCIAL STATEMENTS
23. Changes in and Disagreements with EXPERTS - CHANGE OF
Accountants on Accounting and ACCOUNTING FIRMS
Financial Disclosure
4
ONLINE POWER SUPPLY, INC.
RESCISSION OFFER: $1,416,405 CASH FOR 1,243,151 SHARES OF COMMON STOCK
We may have violated the Securities Act of 1933 and the securities laws
of some states when we sold common and preferred stock in 1998 and 1999. To
eliminate the uncertainty involving these violations, we are now making a
rescission offer to you and the other 181 investors: Until March __, 2000 we
offer cash to buy back your common stock (and the stock held by the other 180
investors) at the price you originally paid plus interest. The price depends on
when and which stock you bought , but generally the price is $ 5.00 per share
for some shares, and $1.00 or $2.00 per share for the shares into which
preferred stock was converted in December 1999. Our letter to you which came
with this prospectus identifies how many shares you bought and the price you
paid. In this prospectus, all of these shares of common stock which we offer to
buy are referred to as the rescission shares.
Your decision must cover all of your rescission shares; you cannot get
a refund for some and keep the rest. If you ask for a refund of your investment,
your decision will be irrevocable and cannot be withdrawn. If you no longer own
rescission shares, you have the right to be paid the difference between what you
originally invested and what you received when you sold or disposed of your
shares, plus interest on the amount of your original total investment.
You have the right to keep your rescission shares and not be paid
anything for your rescission shares. If you decide to keep your rescission
shares, your decision will be irrevocable. Your shares will continue to be
"restricted securities" under the 1933 Act and SEC rule 144. An investment in
our company is subject to significant risks.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THE ONLINE STOCK WHICH IS THE SUBJECT OF THIS
RESCISSION OFFER UNDER THIS PROSPECTUS, OR DETERMINED IF THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is February __, 2000
5
We have not authorized any person to make any recommendation on behalf
of us as to whether you should ask for a refund of your investment plus
interest, or keep your rescission shares. No one has been authorized by us to
give any information or make any representations in connection with this
exchange offer, other than what is contained in this prospectus and the letter
of transmittal. If given or made, such recommendations, information or
representations must not be relied upon as statements made by us. The delivery
of this prospectus shall not under any circumstances create any implication that
the information contained in this prospectus, or in any addendum to it, is
correct as of any time after the date on the front of those documents, or that
there has been no change in the information contained in them, or in our
affairs, since that date.
This prospectus does not constitute an offer to sell or a solicitation
of an offer to buy the rescission shares by any person in any jurisdiction in
which such an offer or solicitation would be unlawful.
6
PROSPECTUS SUMMARY
BUSINESS
We have developed patented and patent pending proprietary technology
for what we believe are better power supply systems for electronic devices (our
OPS line of products). The electrical current (power supply) going into such
devices has to be converted and controlled so the power is constantly and evenly
supplied in the right format. Computers, for example, must use direct current
(steady flow, or "DC"), but most output from electrical suppliers (utilities) is
alternating current ("AC"). There is a power supply system in every computer
which converts the AC power into DC. These computers are used in personal
computing, office environments, industrial applications, telecommunication
switching stations, and a host of other uses.
We estimate that the total annual United States market for the size of
power supply systems which we have designed is approximately $4 billion, meaning
that original equipment manufacturers ("OEM") and end users in the United States
buy that dollar volume every year. Another $5 billion is spent on systems in
Europe and Asia every year. Our business model projects that our OPS line may
start to be "designed into" new generations of smaller advanced electronic
devices by a number of manufacturers. Our competitors' current products will not
fit the new generations' standards of efficiency, size and weight which the
manufacturers appear to be adopting on their own. Therefore, our products should
enable us to capture a share of the annual market.
For several years we have been selling the "Glitch Master" power
circuit which is installed to protect the power supply system in personal
computers and workstations. We are winding down this product. We have recorded
revenues from sales of this product line in 1998 and 1999, but presently are not
predicting significant sales in 2000.
Our offices are located at 6909 South Holly Circle, suite 200,
Englewood, Colorado 80112; telephone 303.741.5641 (fax 303.741.5679).
7
SUMMARY OF RESCISSION OFFER
Record and Expiration Dates Eligible holders of shares of common
stock on February __, 2000. The offer
expires on March __, 2000 (subject to
extension for another 30 days in our
discretion).
Offer We are offering to buy back all of your
common stock for cash equal to what you
originally invested plus interest under
your state's law (calculated from the
first day of the month when you invested,
through the date when we receive your
acceptance of our offer). If you have
sold your stock, we will pay you the
difference between what you invested and
the amount you received for your stock,
plus interest under your state's law. You
will have to tell us if you've sold your
stock, and what you received for it. We
will attempt to confirm your information,
and may ask for confirmation of what you
tell us.
You are not required to accept our offer.
You may keep your stock, but we will not
offer to buy your stock again. If you
accept our offer, your decision is final
and cannot be changed.
Market Prices Our common stock is traded on the OTCBB
("OPWRE"). The last reported sales price
was $27.25 on February 18, 2000. There is
no guarantee that the stock will continue
to trade at this price. There is no
relationship between this recent price
and our current financial condition or
results of operations through the date of
this prospectus.
Conditions If you accept our offer, we must receive
your letter of transmittal and your stock
certificate (if you still own any stock)
before the Expiration Date. If we don't
receive these documents from you, we will
assume you want to keep your stock.
If you want to keep your stock, please so
indicate in your letter of transmittal
and send it to us.
8
Delivery of Documents If you accept our offer, your letter of
Rescission Offer Agent transmittal and your stock certificate
(if you still own stock) must be returned
to our transfer agent, Corporate Stock
Transfer, Inc., 3200 Cherry Creek Drive
South, suite 430, Denver, Colorado 80209;
telephone 303.282.4800 (fax 303.282.5800).
CST will tell us how much stock is being
returned, and we will pay the cash
directly.
SUMMARY FINANCIAL INFORMATION
We were organized in 1991. From that date through mid-1996 we were
involved in two business endeavors which were not successful. In mid-1996 we
merged with Glitch Master Marketing, Inc. and began to focus on the power system
device market. From mid-1996 through December 31, 1999, we have raised money to
fund the development of the OPS product, pay our marketing costs, and prepare
for manufacturing.
We have prepared a table showing some of the information which appears
in our consolidated financial statements as of December 31, 1999 and for the two
years then ended.
The information in the table is qualified in its entirety by the full
financial statements and notes thereto which are included in this prospectus.
You also should read the information we have prepared in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" which
explains some of the financial data.
BALANCE SHEET DATA DECEMBER 31, 1999 DECEMBER 31, 1998
- ------------------ ----------------- -----------------
Assets $ 5,702,279 $ 742,784
Liabilities $ 1,896,783 $ 1,185,034
Working Capital
(Deficit) $ 4,550,523 $ (366,709)
Stockholders' Equity $ 3,805,496 $ (442,250)
(Deficit)
9
OPERATING DATA DECEMBER 31, 1999 YEAR ENDED
DECEMBER 31, 1998
-----------------
Revenue $ 299,408 $ 262,564
Loss from Operations $ (1,525,043) $ (1,240,241)
Net Loss $ (1,588,355) $ (1,449,530)
Basic and Diluted Loss
per Common Share $ (0.13) $ (0.13)
Shares of Common
Stock Used in
Computing Data 12,491,158 11,062,039
PRICE RANGE OF COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the over-the-counter market on the OTC
Electronic Bulletin Board (referred to sometimes as the OTCBB) under the symbol
"OPWRE". We changed our symbol to "OPWR" when we changed our name in January
2000. The "E" is attached because we were to be delisted from OTCBB if we were
not registered with the SEC by February 24, 2000. None of the preferred stock
has been traded. The high and low bid quotations for the common stock, by
quarters, starting when trading commenced in the second quarter of 1998 as
reported by the OTCBB were as follows:
Quarter Ended High Low
------------- ---- ---
June 30, 1998 $ 4.75 $ 1.75
September 30, 1998 3.06 0.78
December 31, 1998 3.50 0.75
March 31, 1999 4.50 1.88
June 30, 1999 4.75 2.50
September 30, 1999 3.75 2.25
December 31, 1999 6.75 2.65
At February 2, 2000 we had 20 shareholders of record owning 10,467
shares of preferred stock (without designation), and 1,714 shareholders of
record owning 16,954,119 shares of common stock. The number of shares of common
stock includes the shares issued on conversion of all series A and series B
preferred stock and the dividend thereon. If the rescission offer is accepted at
the following levels, we would have issued and outstanding shares of common
stock: 15,710,968 shares if 100%; 16,021,756 shares if 75%; 16,332,543 shares if
50%; and 16,643,332 shares at 25%.
10
The closing price on Friday, February 18, 2000 was $27.25. There is no
guarantee that the stock will continue to trade at this price. There is no
relationship between this recent price and our current financial condition or
results of operations through the date of this prospectus.
We have not declared any dividends on the common stock and don't expect
to declare any from any future profits in the foreseeable future. We will keep
any profits to expand our operations.
THE RESCISSION OFFER
BACKGROUND OF THE RESCISSION OFFER AND THE 1933 ACT; ESTIMATED AMOUNT
OF THE RESCISSION. From September 1997 through September 1999, we sold stock to
investors for $1,845,050 in cash: 136,800 shares of common stock (at $5.00 per
share) and 573,700 shares of series A and series B cumulative convertible
preferred stock (at $2.00 per share except for 2,250 shares at $4.00 per share).
The series A and series B preferred stock had the same rights. In December 1999,
we converted all of the preferred stock, plus another 34,434 shares of preferred
stock which we issued to pay the 6% annual dividend on the series A and series B
stock, for a total of 608,134 preferred shares, into a total of 1,216,268 shares
of common stock. At the time, we believed that the original common and preferred
shares had been sold in three separate private placements of securities which
were exempt from SEC registration under the 1933 Act and similar exemptions from
registration under the states' securities laws.
However, facts recently coming to our attention have created some
uncertainty whether the exemptions from SEC registration under the 1933 Act in
fact were available for all of the shares sold in the three private placements.
Specifically, we had sold other securities in the 12 month period before
September 1997, so for the first private placement we did not have available to
us the full amount of the one exemption ($1 million under rule 504 in a 12 month
period); $134,415 of our first private placement offering exceeded our $1
million limit. Another exemption (rule 506) was not available to us because
considered as a group, there were approximately 45 "nonaccredited investors"
among the investors who paid the last $134,415 of the money raised from the
first offering of common stock in early 1998, but rule 506 only allows 35
nonaccredited investors. Last, in the series A and series B preferred stock
private placement offerings later in 1998 and continuing into early 1999, there
were 69 nonaccredited investors in that group of investors. And, these two
offerings could be deemed to have been one offering under SEC integration rules.
These two facts mean that we did not have available an exemption under rule 506.
Under SEC rules, in general an individual investor is nonaccredited if he or she
has a net worth of less than $1 million (either singly or together with a
spouse), or historical and current expected annual net income of less than
$200,000 ($300,000 together with a spouse).
For clarification, please note that we conducted private placements of
our securities before and after the "three private placement offerings" of
common and preferred stock.
11
BACKGROUND OF FACTS. This table summarizes some of the information, and
also shows how we calculated the number of rescission shares involved in this
refund offer:
START
DATE OF TYPE OF NO. SHARES PRICE PER NO. OF RES- REASON FOR
OFFERING SHARES SOLD SHARE CISSION SHARES RESCISSION
April 1997 common 110,000 $5.00 None Not applicable
Sept. 1997 common 136,800 $5.00 26,883 Exceeded $1 million
1st pvt offering Rule 504 limit
otherwise available
for 12 months ending
Sept. 1997 because
of prior offering
before April 1997,
and the presence of
40 nonaccredited
investors made
rule 506 unavailable.
Oct. 1998 preferred B 442,700 $2.00 885,400 Exceeded rule 504
2d pvt offering common shares(2) limit, and approx-
imately 69 non-
accredited investors
(including preferred
A investors) made
rule 506 unavailable.
Nov. 1998 preferred A 131,000 $2.00(3) 262,000
3d pvt offering common shares(2) Exceeded rule 504
limit (same type of
security as preferred
B), and approximately
69 non-accredited
investors (including
preferred B investors)
made rule 506 not
available.
Add dividend of 6% on preferred stock, paid in December
1999 in shares of preferred stock then converted to common stock:
preferred B 26,574 n/a 53,148 No exemption
common shares required for dividend.
preferred A 7,860 n/a 15,720 No exemption
common shares required for dividend.
TOTAL RESCISSION
SHARES 1,243,151
COMMON SHARES
12
<FN>
(1) These are the last shares sold in the $5.00 common stock offering.
(2) Reflects conversion in 1999 of each 1 preferred share into 2 shares of
common stock. No extra consideration was received by us or paid by the
preferred shareholders, so the effective price per share
for the converted common stock was $1.00 per share of common stock.
(3) A few of these shares were sold at $4.00.
</FN>
SECURITIES ACT OF 1933. In general, section 5 of the 1933 Act requires
all offers and sales of securities in interstate commerce in the United States
to be registered with the SEC. The offer and sale of securities is presumed to
be a "public offering" which must be registered under section 5. If an offer and
sale is not registered, it must be either exempt or illegal. Among the
exemptions from section 5 registration are the "private placement" transaction
exemptions provided by section 3(b) and SEC rule 505, section 4(2) and SEC rule
506, and section 4(6), all such sections being within the 1933 Act. Under
certain limited circumstances, an offering may not be a public offering and may
be exempt under section 4(2) without having to be exempt under SEC rule 506.
Another exemption from section 5 registration with the SEC is the SEC's rule 504
exemption under section 3(b); this is not a private placement exemption but
rather an annual exemption from SEC registration for up to $1 million in
securities sold (less the amount of other securities sold in the prior 12 months
using rule 504 or in violation of section 5). The issuer always has the burden
of proof that it complied with the conditions to the availability of an
exemption for each of its claimed exempt offerings. If the transactions are not
registered, and the issuer cannot sustain the burden of showing how it complied
with the conditions to one of the 1933 Act exemptions, the offer and sale of
such securities would be illegal under the 1933 Act.
We are not certain that our offer and sale of the preferred stock part
of the rescission shares was exempt under the "safe harbor" rules of the SEC
(rules 505 and 506) because of the number of nonaccredited investors in the
series A and series B preferred stock (which might be deemed to have been one
integrated offering under SEC rules). The section 4(6) exemption is not
available to us because some nonaccredited persons bought preferred stock, and
only accredited investors are permitted under section 4(6) offerings. Also, we
are not certain that the last $134,415 raised from selling shares of common
stock was exempt under rule 504 (we might have exceeded our allowable ceiling
for this kind of exempt offering). Still, these transactions might be exempt
under federal court decisions which have interpreted "public offering" and
related terms over the years. However, the federal court decisions taken as a
whole do not give clear guidelines on what is, or isn't, an exempt offering, and
in some areas the court decisions are not in agreement on this matter.
The principal remedy under the 1933 Act for violations of section 5 is
provided by section 12(a)(1) which allows investors in an offering to sue for a
refund of what was paid for the securities (a "rescission action"), plus
interest. Section 13 of the 1933 Act bars recovery in the courts by investors
under section 12(a)(1) unless in a suit brought within one year of the later of
the investment transaction or the date of delivery of certificates for the
securities. None of the investors who bought the rescission shares have told us
they intend to sue us to get their money back, under either federal or state
laws.
13
Based on the foregoing facts and legal considerations, we believe may
have sold the rescission shares in violation of SEC registration requirements
under the 1933 Act. Therefore, we believe we would have a liability of
approximately $1,416,405 (based on $1,281,815 of original investment plus
$134,590 of interest for 18 months at an average annual rate of 7%). This amount
will change as interest accrues at the state law rates. On our financial
statements, we have recorded $1,281,815 (the original invested amount) as a
liability for the stock subject to this rescission offer at December 31, 1999.
Because we believe the probability of the rescission of shares is unlikely, no
accrued interest on the rescission has been recorded at December 31, 1999.
PURPOSE OF THIS RESCISSION OFFER AND DETERMINATION OF OFFERING PRICE.
The determination of the question of ultimate liability is one for the courts to
whom is confided the interpretation of section 12(1) of the 1933 Act. We
presently do not know for certain if we violated the 1933 Act's registration
provisions, but we do know that it is important to eliminate the financial and
legal uncertainty surrounding the financing from sale of the rescission shares.
Until it is eliminated, whether by paying back all the money or having the
investors decide to keep their rescission shares, there will be financial
uncertainty: If we need more equity or debt financing in the future, potential
sources of the financing will need to know where the funds are going to be
allocated. Paying off contingent liabilities that mature into legal claims is
usually not acceptable to new investors as a use of their funds. Also, until it
is eliminated, there is legal uncertainty because we could be involved in court
proceedings to force a refund of the invested money. This kind of legal
uncertainty impacts potential sources of financing we might need in the future,
and also would be expensive to defend in the courts and take up management's
time to the detriment of running our business.
Therefore, with this prospectus we offer you a refund of your money,
plus interest at the rate in effect in your state. If you accept the offer, you
will be paid cash for your investment and you will return your stock certificate
to us (or, if you don't own or some of all the shares, you will be paid the
difference between what you sold them for and what you invested to buy those
shares), in both cases including interest on the whole original invested amount.
You will have to tell us if you've sold your stock, and what you received for
it. We will attempt to confirm your information, and may ask for confirmation of
what you tell us. If you tell us you have decided to keep your shares, or if we
don't hear from you (receive your executed and completed letter of transmittal)
at all by the Expiration Date of this offer, you will be barred from filing any
claims against us under section 12(1) of the 1933 Act. If you decide to keep
your shares, your shares will continue to be restricted securities as that term
is defined in SEC rule 144.
The offering price (refund offer) of $5.00 per share of common stock
for 26,883 of the rescission shares is based on the original $5.00 per share
investment price. The offering price (refund offer) of $1.00 per share of common
stock for the remaining 1,216,268 rescission shares is based on the original
$2.00 price per share of series A or series B preferred stock, except for a few
preferred shares sold at $4.00. All of the preferred stock has been converted to
common stock at the rate of 2 common shares for 1 preferred share, for an
effective price of $1.00 per share of common stock for nearly all shares, and
$2.00 for a few shares. In all cases, the offering prices (refund offers) will
include interest at the applicable state rate. These offering prices are not
related
14
to the stock market prices for our stock, which have ranged from $0.75 to $6.75
per share in 1998 and 1999, and averaged about $15.00 per share in January and
the first week of February 2000. Instead, these offering prices have been
determined with reference to your legal rights to a refund of your investment
plus interest.
You should note that the closing price was $27.25 on February 18, 2000.
There is no guarantee that the stock will continue to trade at this price. There
is no relationship between this recent price and our current financial condition
or results of operations through the date of this prospectus.
You should note that when we sold you the original rescission shares,
we established the original offering prices of those shares by taking into
account our internal estimates of the value of the our "intellectual property"
assets, the business we then expected to generate over a period of several
years, and other factors. However, our offering prices did not bear any
relationship to our assets, book value, or net worth or any other generally
accepted criteria of value. The offering prices for the rescission shares in
this rescission offering should not be considered to be an indication of our
actual value or to be related to the market prices for our stock.
If our stock price drops below $5.00, trading interest may be reduced
and the value of your investment may be impaired. For most of the time in 1998
and 1999 the trading price has been less than $5.00 per share. Stock which
trades for less than $5.00 per share and is not listed on the Nasdaq Small Cap
Market (or on other principal markets) is defined as "low priced stock" under
rule 3a51-1 adopted by the Commission under the Securities Exchange Act of 1934.
In general, "low priced stock" includes securities (a) which are not listed on
the principal stock exchanges or the National Association of Securities Dealers
Automated Quotation System ("Nasdaq"); or (b) which are not so listed, and have
a bid price in the market of less than $5.00; or (c) of an issuer with net
tangible assets of less than $2 million ($5 million if the issuer has been in
continuous operation for less than three years), or which has recorded average
revenues of less than $6 million in the last three years. If our stock trades
below $5.00 or otherwise is classified as "low priced," the stock is subject to
rule 15g-9 adopted by the Commission under the 1934 Act. Rule 15g-9 imposes
additional sales practice requirements on broker-dealers which sell such
securities to persons other than established customers and accredited investors.
For transactions covered by rule 15g-9, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, this rule may
adversely affect the ability of broker-dealers to sell our stock, and therefore
may impact your ability to sell your stock.
STATE SECURITIES LAWS - GENERAL. Investors in 18 states bought the
rescission shares. In the majority of these states, we believe that the offer
and sale of the securities was exempt from the registration provisions of state
securities laws because the securities were restricted under the 1933 Act, or
because the investors in the particular state were accredited, or because there
were a limited number of investors in the state. These states do not generally
require a pre-sale or post-sale filing
15
to perfect the exemption from registration of the offer and sale of securities
with the state securities administration agency.
However, it has come to our attention that the offer and sale of the
rescission shares in some of the states may not have been exempt from those
states' registration provisions. Therefore, investors residing in some of the
states may have the right under state laws to a refund of their investment, with
interest (in most of the states). The statutes of limitations for filing a claim
in state courts are usually longer than the one year available under the 1933
Act.
We currently intend to make this offer to all eligible shareholders to
remove the financial and legal uncertainty under both federal and state laws
associated with the offer and sale of the rescission shares. However, some of
the states may not allow this offer to be made in those states, or we may find
it is not practical or advisable to comply with the requirements of each and
every applicable state. Therefore, we reserve the right not to make this
rescission offer in any state where we in our sole discretion determine that it
is not possible or it is not practical or advisable for the Company to make this
rescission offer in that state.
Holders of rescission shares who reside in any states where we do not
make this rescission offer will keep their shares. Their legal rights under the
1933 Act and resident state securities laws will not be affected by this
rescission offer.
STATE SECURITIES LAWS - INTEREST RATES. All of the state laws where
eligible shareholders reside allow for the recovery of annual interest at the
rate of 6% (not compounded) on the amount of original investment, except for 8%
in Colorado, Missouri and Washington; 10% in Illinois and Texas; 7% in
California; 15% in New Mexico; 10% in Tennessee; and 5% in Wisconsin. There is
no statutory provision for recovery of interest in New York or Ohio, although
under certain circumstances state courts will award interest on claims.
SOURCE OF FUNDS TO PAY THE RESCISSION OFFER AND THE IMPACT ON
OUTSTANDING SECURITIES. At December 31, 1999 we had on hand $5,041,367 cash and
cash equivalents (certificates of deposit), but only $566,385 of current
liabilities not including the estimated maximum amount of $1,416,405 we would
have to pay out if we buy back all of the rescission shares which you and the
other eligible share-holders own. If we do buy back all of the rescission
shares, we would have on hand approximately $3,624,962 cash and cash equivalents
on a pro forma basis as of December 31, 1999, which we believe will be enough
cash to pay our current liabilities and fund our plan of operations through 2000
without any positive cash flow from operations. Our ability to pay for this
rescission offer comes from the proceeds of two private placements of a total of
3,247,000 restricted shares of our common stock (only to accredited investors)
from mid-July 1999 until December 21, 1999, at $2.00 per share. The purpose of
these two private placements was to raise money for our plan of operations, not
to pay for this rescission offer. We received net proceeds of $5,844,600 from
these private placements, after paying $649,400 in commissions and other
offering costs. We have enough extra money on hand from unallocated working
capital in those 1999 private placements to pay for this rescission offer. The
first of these private placements was conducted under the
16
exemptions from registration allowed by section 4(6) of the 1933 Act; and the
second was conducted under section 4(2) of the 1933 Act and SEC rule 506.
We believe that if the market price for our common stock stays within
the trading range of $15.00 which has been experienced in January and February
2000 (the range was $4.00 to $5.50 from early September through December 1999),
many of you may elect to keep your shares. To the extent you and the other
eligible shareholders decide not to accept our refund offer, we will have more
than the $3,624,962 of cash and cash equivalents (pro forma at December 31,
1999) available to pay current liabilities and pay for our plan of operations.
There are no loan agreements or other restrictions on our ability to
pay cash in this rescission offer. Also, we are incorporated under Nevada law.
Under Nevada law we are allowed to to buy back stock if after payments to you,
we will be able to pay our debts as they become due in the usual course of
business, and our total assets will be more than our total liabilities.
At the record date (and also at December 31, 1999), there are
16,954,119 shares of common stock issued and outstanding. If all eligible
shareholders accept the rescission offer, we will have purchased 1,243,151
shares of common stock (which will be retired and canceled), and then there
would be 15,710,968 shares of common stock issued and outstanding.
RESALE OF SHARES UNDER RULE 144
We never have sold "free trading" shares of common or preferred stock
or any other securities pursuant to any exemption from registration under the
1933 Act or state securities laws, or under a registration statement filed with
the Commission. Approximately 4,710,000 shares of common stock (currently the
"public float") were sold by us from 1991 to 1996 to persons not now affiliated
with us. These shares are free trading because the resale restriction under rule
144 has expired. Shares which are traded in the OTCBB market are part of these
shares. All of the other shares of common stock (a total of 12,244,119 shares)
are restricted securities under rule 144, including the shares of common stock
into which the shares of series A and series B preferred stock were converted in
December 1999.
Resales to the public of these restricted securities will be permitted
only in accordance with the manner and notice of sale requirements, the
limitations on the number of shares which can be sold, and the other
requirements of rule 144.
In general, rule 144 permits the holder of restricted securities to
sell, in any three month period, an amount of securities of the issuer which
does not exceed one percent of all the outstanding securities of the issuer.
Rule 144 sales must be made to a market maker or in brokerage transactions, and
a Notice of Sale on Form 144 must be filed with the Commission. The securities
to be sold must have been owned for at least one year after purchase. Under rule
144(k), restricted securities which have been held by nonaffiliates of the
issuer for at least two years may be sold
17
without having to comply with the volume, manner of sale or notice filing
requirements of rule 144, provided that the seller has not been affiliated with
the issuer for at least three months prior to the date of sale of the restricted
securities.
The conversion of series A and series B preferred stock to common
stock, and your receipt of more shares of common stock in payment of the 6%
annual dividend, have not changed your rule 144 holding period (which started
when you bought your stock from us). Also, this rescission offer will not affect
your rule 144 holding period if you decide to keep your stock.
FEDERAL INCOME TAX CONSEQUENCES
We have not obtained a legal opinion from tax lawyers about the tax
consequences of this exchange offer. The following is a summary of certain of
the United States federal income tax aspects of this exchange offer as we
understand them. You should consult with your own advisors about how the
exchange offer will affect you, depending on whether you take cash or keep your
stock. The summary does not address the tax consequences to holders of
rescission shares who may not hold them as "capital assets" under section 1221
of the Internal Revenue Code of 1986 (the "Code"). Also, the summary does not
discuss the tax consequences to holders of rescission shares who may be subject
to special treatment under the Code, such as dealers in securities, tax-exempt
entities, foreign holders, regulated investment companies, and others.
Our discussion does not describe any tax consequences arising from tax
laws of any state or local jurisdiction. Our discussion is limited to the
current Code and IRS regulations, and does not take into account changes which
could be made at any time to the Code or the IRS regulations.
The following discussion is limited to the United States federal income
tax consequences relevant to a holder of rescission shares that is (1) a citizen
or resident of the United States, (2) a corporation or partnership organized in
the United States, (3) an estate, or (4) a trust if its decisions are controlled
by one or more United States persons.
CONSEQUENCES OF ACCEPTING THE EXCHANGE OFFER. If you decide to take a
refund of your investment, you will recognize ordinary income and be subject to
tax under the Code, but only on the interest paid to you. You will be paid in
2000, so you will have to report this income in your 2000 tax return which you
will file in 2001.
CONSEQUENCES OF KEEPING THE RESCISSION SHARES. If you decide to keep
your rescission shares, you will not recognize any kind of income or loss under
the Code because of your decision. However, you will recognize income or loss
from the future sale or other disposition of your rescission shares, depending
on whether you sell them for more or less than your investment amount.
CONSEQUENCES OF THE DIVIDEND AND COMMISSION OF PREFERRED STOCK. Your
receipt of the shares of preferred stock to pay the 6% dividend on your
preferred stock will be taxable income to
18
you in 1999 and you will have to report this income on your tax return for 1999
which will be due April 2000. The conversion of your preferred stock to common
stock may not be taxable for you.
You should consult your own advisors on these matters.
RISK FACTORS
An investment in our common stock involves substantial risks. In
deciding whether you should keep your rescission shares, or accept our offer for
a cash refund plus interest, you should carefully consider the following
factors, in addition to the other information and financial data in this
prospectus.
RISK FACTORS RELATING TO OUR COMPANY
YOU COULD LOSE ALL OR A PORTION OF YOUR INVESTMENT IF WE CONTINUE TO
SUFFER RECURRING LOSSES. So far, we have lost money in our business. Except for
fiscal 1996 (when we earned a profit of approximately $19,000), we have incurred
net losses since inception and expect to incur significant losses for at least
the first six months of 2000 if not longer. At December 31, 1998, the total
retained deficit was $9,573,142, including the $1,449,530 net loss recorded for
fiscal 1998. At December 31, 1999, the total retained deficit was $16,110,904,
including the $1,588,355 net loss recorded for fiscal 1999, preferred stock
dividends of $47,969, and the accretion of beneficial conversion feature of our
preferred stock in the amount of $4,901,438. For fiscal 1999, we lost $1,525,043
from operations. These operating losses are expected to continue at least
through the first two quarters of fiscal 2000 and may continue later, depending
on our success in signing contracts and selling our products at a profit.
IF WE ARE UNABLE TO CONTINUE AS A GOING CONCERN, YOU COULD LOSE ALL OR
A PORTION OF YOUR INVESTMENT. We have only recently had working capital
available to us to keep operations going for a while. At December 31, 1999 and
1998, we had working capital of $4,550,523 and a working capital (deficit) of
($366,709), respectively. At December 31, 1998 we did not have adequate capital
and our current liabilities then exceeded our current assets by these amounts.
However, at December 31, 1999 working capital was approximately $4,550,523,
which reflects additional capital which was raised in private placements of
stock at $2.00 per share in that year. However, even with the added capital, our
business model remains unproven.
IF WE DON'T ACHIEVE PROFITABILITY IN LATE 2000 OR IN 2001, YOU COULD
LOSE SOME OR ALL OF YOUR INVESTMENT UNLESS WE CAN RAISE MORE MONEY TO STAY IN
BUSINESS IN 2001. Our revenue for the
19
foreseeable future will be almost entirely composed of future sales of our OPS
products to major end users who will use the products as one of many components
in their own products. We don't have any sales contracts yet.
IF WE ARE UNABLE TO MAINTAIN A RELIABLE SOURCE FOR A KEY COMPONENT WE
USE, WE MIGHT NOT BE ABLE TO SUCCESSFULLY COMPLETE OUR FUTURE CONTRACTS. We may
depend on a single source of supply for a key component of our principal OPS
product line that we use to build our OPS unit. We will try to buy an inventory
reserve of adequate supply of the parts, or use other means to secure an
adequate supply, from that supplier. However, if that supplier is unable to ship
the parts that we will need, or increases the price to unreasonable levels, and
we can't locate another source of supply for the item, we may not be able to
complete our future contracts with customers profitably.
IF WE NEED MORE CAPITAL IN 2000 OR 2001 BUT CAN'T OBTAIN IT, WE MAY
HAVE TO CUT BACK OR CEASE OPERATIONS, WHICH MEANS YOU COULD LOSE ALL OR PART OF
THE VALUE OF YOUR INVESTMENT. Working capital now on hand and to a much lesser
extent expected revenues from the Glitch Master product line are expected to
fund our ongoing operations and plan of business through at least December 2000,
and probably through June 2001, even if we buy back all of the rescission
shares. However, you should note that the we still anticipate a loss from
operations through June 30, 2000, even if contracts for sale of the OPS products
are signed by that date. Therefore, depending on the size, timing, and cash
flows from new product customers which are anticipated to be signed in the first
part of 2000, we could need more capital financing by the end of 2000.
IF WE RUN OUT OF MONEY BEFORE WE START RECEIVING CONTRACT REVENUES,
YOUR INVESTMENT COULD BE LOST. We expect to base our expenditures of money on
our plans and estimates of future revenue. In turn, revenue estimates will
depend on contracts in place and the cost of executing (fulfilling) those
contracts in terms of overhead and engineering costs, inventory expense, and
manufacturing and delivery costs. Currently we have no signed contracts. Our
future payroll and inventory costs will increase considerably. Even if we sign
contracts for the OPS products, we will have to hire more employees and we may
have to pay for production line inventory costs well before the time when we are
paid by our customers. These payroll expenses and inventory costs could be
considerable. We believe that with signed contracts in hand, we should be able
to borrow money from banks or other lenders to pay for the inventory costs. But,
if we can't borrow the money we need for inventory costs, we would have to spend
our working capital to pay for those costs. There is a risk, therefore, that we
could run out of money while waiting for payment from customers. We might not be
able to raise the money we would need to stay in business.
If we have to raise debt financing in the future, your rights and the
value of your investment in the common stock could be reduced. For example, if
we have to issue debt securities, the holders of the debt would have a claim to
our assets that would be prior to the rights of stockholders. Interest on these
debt securities would increase our costs and negatively impact operating
results. If we issue more common stock or preferred stock, the percentage
ownership of our then-existing stockholders will decrease and they may
experience additional dilution. In addition, any convertible
20
or exchangeable securities may have rights, preferences and privileges more
favorable to the holders than those of the common stock.
Our future growth would be materially affected if we can't hire enough
professional personnel. Therefore, we may face capacity constraints in the OPS
sector that would prevent us from meeting customer demands. Each OPS customer
will require us to engineer one of our basic products to meet the customer's
specific size, configuration and performance requirements. In turn, each
engineered product will have to be "designed for manufacture,"which means that
the precise manufacturing steps required to make that product will have to be
described and quantified before manufacturing can begin. There is a shortage of
qualified personnel in our industry, particularly of technical personnel who can
understand the core product concepts and implement them in designs for
customers. If we get more contracts than we can handle in a timely manner, we
may lose customers and opportunities to make money.
If we lost the services of any of our executives, our operations could
be materially affected and the value of your investment could be reduced. We
will continue to depend upon the services of our principal officers for our
future success. Our business would suffer if the services of Larry G. Arnold
(Chief Executive Officer), Kris M. Budinger (President), Chris A. Riggio (Vice
President Research), Garth Woodland (Vice President Engineering, Research and
Development), or Richard Millspaugh (Chief Financial Officer) were not available
to us. We have key person life insurance on Messrs. Arnold, Budinger and
Woodland ($500,000 per person), but still it would be difficult to find
replacement personnel if they or the other officers did not continue to work for
us. We have written employment agreements with all of the officers except Mr.
Riggio, but these agreements would not prevent any of them from leaving us.
The value of your investment would be materially affected if our
intellectual property rights don't protect our business. We depend on our
intellectual property. One patent has been issued by the United States Patent
and Trademark Office, covering certain aspects of our OPS technology and
products, and another patent has been filed covering additional aspects of these
items. We will
21
make new filings on a regular basis for patent protection on new technology and
products as developed. However, although deemed unlikely by management, there is
no assurance competing technology will not be developed by other companies which
would achieve the same user objectives without violating our patent rights. In
addition, there is no assurance other companies would not seek to introduce
technology and products which would violate our rights. In the event of patent
infringements, we might have to seek remedies in court to enforce our rights.
Such proceedings are difficult to win, cost a lot of money, and can take years
to obtain final adjudication of the parties' rights and liabilities.
Our operations would be materially affected, and the value of your
investment reduced or eliminated, if we are unable to successfully compete with
larger companies. Our principal competitors include Delta Products, Vicor and
Artesyn. There are approximately 150 more companies in the power supply unit
manufacturing business, which is very competitive. All of these companies have
significant customer relationships and vastly larger financial, marketing,
customer support, technical and other resources than we do. Therefore, they may
be able to respond more quickly to changes in customer requirements or be able
to undertake more extensive marketing campaigns, adopt more aggressive pricing
policies, and make more attractive offers to potential customers and employees.
They also may be able to devote greater resources to new products and services
than we can. Therefore, we may not be successful in competing against
competitors, because even though we believe we have a superior product, that
advantage could be outweighed by marketing, pricing, or the other factors where
our competitors are stronger.
Our working capital would be reduced if we lose lawsuits. We still are
involved in litigation related to the 1995 bankruptcy proceedings of a company
with which we had merged but later separated. In late 1998 we paid $150,000 to
the trustee in bankruptcy to settle the litigation, but in 1999 he started other
proceedings to collect approximately $390,000 more from us. After extensive
hearings, in November 1999 the magistrate in United States District Court found
in our favor. However, the trustee now seeks to have the United States District
Court not adopt the magistrate's recommendation. Until this litigation is
concluded, we won't know whether we will have to pay the trustee this additional
amount or not. We also are involved in a separate lawsuit (with Fox Sports,
Inc.), also related to our former activities in the entertainment business. We
believe this matter will be resolved by a settlement, but we could lose the
lawsuit if the settlement discussions fail.
RISK FACTORS INVOLVING THIS OFFERING.
If the market for our common stock is illiquid in the future, you could
encounter difficulty if you try to sell your stock. Our common stock is
currently trading on the Over-the-Counter Bulletin Board. An active trading
market may not be sustained. If there is no active trading market for our common
stock, you may not be able to resell your shares at any price, if at all. It is
possible that the trading market for the common stock in the future will be
"thin" and "illiquid," which could result in increased volatility in the trading
prices for our common stock. These future prices cannot be predicted, and will
be determined by the market. The prices may be influenced by investors'
perceptions of us, general economic conditions, and the general conditions of
the securities markets.
22
Until our financial performance indicates substantial success in executing our
business model, it is unlikely that significant coverage by stock market
analysts will be extended to us. Without such coverage, institutional investors
are not likely to invest. Until such time, if ever, as such coverage by analysts
and wider market interest develops, the market for the common stock may well
remain limited in its capacity to absorb significant amounts of trading volumes.
You should read the next risk factor in connection with this discussion of the
risks of a illiquid market.
If the holders of a significant amount of shares of common stock which
are currently restricted sell into the market, the value of your investment
could be materially affected. Presently, approximately 4,710,000 (less than 28%)
of the outstanding shares of common stock are unrestricted securities under SEC
rule 144, and less than 5 percent of those 4,710,000 shares are traded on a
daily basis. However, with the passage of time, additional shares (including
your rescission shares) which are now restricted will be eligible for public
sale into the market through rule 144 or even to have all restrictions removed
under rule 144(k). Until such time, if ever, as our operations generate
significant profits and wider market interest for our stock develops, the sale
of more shares into the present market for our stock could drive down the market
price.
FORWARD LOOKING STATEMENTS
Except for the historical information, all of the information which is
contained in this Prospectus are "forward looking" statements within the meaning
of section 27A of the 1933 Act and section 21E of the Securities Exchange Act of
1934. Specifically, all statements in this prospectus (other than statements of
historical fact) regarding our financial position, business strategy and plans
and objectives of management for future operations are forward-looking
statements. These forward- looking statements are based on the beliefs of
management, as well as assumptions made by and information currently available
to management. These statements involve known and unknown risks, including the
risks resulting from economic and market conditions, accurately forecasting
operating and capital expenditures and capital needs, successful anticipation of
competition which may not yet be fully developed, the uncertainties of
litigation, and other business conditions. The use in this prospectus of the
words "anticipate," "believe," "estimate," "expect," "may," "will," "continue"
and "intend" and similar words or phrases, are intended by us to identify
forward-looking statements (also known as "cautionary statements"). These
statements reflect our current views with respect to future events. They are
subject to the realization in fact of assumptions, but what we now think will
happen may be turn out to be inaccurate or incomplete. Our actual operating
results and financial performance may prove to be very different from what we
now predict or anticipate. The investment risks discussed under "Risk Factors"
below specifically address some of the factors that may influence future
operating results and financial performance.
Although we believe that our expectations are reasonable, we cannot
assure you that our expectations will prove to be correct. Based on changing
conditions, should any one or more of these risks or uncertainties materialize,
or should any of our underlying assumptions prove incorrect, actual results for
the Company may vary substantially from what we now anticipate, believe,
23
estimate, expect or intend. All subsequent written and oral forward-looking
statements attributable to us are expressly qualified in their entirety by these
cautionary statements.
DILUTION AND COMPARATIVE DATA
As of December 31, 1999, our net tangible book value was $4,828,756 or
$.28 per share of common stock issued and outstanding on that date (including
the shares of common stock into which the series A and series B preferred stock
was converted in December 1999). If we had bought back all of the rescission
shares as of December 31, 1999, the net tangible book value of the Company would
have been $3,546,941 or $.21 per share of common stock issued and outstanding on
that date.
If you decide to keep your rescission shares, in effect you now will be
making an investment decision to buy those shares. If your rescission shares are
shares of common stock which were originally sold for $5.00 per share, you will
realize immediate and substantial dilution of $4.86 (97%) in the net tangible
book value of your shares. If your rescission shares are shares of common stock
into which the preferred stock was converted, you will realize immediate and
substantial dilution of $.86 (86%) in the net tangible book value of your
shares. These calculations are based on our financial information as of December
31, 1999, minus the amounts paid for the rescission shares as well as the number
of shares of stock then outstanding.
We have had losses in two of the last three fiscal years, and our
officers and directors and other persons have acquired our stock (and the
officers have options to buy more stock) at prices which were significantly less
than what you paid for your rescission shares. The prices paid by the
shareholders for their shares, and the relative percentage ownership of shares,
are as follows, as of December 31, 1999:
TOTAL TOTAL AVERAGE PRICE
SHARES PURCHASED CONSIDERATION PER SHARE
------------------------ ----------------------- -------------
Number % Amount %
Present Shareholders(1) 15,710,968 100% $19,916,400 93% $1.19
Rescission Investors(2) 1,243,151(1) 8%(1) $1,281,815(1) 7% $1.03
<FN>
(1) Equal to total shares of common stock, but not including any rescission
shares.
(2) Equal to total rescission shares of common stock, including the shares
issued on conversion of series A and series B preferred stock.
</FN>
24
CAPITALIZATION
We have prepared a table showing our capitalization at December 31,
1999, and adjusted as of that date to reflect a range of acceptance of the
rescission offer (25%, 50%, 75% and 100%) as if the offer had occurred and been
finished as of December 31, 1999. The costs of this offer are not reflected in
the table (approximately $50,000, being legal and accounting fees, filing fees,
etc.).
PROFORMA BALANCE SHEET AND CAPITALIZATION TABLE
AT VARIOUS STOCK RESCISSION ACCEPTANCE LEVELS
Audited
12/31/99 75% Acceptance 50% Acceptance
------------ ------------ ------------ ------------ --------------
Cash $ 1,941,367 $ (961,361) $ 980,006 $ (640,908) $ 1,300,460
Certificates of Deposits 3,100,000 3,100,000 3,100,000
Other Current Assets 75,541 75,541 75,541
Fixed Assets 585,371 585,371 585,371
Total Assets $ 5,702,279 $ (961,361) $ 4,740,918 $ (640,908) $ 5,061,372
=========== =========== ============ =========== =============
LIABILITIES
Current Liabilities 566,386 566,386 566,386
Long-term Liabilities 48,583 48,583 48,583
Rescission Liability 1,281,815 (1,281,815) (1,281,815)
Total Liabilities 1,896,784 (1,281,815) 614,969 (1,281,815) 614,969
=========== =========== ============ =========== ============
SHAREHOLDERS' EQUITY
Par Value Common Stock 1,571 31 1,602 61 1,633
Additional Paid In Capital 19,914,828 320,423 20,235,251 640,846 20,555,674
Retained (Deficits) (16,110,904) (16,110,904) (16,110,904)
Total Shareholders' Equity 3,805,495 320,454 4,125,949 640,907 4,446,403
Total Liabilities & Equity $ 5,702,279 $ (961,361) $ 4,740,918 $ (640,908) $ 5,061,372
=========== =========== ============ =========== ============
25
PROFORMA BALANCE SHEET AND CAPITALIZATION TABLE
AT VARIOUS STOCK RESCISSION ACCEPTANCE LEVELS
25% Acceptance 0% Acceptance
------------ ----------- ------------ ------------
Cash $ (320,454) $ 1,620,913 $ $ 1,941,367
Certificates of Deposits 3,100,000 3,100,000
Other Current Assets 75,541 75,541
Fixed Assets 585,371 585,371
Total Assets $ (320,454) $ 5,381,825 $ $ 5,702,279
=========== =========== =========== ============
LIABILITIES
Current Liabilities 566,386 566,386
Long-term Liabilities 48,583 48,583
Rescission Liability (1,281,815) (1,281,815)
Total Liabilities (1,281,815) 614,969 (1,281,815) 614,969
=========== =========== =========== ============
SHAREHOLDERS' EQUITY
Par Value Common Stock 93 1,664 124 1,695
Additional Paid In Capital 961,268 20,876,098 1,281,691 21,196,519
Retained (Deficits) (16,110,904) (16,110,904)
Total Shareholders' Equity 961,361 4,766,858 1,281,815 5,087,310
Total Liabilities & Equity $ (320,454) $ 5,381,825 $ - $ 5,702,279
=========== =========== =========== ===========
25a
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We were originally founded in 1991 under the name Roth Financial
Fitness, Inc. to market the financial fitness and wealth-building concepts of
J.W. Roth. We developed a mail order program of videos, workbooks, telephone
consultant sessions with financial experts and monthly newsletters. These items
were marketed and sold through infomercials and television advertising featuring
celebrities. This business was not successful and the plan of operations was
abandoned in late 1995.
In late 1995, we changed our name to OnLine Entertainment, Inc. and
developed a business plan to sell entertainment products which we packaged
through the Internet. Our products were to include nature films, rock and roll
record compilations, and other items. In late 1995 and early 1996 we also
performed a limited amount of media advertising placement work for other
companies (arranging radio and television advertising time for our clients).
This business plan also was unsuccessful.
In 1996, we acquired 100% of the stock of Glitch Master Marketing, Inc.
Our acquisition of the common stock of that entity in exchange for shares of our
common stock was treated for accounting purposes as a recapitalization of that
entity, with that entity as the acquiror. The entertainment business line was
discontinued after the merger.
In 1997 we acquired Renaissance Systems, Inc. and formed OnLine Power
Supply, Inc. as a 100% subsidiary to develop new products in the power supply
business (Renaissance was not continued as a separate subsidiary). In December
1999 the two subsidiaries OnLine Power Supply, Inc. and Glitch Master Marketing,
Inc. transferred their assets and liabilities to us and the subsidiaries were
dissolved. This action was taken to simplify our accounting systems and will
have no effect on our operations or financial statements. Our historical
financial statements included in this prospectus are consolidated (which means
they reflect the assets, liabilities, revenues and expenses of the two
subsidiaries). Starting with the fiscal year ended December 31, 2000 our
financial statements will be for one entity and will not be consolidated.
LIQUIDITY AND CAPITAL RESOURCES, AND RESULTS OF OPERATIONS, FOR TWO
FISCAL YEARS 1998 AND 1999. In 1998 and 1999 we received $6,548,019 in cash (net
of offering costs) from the sale of preferred and common stock. Over that 24
month period, these funds, plus gross operating profits totaling $134,203 from
sales of the Glitch Master Marketing, Inc. ("GMM") product line, have been used
to pay $1,901,057 in general and administrative expense, $774,994 in OPS product
research and development costs, and $218,000 in litigation settlement costs in
1998 ($150,000 of these costs were borrowed from a trust controlled by a member
of one of our officer's family). General and administrative expenses for the two
years 1999 and 1998 included officers' salaries $377,000; administrative
salaries $193,942; sales salaries $159,136; trade show costs $361,767; legal and
accounting $227,553; office lease $100,876; travel $97,975; public relations
$176,239; insurance $61,822; and other $166,938.
26
Revenues from GMM sales in fiscal 1999 were $299,408 compared to
$262,564 1998, representing a small increase. We realized a gross profit from
GMM sales of $66,022 and $68,181 in 1999 and 1998. One GMM customer represented
48% of 1999 sales and 9% of sales in 1998.
Losses from operations were $1,525,043 in 1999 compared to $1,240,241
in 1998. Among the principal items causing the increased losses from 1998 to
1999 in fiscal 1998 were increased expenses for laboratory personnel and
equipment, management and administrative salaries and related office expenses.
In 1999 we have been fully developing the corporate infrastructure needed to
become a large volume maker of power supply systems. Increased expenditures
planned for 2000 may have to be scaled back to the extent we have to pay out
substantial costs in the rescission offer, or if sales efforts fall short of
current expectations.
* Salaries, commissions and payroll taxes increased by $254,577 during
1999 as a result of increased staffing. This item is expected to
increase by an additional $100,000 in 2000 because of increased
research and staffing.
* Research and development expenditures were $454,435 for our OPS product
line in 1999, compared to $319,559 in 1998. For 2000 we may spend up to
$750,000 for research and development of new follow along versions of
our basic power supply technology.
* We issued stock for services. In 1999 we recorded an expense of $62,837
for this item, compared to $59,799 for 1998. If we continue to need to
raise money by selling stock in private placements in future years, we
may be issuing more stock for services (i.e. the brokerage firms that
place the offering for us). We can't predict whether or how much this
may occur.
* To develop customer contacts, sign up distributors and contract with
sales representatives, our personnel have traveled extensively,
attended trade shows and purchased a trade show booth, and conducted
informational seminars. Total expenses for these items were $242,000 in
1999 and $278,702 in 1998. We may spend more than $500,000 for expanded
efforts in this area in 2000.
* Legal and accounting expenses were $144,271 in 1999 and $83,282 in
1998. The increases in 1999 were related primarily to litigation
expense as a result of a prior line of business, which should decrease
significantly after in 2000. However, legal and accounting expenses
associated with becoming registered with the Commission under the
Securities Exchange Act of 1934 may offset expected savings in the
litigation area to some extent.
* In 1998 we contracted with an outside source for investor relations
services at a cost of $144,265 without acceptable results. We
terminated the relationship in 1999 in favor of performing this service
in-house and realized considerable savings. These costs were $31,973 in
1999 compared to $144,265 in 1998.
27
* In 1998 we wrote off a bad debt for $74,000 owed by a Glitch Master
customer.
* As a result of winding down the business of manufacturing and selling
the original line of Glitch Master products, a write off of $41,616 was
recorded in 1999 for an obsolete inventory of parts.
* Our retained deficit at December 31, 1998 was $9,573,142. The retained
deficit at December 31, 1999 was $16,110,904, which reflects our
incurring a net loss for that year of $1,588,355, a charge to retained
earnings of $47,969 for series A and B preferred stock dividends, and a
charge of $4,901,438 as a result of a conversion feature when we
converted the series A and B preferred stock into common stock. The
amount of this charge was established using the difference between the
$5.03 trading price on the December 1999 conversion date and the
effective $1.00 cost basis to the investors.
Our operating loss in 1999 was $1,525,043 as compared to $1,240,241 for
1998, representing a year over year increase of $284,802. The principal reasons
for this trend are the additional costs incurred to develop the new product
technology and the hiring of staff at all levels in advance of customer orders.
The results of operations of Glitch Master as a subsidiary in 1999 were
consistent and produced losses for 1999 and 1998.
Continuing losses are expected until the commercialization of OPS
products is completed which is expected to occur in the first three quarters of
2000. We can't predict with certainty the final date for development to be
completed and result in the start of production against specific orders from
customers. Operating losses will continue to occur until the revenue stream is
established. In this context, commercialization will mean contracts for sale are
signed and sufficiently performed to be profitable. At the present time there
are no contracts in hand.
General and administrative expenses will increase in 2000 as we add
staff and we may expand our facilities if needed. Research and development
salaries also will increase from hiring more engineers and support staff.
Additional working capital was obtained in 1999 resulting in cash and
certificates of deposit totaling $5,041,367 at December 31, 1999 compared to
$151,341 at December 31, 1998. In 1998, we borrowed money from officers and
raised some equity capital for operating funds, and there was a working capital
(deficit) of ($366,709) at the end of 1998. Proceeds from equity financing in
1999 will allow us to meet our obligations in a timely manner in 2000, as our
working capital at December 31, 1999 was $4,550,523.
We do not foresee the need for additional financing in 2000 unless
start up orders require added up-front funding to secure raw materials, fund
work in process and provide capital for operating cycles in excess of our
present cash needs projections. If we have all our products manufactured for us
by Saturn, there should be a reduced need for such additional financing.
28
Sales of the GMM products, and expected sales of the OPS products, have
not been and are not expected to be seasonal.
The contingent stock rescission liability of $1,281,815 (representing
original invested amounts, without interest) has been recorded as temporary
capital subject to rescission (an offset reducing equity capital) on our balance
sheet at December 31, 1999. In 1998, a portion of this amount (i.e., $550,700)
was so recorded to reflect the amount subject to rescission during that year.
The actual liability will be determined and reclassified based on the results of
the rescission offer in the first quarter 2000. At that time, the balance of the
temporary capital amount not actually rescinded will be reclassified as
permanent capital.
PLAN OF OPERATIONS
In 2000 we intend to speed up the commercialization process for OPS
technology. The development of marketable product lines for OPS will have a
direct and significant impact on revenues and earnings in the future. Most of
our resources will be devoted to support OPS' research and development and
marketing efforts, tailoring OPS products to the specific configurations of
customers' needs, and to obtaining contracts and setting up production lines
(working out the protocols for parts inventory and other matters with
third-party manufacturers). These activities will require substantial amounts of
additional capital.
The new OPS PFC Front End Module products and the new 500 Watt 48 Vdc
power supply product are expected to enter the market in the first or second
quarter of 2000. Additional testing and refinement of the products will be
completed in early 2000. Revenues and earnings (profits) from sales of these
products will not be predictable until well into the initial production period.
Capital outlays for manufacturing are expected to be minimal as the
Company will subcontract out all manufacturing of devices except demonstration
prototypes. As production is underway, however, added staff and warehousing
resources for finished goods will be needed, and more technical and middle
management staff will be hired. Growth of employees could be up to 30 employees
in 2000.
More products are planned by OPS, including a dynamic array of power
output wattages and multiple DC voltage outputs. This expansion of product lines
will continue to project OPS into larger and diversified markets, which may lead
to customer diversification.
BUSINESS OF ONLINE
We were originally founded in 1991 under the name Roth Financial
Fitness, Inc. to market the financial fitness and wealth-building concepts of
J.W. Roth. We developed a mail order program of videos, workbooks, telephone
consultant sessions with financial experts and monthly newsletter. These items
were marketed and sold through infomercials and television advertising
29
featuring celebrities. This business was not successful and the plan of
operations was abandoned in late 1995.
In late 1995, we changed our name to OnLine Entertainment, Inc. and
developed a business plan to sell entertainment products which we packaged
through the Internet. Our product were to include nature films, rock and roll
record compilations, and other items. In late 1995 and early 1996 we also
performed a limited amount of media advertising placement work for other
companies (arranging radio and television advertising time for our clients).
This business plan also was unsuccessful.
In 1996, we acquired 100% of the stock of Glitch Master Marketing, Inc.
Our acquisition of the common stock of that entity in exchange for shares of our
common stock was treated for accounting purposes as a recapitalization of that
entity, with that entity as the acquiror. The entertainment business line was
discontinued after the merger.
In 1997 we acquired Renaissance Systems, Inc. and formed OnLine Power
Supply, Inc. as a 100% subsidiary to develop new products in the power supply
business (Renaissance was not continued as a separate subsidiary). In December
1999 the two subsidiaries OnLine Power Supply, Inc. and Glitch Master Marketing,
Inc. transferred their assets and liabilities to us and the subsidiaries were
dissolved. As used in this prospectus, unless otherwise specified, references to
OPS mean either the former subsidiary OnLine Power Supply, Inc. or the line of
products it has developed, and references to GMM mean either the former
subsidiary Glitch Master Marketing, Inc. or the products it has developed. In
2000, GMM products will be discontinued.
We changed our name to OnLine Power Supply, Inc. and at that time
change our stock symbol to "OPWR" from "ONLN." Recently the symbol has been
"OPWRE" because we were to be delisted from OTCBB if we were not registered with
the SEC by February 24, 2000.
There are two basic technologies for converting AC power to DC power:
linear and switching. Linear power supply technology has been around since the
turn of the century. It consists of a transformer, bridge rectifier and a filter
cap. It is bulky, heavy and very inefficient, dissipating over 50% of its power
to heat. A 200 watt power supply weighs approximately 40 lbs. and is 19" x 10" x
7", however, the advantage is a very clean, smooth output of the voltage and
current which is needed in many applications.
Thirty years ago, electrical engineers discovered how to increase the
efficiency and size of the linear power supply by immediately changing AC power
to DC power then switching the transformer on and off at high speeds to create
the flow of power across the transformer. This is known as switching technology.
The downfall of this technique is noisy power (switching the transformer on and
off creates huge surges, spikes, harmonics and radiated noise in systems).
However, motors and logic circuits don't mind this noise. Therefore, the
computer industry exclusively uses these power supplies. They are large and
inefficient. Because they are inefficient, a lot of electrical power going into
the system is wasted and lost to heat; almost all computers using
30
the traditional switching technology must use ventilating fans to keep the
systems' operating temperatures cool. Also, more capacity (a bigger system) is
needed to compensate for inefficiencies.
We believe we have developed a significant improvement to the switching
technology, by designing semi-conductor controls into the switching technology
to create high efficiency systems that enhance voltage conversion. This new
product line features significant improvement in efficiency (93% efficient
compared to 50%-70% in current technology), size and weight (80% lighter) and a
reduction in parts count of up to 50%.
Our technology, which is exclusively owned, will produce power supply
products for applications in the electronics industry, including the
telecommunication, industrial, commercial, medical, government and computer
markets. Prototype products have been developed and patents have been filed. One
patent has been granted to date by the United States Patent and Trademark Office
(Pat. No.5,798,671) which relates to our earlier versions of the OPS products
(power corrected front end modules). An application for another patent was filed
in 1999 which covers numerous refinements and improvements to the OPS
technology. The second patent is now in review at the United States Patent and
Trademark Office. Certification by Underwriters Laboratories has been received
for certain components of the OPS products. Discussions with a number of large
corporations are ongoing for possible contracts to buy OPS products. To date, no
contacts have been secured.
Presently, we are in discussions with a number of potential customers
who may buy our OPS products. We are making prototype versions of our products
for evaluation by potential customers, which include some of the larger
corporations in the United States. We have sold only a few of the OPS products
as demonstration units, and we have not signed any contracts yet. Manufacturing
will be done by others, so we won't have to build factories. Our products are
marketed by employees and independent distributors. We are estimating that if we
obtain contracts for the OPS products, our per unit sales price would be from
$150 to $500. Based on detailed discussions with Saturn Electronics and
Engineering, Inc. our direct operating costs are estimated to be 50% or less of
sales. Therefore, if we can sign contracts for this line, we may have sales
revenues in 2000 and 2001, but whether we can make any profits in this period of
time will depend on the amount of our general and administrative, engineering,
and product design costs.
GMM has sold unique products related to better power supply performance
since 1990; these products are sold to several niche markets which require very
stable power for voltage-sensitive computer and machinery operations. We are
winding down this product. We have recorded revenues from sales of this product
line in 1998 and 1999, but presently are not predicting significant sales in
2000.
31
POWER SUPPLY TECHNOLOGY
We believe the OPS technology will produce a new generation of power
supply devices. While new electronic products are being introduced in smaller,
faster, more complex and more powerful configurations, the power supply, which
is one of the most basic components of all electronics, has not changed its
basic technology since AC current became the standard. Every electronic product
today uses a 20-year old inefficient technology to convert and control
electrical current. While this technology works, significant advances are being
made in electronic applications. However, these continued advances in new
products are being limited by the limitations of the power supply systems which
are presently available in the market. Current possibilities in electronics
"architecture" are becoming limited by power supply systems which are too large
and heavy, and run inefficiently and generate significant amounts of heat (lost
power).
Present power systems also lose power at higher temperatures.
For example, a traditional AC to DC power supply systems for a computer
usually operates at about 70% efficiency. Computer designers must design in
power supplies which are rated significantly higher (usually 30% higher at a
minimum) than the applications really need. Fans are needed to keep temperatures
at acceptable levels. Additional components and circuits help minimize the
intrusion of spikes, harmonics and radiated electrical "noise" which are
unavoidable in the systems and still cannot be eliminated, even with the
introduction of switching technology in the 1960s. These needed features add
cost, complexity, size and weight to the end product, i.e. the power system.
Therefore, while advances in circuit technology keep producing more powerful
applications which need less space, the unchanged power supply technology keeps
the overall size of the devices larger than necessary.
We have applied a problem solving strategy to power supply systems, and
designed and built new devices that will keep pace with advances in electronic
manufacturing. The new technology is significantly different from traditional
linear or switching power supply products. OPS products feature 93%-97.4%
efficiency factors, 80% reduction in weight, and up to 50% fewer parts (which
decreases the size and complexity of the products). Additionally, the new
products experience virtually no magnetic thermal deration (loss of performance
because of heat build up); therefore, fans and other ventilating measures are
not needed.
We have completed our first new technology product, the Power Factor
Corrected Front End module ("PFCFE"). The PFCFE is a modular power supply that
converts AC voltage to DC voltage. Any electrical machine, such as electronic
equipment with "memory" supplied by a computer chip, requires DC voltage to
operate. The PFCFE converts, translates and conditions AC voltage from the wall
plug into DC power language that sophisticated electronic equipment can use
efficiently. The PFCFE design, small size and weight provide flexibility to
end-user design engineers, particularly in the telecommunications industry. This
design allows the PFCFE to be utilized in distributed power systems or as a
modification to existing power supplies that require power factor correction.
The power factor correction brings the front end voltage and current into phase
and enables the unit
32
to pull constant current from the power line. It eliminates damaging and
inefficient harmonies and current spikes.
We believe the PFCFE device exceeds the requirements of new European
standards that take effect in 2001. These standards require efficient
utilization of power throughout Europe and will ultimately become worldwide
standards. Efficiency is measured with reference to the "perfect power factor"
of 1.0; the PFCFE's power factor is .99984.
We have produced prototypes of the PFCFE module and obtained electrical
certifications for the prototypes, and are completing development of its next
new technology, a 48 Vdc distributed power supply. We believe these first two
OPS products will form the basis for approximately 30 product lines for
different power requirements and commercial uses.
One application of the PFCFE is a very small module which is adaptable
to distributed power systems (particularly in telecommunications) and will fit
into a PS2 computer power supply. Currently, prototype units are being evaluated
by a number of large potential customers.
We have conducted performance test comparisons between the PFCFE and a
"state-of-the- art" competitive product. We believe these tests demonstrate the
superiority of the PFCFE to the best competitive products on the market because
PFCFE was more efficient and dissipates substantially less heat without thermal
deration. The PFCFE may have a technological advantage in the marketplace.
Performance and design testing has been conducted on a regular basis
since August 1997. In August 1997, Doyle & Associates, Inc. ran tests to
evaluate the long term market feasibility of our then-current OPS product line.
These tests included verification of operating efficiencies, power factor
correction ratings, and the operating temperature range for our product line
versus other companies' products. Richard L. Doyle provides us consulting
services from time to time.
In October 1998, INTERtest Systems Inc. conducted tests at its
independent laboratory to evaluate our products' compatibility with
internationally accepted standards and to insure product compatibility into
certain market arenas such as telecommunications. These tests covered
electromagnetic compatibility for the "immunity standard" in the electronics
industry; levels of radiated emissions; conformance with standards of
electromagnetic discharge requirements; radiated frequency, electrical fast
transients and transients surge, and radio-frequency fields inducted
disturbances. The standards used in the tests were CENELEC EN 50 081-1:1992; 55
022:1995; 50 082-1:1992; and 61 000-4-2 through 4-6:1995. Our products met all
of these standards.
Later in 1998, INTERtest Systems Inc. ran an initial testing review for
tolerances related to compatibility with electronic components (spacing and
clearance, and short circuits), as well as safety issues which would be
addressed by Underwriters' Laboratories. Some changes in design were adopted to
improve tolerances compatibility.
33
In August 1999, Accelerated Reliability Test Centers (a division of
QualMark Corporation) conducted highly accelerated life testing ("HALT") to
uncover potential design and/or process weaknesses in our products. During HALT
testing, the OPS power supply units were subjected to increasingly higher stress
levels caused by vibration, heat, rapid temperature change; combined
environments, and power cycling. Our products passed the HALT testing without
difficulty.
In October 1999, UL approved the OPS product line under UL file
#E203110, Project #99NK36016.
In November 1999, Doyle and Associates conducted a "mean time between
failure " test to determine long term reliability of our products. The Bellcore
Standard data base was used as the performance reference benchmark. Our products
were rated at a temperature of 50 degrees Centigrade to last 798,557 hours (91
years).
TECHNICAL COMPARISONS OF OPS AND TRADITIONAL POWER SUPPLY DEVICES
We have summarized in the chart below the benefits of OPS technology
compared to the devices made by our competitors. The chart reflects a
statistical analysis of our competitors' products as published in technical
journals and trade magazines. Traditionally, power supply devices are evaluated
according to their specifications, which are a demonstration of expected
performance in the field. For example, a 1000 watt power supply rated at 70%
efficiency will dissipate significantly more heat (300 watts). This condition
would require cooling by a fan to keep moving air over the device to remove the
heat buildup. However, this condition also would make such a unit less reliable
because it operates in a narrow temperature range while taking up more valuable
space within the power supply unit. A 1000 watt OPS power supply with 90%
efficiency will dissipate only 100 watts of heat, which means it will last
longer, require less cooling (none in some applications), and allow it to
operate over a greater temperature range in a dramatically smaller space.
Therefore, we believe the OPS power supply devices are smaller, lighter, more
efficient, and more reliable. These benefits are summarized below.
34
OPS POWER SUPPLY FEATURES/BENEFITS CONVENTIONAL SWITCH/LINEAR TECHNOLOGY
Weight-1 lb. 9 ounces 300w=5.5lbs.
(250-1000w) 1000w= 11.2 lbs.
Dimensions- 2.7" x 6.7" x 1.5" 5" x 5" x 11"(1000w)
27.13 cu.in. 275 cu.in.
(250-1000w)
93%-97.5% efficient 50%-75% efficient
Fan may not be required-coolest Fan required-high heat
in industry
MTBF- 800,000 hours + MTBF-100,000 hours
Hold up time- 300 ms + 16 ms
Power Factor Correction <.999 Power Factor typically .60
(Perfect Power Factor 1.0)
Power Density 18 watts/cu.in. 2.5 watts/cu.in.
No minimum load required required
Power fail warning none
N + 1 Operation N + 1 Operation
Small idling losses % idling losses
Operating temperature -55(degree)C 0(degree)C to 60(dEGREE)C
to 100(degree)C typical loss 50% of power
No power deration due to temperature due to temp. deration above
45(degree)C
Output Power range-250 watts to 9,600 watts Multiple sizes and weights
Same size and weight
Independently isolated and regulated Always running
lines with floating outputs
35
FEATURES/BENEFITS/DESCRIPTION
BENEFIT OPS PRODUCTS INDUSTRY STANDARDS
Efficiency OPS products achieve Average efficiency is
over 90% efficiencies. Front 75% in switching power
end power modules will be supplies and 50% in linear
97% efficient. power supplies.
Smaller OPS products have greater Smallest 1000 watt footprint
watt per cubic inch power than is 5"x 5" x 11" (275 cu.in.)
previously achieved. Most models
will fit into a 2.7"x 6.7"x 1.5" footprint
(27.13 cu.in.)
Lighter OPS products will weigh 1.9 lbs Industry products weigh
for 1000 watts unit. 12-14+ lbs for 1000 watts.
Cooler Higher efficiencies result in smaller Large heat dissipations
heat dissipations. Most OPS cooled by low reliability
products may not require a fan fans.
for cooling.
Reliability Higher efficiencies, cooler running MTBF is determined by the
power supplies and high quality quality of the fan, about 100,000
component selection will result hours.
in a high MTBF in the 1,000,000
Hrs. range.
Agencies OPS products will comply with Power supply companies who
National & International standards. do not adapt to European
standards will not be able to
compete in the worldwide
market by the year 2001.
POWER SUPPLY INDUSTRY
The power supply industry is expected to show continued growth for the
next four years. A report by Darnell Group, Inc., Norco, California, estimates
that the worldwide market for AC/DC switching power supplies in 1999 will be
about $9 billion, with the United States accounting for $4 billion.
POWER SUPPLY INDUSTRY
The power supply industry is expected to show continued growth for the
next four years. A report by Darnell Group, Inc., Norco, California, estimates
that the worldwide market for AC/DC switching power supplies in 1999 will be
about $9 billion, with the United States accounting for $4 billion.
36
The top 10 power supply manufacturing companies represented about 60%
of the market in 1997. Ranked in order (and taking into consideration the merger
between Computer Products and Zytec, which formed Artesyn) are: Lucent
Technologies, Delta Products, Astec, Artesyn, Lite-On, Reltec, Vicor, Celestica,
Lambda Electronics, and Cherokee International. Other mergers continued in 1998
and 1999 as these companies seek increased market share. We believe our new
technology will have dramatic impact to an industry where basic technology has
not changed in 20 years. Some of the leading companies have contacted us about
possible joint ventures or other ways of doing business together, but we don't
yet have any agreements in these respects.
INDUSTRY TRENDS
We believe that over the next five years, manufacturers will be forced
by the marketplace to improve power supply products in order to remain
competitive. The electronics industry is under continuing pressure to reduce
system sizes where a power supply will require considerable amounts of space
within the system. For example, computers, laptops, and wireless base stations
have significantly reduced their size over the last three years, but, at the
same time, have continued to increase in capability. This increased capability
has increased the power requirements which the power supply can deliver, but
these requirements at the same time must be met by a smaller package. Reduction
of the size of a system reduces the overall space in the system which is
available to fit in a power supply device which delivers more power.
Through our new technological approach, we believe the OPS products
will achieve all of the improvements needed by the marketplace. We believe the
industry will use these improvements to continue its race to become smaller and
lighter, in particular. This will have considerable impact with respect to size,
durability, and the rugged qualities of casing. For example, a high-end network
file server would typically utilize 675 watt power supplies. Each power supply
would be about 5"x 5"x 11", weigh 8.8 lbs. and approximately be 75% efficient.
As a result, the case would have to occupy 15" of vertical space; 168.75 watts
of consumed power would be lost to heat dissipation. By comparison, our OPS
products would weigh a total of 3 lbs., utilize 6" of vertical space and
dissipate only 141.75 watts of heat. These are significant improvements that
will provide definite advantages to system design engineers in the future.
SALES AND MARKETING
Our initial sales and marketing strategy is to sell into the
industrial/telecommunication/ medical/government/ military markets where current
power supply solutions are vulnerable to, and can be replaced by our products
with their superior features and attributes. These initial markets will have the
greatest impact for us because they have established needs that are not
adequately met by current industry product. Most device trends continue to be
driven by combinations of needs for smaller, lighter, more efficient, and more
reliable power supply solutions that demand cooler operation.
37
A major part of the our marketing efforts will be sales to original
equipment manufacturers who put their own brand name on the device. This
requires us to work with the design departments to satisfy the unique product
specification demands.
To assist in sales to OEM's and other industry markets, we have
established a network of 13 independent sales representatives and value added
distribution companies, with a combined staff of 100 people. The average
experience of the personnel is 20 years. We have and will continue to select
those representatives and distribution companies who have significant experience
and expertise in the power supply industry. We believe that a well informed and
well-trained network of independent representatives and distributors will
provide immediate, valuable exposure and demonstration value to those markets
most likely to utilize our products.
Independent sales representatives are appointed to market and sell OPS
products in designated territories. They are required to adhere to all of our
sales policies including pricing and terms in our approved price lists. We
provide at no cost to the representatives copies of technical literature,
promotional materials and product samples. We will pay representatives 5% of
gross sales in their territories, based on net invoiced price (total invoiced
price less discounts, credits, allowances, freight charges and duties). Our
agreements with the representatives each have a one year term which can be
renewed by us. Representatives are not allowed to market or sell products that
compete with our products. Presently, the network of independent sales
representatives and distribution companies extends through all of the designated
territories of the United States, Canada, Far East, Mexico, South America, and
Europe.
In the third or fourth quarter of 2000, we expect to increase our
in-house sales force to support the network of distributors, representatives and
OEMs. Our current engineers are able to provide technical support and provide
design solutions to significant applications to the key decision makers at
customers' offices (their engineers). We will be hiring more engineering people
in this area as needed, probably in the second and third quarters of 2000.
MANUFACTURING
Manufacturing will be conducted on a sub-contract basis. Manufacturing
facilities have been identified and have certain characteristics that
demonstrate the ability to produce quality and quantity to meet the our
expectations. These manufacturers specialize in the design and manufacture of
power supplies for various applications to include facsimiles, printers, disk
drives, telecommunication equipment, test instruments and personal computers.
Dedicated, innovative and energetic workforces, and modern facilities with
proven technology characterize these high quality, cost effective manufacturing
facilities. Production systems of the manufacturers have been approved by BAT
and are also ISO 9001 and ISO 9002 and QS 9000 market certified companies.
Performance of consistent timely delivery and a high degree of on-site
engineering and quality control are specified. Initial production capabilities
easily exceed 35,000 units per month. Statistical process control is fully
applied in the production process.
38
In December 1999 we established a manufacturing agreement with Saturn
Electronics and Engineering, Inc. Auburn Hills, Michigan. Saturn is the
exclusive global manufacturer of the OPS products we develop and sell, for the
duration of the specific product families (front end units, 48V power supply).
To help finance our manufacturing costs (inventory of parts and engineering at
Saturn), Saturn will buy the inventory and pay its own engineering costs, and
will take security interests (pledges as collateral) in our customer purchase
orders and accounts receivable. Terms are expected to be 30 days net payment
from customers. Customer payments will be deposited into an escrow arrangement
so that Saturn will recover its advances first before we receive any of the
money. We will require our customers to pay an initial deposit equal to 30% of
the order; these payments would be split 75% to Saturn and 25% to us. The 70%
balance for the order when completed would be paid into the escrow by the
customer upon delivery, with the net balance paid to us after Saturn deducts its
costs and advances. In certain circumstances, there may be an advantage for the
customer and for us for Saturn to act as the selling agent, because Saturn is a
minority owned business. In these type of transactions, Saturn will receive a 5%
markup on sales.
If we become insolvent or unable to pay our debts to Saturn, we will
grant Saturn a royalty free license to finish off inventory on hand and sell the
OPS products direct to our customers to complete existing purchase order
requirements. This license would expire when those orders have been completed.
In turn, Saturn has a first right of refusal to acquire our technology, patents
and designs if we become insolvent or unable to pay our debts.
Saturn has agreed to be price competitive within a 10% range of bids
from comparable manufacturers who offer comparable financing, design,
engineering and quality support.
We signed the agreement with Saturn because of Saturn's high quality
work and capacity to make and deliver what we anticipate could be substantial
orders in the future. We believe their terms are favorable to our small company.
We have placed our first order with Saturn to make 500 units of out PFC
Front End product and will pay $60,832 of nonrecurring engineering charges
incurred by Saturn's staff in connection with the order. Due to the small size
of this order, we will pay for these units directly, including the engineering
charges. Most of these charges involve test equipment required on Saturn's
production line and tooling which Saturn must put in place to build the OPS
products. We will own this equipment. We will have to pay for some similar
charges as needed to build specific configurations of the line for customers,
but these amounts will reimbursed to us as payments are made from escrow.
Delivery of the 500 unit order is expected in February 2000; products will be
used for demonstration and promotional purposes.
In general, we believe that manufacturing by sub-contract represents
the most efficient cost effective manner to bring OPS products to market. We
intend to use trade secret, nondisclosure, and non-circumvention agreements with
our sub contractors including Saturn.
39
PPC PRODUCTS (GLITCH MASTER)
The Glitch MasterTM is a product designed to protect and maintain the
power supply for direct current (DC) circuitry. The primary target market is
personal computers and workstations; these machines are highly susceptible to
momentary power outages which lead to data loss, hardware and software damage,
and delays for restarting the computer system and retrieving data from hard
drive memory. The Glitch Master will keep a computer from "going down" during
brief power interruptions. The Glitch MasterTM is a unique non-battery solution
which costs less and is easier to maintain than alternative approaches. At
startup, the device absorbs energy during the first 8 seconds, which creates a
ride-through capacity which will handle 95% of all power interruptions.
The Glitch Master circuit can be installed in a computer system power
supply, or it can be incorporated into new power supply designs. GMM now offers
142 types of power supplies; the new ATX series is designed for the new P6
processor microchip which has been introduced by Intel; the ATX will increase
the number of power supplies offered to 170 variations.
A specific example of the application of the device is the installation
in Flying "J" Truck Stops. Flying "J" had a unique problem with the computer
kiosks used by truckers at the stops: Each time the store's refrigeration units
would turn on or off, a power spike or sag would occur and cause a lockup at the
computer kiosks. Each incident required restarting the computer in the kiosk, at
least several times each day.
TON Services, Inc., a third party not related to us, builds the touch
screen kiosks for Flying "J" Truck Stops (there are more than 75 of these travel
plazas in the western and midwestern states, each with at least two kiosks). TON
Services, Inc. chose to use the GMM products in the kiosks to relieve power
problems. The Glitch Master was installed at the stores in 1997 and 1998 and the
problems have ceased.
Other institutions using the Glitch Master technology include Brigham
Young University, Regis University, USAF Academy, West Point, US Naval Academy,
Novelle, and Iomega.
GMM also provides custom design and problem solving for its customers,
which has led to significant business opportunities with customers such as
Novelle and Iomega. For the balance of 2000 and thereafter, we intend to
concentrate on custom power supplies markets.
MANUFACTURING AND MARKETING
For the line of GMM products which we sold through 1999 and are now
winding down, the products are assembled by our personnel using standard PC
power supply items available from a variety of vendors, which then are
retrofitted with the GMM circuit which is made for us by Suhtech Corporation in
Korea. Marketing is handled on a direct basis by GMM, and also by several
manufacturer representative firms in different parts of the United States,
Canada, and other countries, as well as through distributor sales companies.
40
COMPETITION
The Glitch Master best serves the low-cost power protection for the
personal computer market and the workstation market. In this area, there is
virtually no direct competition, because consumers are hesitant to pay a high
price for uninterrupted power.
Competition for the Glitch Master is a product that is classified as an
uninterruptible power supply. The primary competition for the Glitch Master
product is a battery backup UPS. We believe the Glitch MasterTM offers
advantages over a battery backup system because it is cheaper and it does not
require batteries. When the computer starts up, the Glitch Master absorbs energy
during the first 8 seconds. Thus, it does not have to be a source of energy on a
continual basis as with a battery backed system. A power interruption during the
first 8 seconds of operation merely requires the user to restart the system
MARKETING STRATEGY
The strategy for Glitch Master is to emphasize product quality and
protection of assets. One of the most likely computer components to break down
or wear out is the power supply. However, power supplies are often perceived as
a commodity by the end user. The Glitch MasterTM improves quality for the end
user as well as increases the life of the power supply and provides product
differentiation.
The Glitch MasterTM power supplies protect the assets of a company
including hardware, the integrity of the data stored in the computer, as well as
time and welfare of management. When demonstrating a computer system with Glitch
MasterTM a prospective customer can unplug the computer from the wall plug for a
short period and reinsert it without losing data. Management believes this is a
sales advantage over other competitors.
GMM provides a 2 year warranty of its products to customers. The cost
of the warranty program is approximately 5% of the sales of the products.
OFFICES
Our offices occupy 4,630 square feet of space and are leased through
January 2001 at $6,950 per month. These offices are suitable for our current
level of administration staff, engineering research and development areas, and
sales. We may have to lease more space in the same building in 2000 as we grow
in operations. We have general business coverage for product liability, personal
injury, fire damage and other casualty losses, in amounts we think are adequate.
EMPLOYEES
We now employ 20 people full time including officers and technical
personnel, and one part time administrative person. We may increase this number
to 30 in 2000.
41
SECURITIES OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT
The following table sets forth certain information about beneficial
ownership of our common stock as of February 7, 2000 by each person or group who
is known to own more than 5% of our common stock, by each officer and director,
and by the officers and directors as a group. Except as otherwise noted, the
beneficial owners have sole voting and dispositive power with respect to their
shares. The percentages reflect 16,954,119 shares of common stock outstanding.
The numbers in the table do not include 385,222 shares owned by Mr.
Arnold's wife, of which he disclaims beneficial ownership, and also do not
include shares issuable upon exercise of stock options which are held by the
named individuals.
NAME AND ADDRESS AMOUNT OF SHARES PERCENT OF CLASS
Larry G. Arnold* 1,424,119 8%
6909 S. Holly Circle
Suite 200
Englewood, Colorado 80112
Kris M. Budinger* 855,541 5%
6909 S. Holly Circle, Suite 200
Englewood, Colorado 80112
Richard L. Millspaugh 3,000 -0-
6909 S. Holly Circle, Suite 200
Englewood, Colorado 80112
Thomas Glaza* 3,000 -0-
6909 S. Holly Circle, Suite 200
Englewood, Colorado 80112
Garth A. Woodland 61,000 -0-
6909 S. Holly Circle, Suite 200
Englewood, Colorado 80112
Chris A. Riggio 516,813 4%
6909 S. Holly Circle, Suite 200
Englewood, Colorado 80112
All Officers and Directors as a 2,863,473 17%
Group (6 persons)
- ---------
* Director
42
MANAGEMENT
NAME AGE POSITION DIRECTOR SINCE
---- --- -------- --------------
Larry G. Arnold 55 Chairman, Director,
Chief Executive Officer 1996
Kris M. Budinger 47 President, Chief Operating
Officer, Secretary, Treasurer 1994
Thomas L. Glaza 63 Director 1999
Richard L. Millspaugh 54 Chief Financial Officer
Garth A. Woodland 35 Vice President - Engineering
Research and Development
Chris A. Riggio 40 Vice President - Research and
Development
LARRY G. ARNOLD was a Director of GMM since 1990 and was elected Chief
Executive Officer and Chairman of the Board of OnLine on July 29, 1996. Mr.
Arnold has also served as a Director of Hillsboro State Bank, Hillsboro, Kansas,
for the past five years, and is presently Vice Chairman of the Board. From
February, 1989, until July, 1990, he served as Vice President, Treasurer and a
Director of Ryan-Murphy, Incorporated, a public company. From April, 1988 to
February, 1989, he served as a financial consultant to Postmark Stores of
America, Denver, Colorado. From January, 1987 to April, 1988, he was the
President of Discount Converter Supply Company, Colorado Springs, Colorado, a
private Colorado corporation, and from May, 1985 to November, 1986, Mr. Arnold
was President of Nova Resources Corporation, Colorado Springs, Colorado, a
public corporation. He holds a B.A. degree in Business Administration.
KRIS M. BUDINGER has been President, Chief Operating Officer, Secretary
and Treasurer of OnLine since July 29, 1996. His primary duties cover
supervision of product development, coordination of research and development
with prospective customers' design needs, prospective customer relations at the
corporate level, and developing relationships with manufacturers and suppliers.
He had been the Chairman, President, and CEO of OnLine Entertainment, Inc.
(prior to the merger with Glitch Master Marketing, Inc. on July 29, 1996) from
February 12, 1996 to July 29, 1996. From early 1995 to February 12, 1996 he was
a Director and Vice-President of OnLine Entertainment, Inc. His responsibilities
at OnLine Entertainment, Inc. included production of original direct response
television programming, management of product order fulfillment, telemarketing,
merchant banking, and television and radio distribution functions.
43
Mr. Budinger graduated from the United States Air Force Academy in 1974
and served as a Captain in the USAF until his honorable discharge in 1980. Mr.
Budinger was associated with national investment banking firms, E.F. Hutton as a
registered representative from 1981 to 1985, and from 1985 to 1988 as
Vice-President and Branch Manager in Peoria, Arizona. Mr. Budinger was
associated with Dean Witter Reynolds as a registered representative from 1988 to
1992, and from 1988 through 1992, as Vice-President and Assistant Branch
Manager, Sun City, Arizona.
THOMAS L. GLAZA was appointed to the board of directors of OnLine in
July 1999. He serves as an outside director, and is not employed by OnLine. He
has been Director of Marketing for MAPICS Business Group-Marcam Corp. since
1989. He leads business activities associated with the acquisition of
complementary software products; his company is considered a leader in
developing strategic partnerships in the high growth area of enterprise resource
planning. In this position, his group is responsible for worldwide marketing
support, including product requirements, education strategy, and product
information development and delivery. He also is involved in issues regarding
mergers with or acquisitions of other companies. He leads the effort to develop
and maintain the strategic planning for MAPICS.
He is a member and Fellow of the American Production and Information
Control Society ("APICS").
Mr. Glaza's brother James Glaza is associated with Northstar Securities,
Inc., a registered broker-dealer in securities which has raised money for us in
the past.
RICHARD L. MILLSPAUGH, a certified public accountant (licensed in
Colorado) has been Chief Financial Officer for OnLine since September 1, 1999.
From 1990 to 1994 he was Vice President Finance and part owner of Fibertection
Corporation. From 1995 to November 1997, Mr. Millspaugh was employed by Western
Pacific Airlines, and thereafter until he joined OnLine in 1999 he practiced
accounting at R.F. Hall & Associates, an accounting, tax and audit firm based in
Colorado. He has also been involved from time to time in special projects as a
consultant and financial administrator to different companies. In November 1994,
Mr. Millspaugh filed for personal bankruptcy proceedings in the United States
Bankruptcy Court, in connection with a claim made against his personal guarantee
of a $988,000 loan to Fibertection; this obligation and other personal
liabilities were discharged by the court in due course. Mr. Millspaugh received
a bachelor degree (accounting) from the University of Kansas in 1967.
GARTH WOODLAND joined us in July 1996. Mr. Woodland has been Vice
President- Engineering, Research and Development, since 1999. He has extensive
experience in technical application support and technical design in the power
supply industry. From 1992 to 1996 Mr. Woodland was employed by ForeSight
Electronics, Sunnyvale, California, a nationwide distributor of power supply
systems. His experience extends to technical sales, training and effective
management of technical sales forces, design in of new applications, and
coordinating production line outputs with sales flow. He is a knowledgeable
electrical and audio engineer who is capable in most software applications. His
technical Marketing and Support expertise includes: Integration,
44
Test/Verification Evaluation, Field Tech Support, Chit-Sits, Return Material
Authorization, and Order Fulfillment. His designs include variable linear DC
Power Supplies with 0% ripple and a battery charging circuit for lap top
computers. While at IBM in 1992, he conducted macro programming and repair
support to managers and employee groups. Mr. Woodland holds a bachelor of arts
degree in Creative Arts.
CHRIS A. RIGGIO joined us in 1996. Mr. Riggio has been Vice President -
Research and Development since 1999. Previously, he has been an inventor, patent
holder, and engineering consultant for a variety of electro-mechanical
applications such as: power control electronics, audio electronics, acoustics,
gas and diesel systems, electronic instrumentation, monitoring systems and
process control systems. He has conducted research and development projects at
the University of Colorado in the areas of bio-electromagnetics and magneto
biology. Mr. Riggio has invented and patented two thyristor control technologies
(Load Factor Controller and Ideal Voltage Controller) and transferred other
intellectual property rights pertaining to failure bypass circuitry and
precision thermostat control technology. His other areas of expertise include
manufacturing process support, quality control engineering support, end use
product testing, field testing, test protocol design, product performance
characterization, data acquisition system design, utility and DSM sales
engineering support and training. He was a founder, officer and director of
Renaissance Systems, Inc. from 1994 until we acquired that company in 1997.
Renaissance was a small company engaged developing new approaches to the power
supply system technologies.
Under the Nevada statutes, the number of directors may be fixed by or
in the manner provided in the our articles or bylaws. The bylaws provide that
the number of directors may be determined from time to time by resolution of the
board of directors. The board of directors currently consists of three members.
MANAGEMENT - INDEMNIFICATION
We will indemnify our executive officers and directors to the full
extent allowed by Nevada law. Insofar as indemnification for liabilities arising
under the 1933 Act may be permitted to directors, officers or persons
controlling us pursuant to the foregoing provisions, we have been advised that
it is the position of the Commission that such indemnification is against public
policy as expressed in the 1933 Act and is therefore unenforceable.
ENGINEERING CONSULTANT
Richard L. Doyle serves as an engineering consultant to us on a contract
basis under an agreement dated August 25, 1997. There is no set term for this
agreement. Mr. Doyle provides services as requested for independent reliability
testing of its products. Mr. Doyle receives restricted shares of our common
stock for his services, at the average share price over the 90 day period in
which he renders services, at the rate of $200 of stock for every hour of his
services (using his billing rate of $100 per hour). We have issued 5,200 shares
to Mr. Doyle under his agreement. Mr. Doyle graduated with a B.S. in Mechanical
Engineering from Oregon State University in 1963: He
45
earned an M.S. in Electrical Engineering from the University of California,
Irvine, in 1969. Mr. Doyle provides analytical and experimental insights into
complex physical and electrical phenomena. He specializes in systems analysis
with primary strength in electrical control systems and dynamics His work in
these areas has broken new ground in advancing the state-of-the-art in aircraft,
missiles, ships, and nuclear reactor plants. He provides solid contributions to
proposals and in planning organizing activities. Mr. Doyle is a registered
Electrical Engineer and a registered Civil Engineer with the State of
California, and is a senior member of the Institute of Electrical and
Electronics Engineers Inc., where he served as President for the years 1995 and
1996. He is also a member of Sigma Tau and Pi Tau Sigma honorary societies. Mr.
Doyle has more than 25 years of experience in the theoretical analysis of
dynamic systems including analysis and design of electrical and mechanical
systems. For the past 15 years Mr. Doyle has been a consultant. Mr. Doyle's
recent experience includes consulting on Nuclear Power Plant equipment. He is
presently involved in qualifying Radiation Monitoring equipment for Sorrento
Electronics. Other recent consulting tasks have included Reliability Studies,
Structural Analysis and Thermal Analysis of Electronic circuits. Previous
consulting work included program planning, test planning, and systems evaluation
for Kennecott Exploration Inc. of San Diego, California. He was responsible for
airlift testing and analysis and developed plans and analyzed several slurry
hydraulic tests. Mr. Doyle is not an officer or director of the Company.
EMPLOYMENT AGREEMENTS
We have written employment agreements with Larry G. Arnold and Kris M.
Budinger dated March 4, 1998. Each employment agreement ends on March 31, 2003,
subject to automatic renewal for 5 year terms unless terminated by the Company
on or after September 30, 2002. The base salary is $72,000 per year, subject to
increases. In December 1999 the board of directors approved a salary of $150,000
to each individual for the year 2000. Each employment agreement granted
nonqualified stock options to purchase 500,000 shares of common stock at $5.50
per share (all now vested), which was the fair value of the stock at March 4,
1998; these options will expire March 4, 2004. None have been exercised to date.
Each employment agreement also granted other nonqualified performance stock
options to purchase 500,000 shares of common stock at $.0001 per share; these
options will expire March 4, 2009. The performance options will vest according
to a formula: If we had more than $3 million of gross revenues by December 31,
1999, 35% of the options would have vested for Mr. Arnold and Mr. Budinger (we
didn't make this target so this part of the options has lapsed). If we have more
than $6 million of gross revenues by December 31, 2000, 35% of the options will
vest for Mr. Arnold and Mr. Budinger. Finally, if we have more than $9 million
of gross revenues by December 31, 2001, an additional 30% of the options will
vest for Mr. Arnold and Mr. Budinger. These options are discussed in our
financial statements (note 6 for the vested options and note 10 for the
performance options).
For the year ending December, 1999 and later, each employment agreement
provides a cash bonus of 50% of base salary if the if the average closing price
of the common stock for the last 20 business days of the year exceeds the
previous year comparable amount by 51% or more. For fiscal
46
1999, Mr. Arnold and Mr. Budinger each will be paid a cash bonus of $36,000
based on stock prices for that year.
We have issued qualified options to Mr. Arnold and Mr. Budinger, each
for 11,650 shares of common stock at $6.18 per share, expiring if either leaves
our employment or when the options expire in 2009.
Garth Woodland has a five year employment agreement, at a base salary
of $84,000 per year. He received nonqualified stock options to purchase 523,000
shares of common stock at $3.00, all of which are vested, and options for
another 500,000 shares at the same price, to vest 20% per year starting
September 1, 2000. Mr. Woodland has separate qualified options to buy 11,032
shares at $5.62 and 25,000 shares at $2.88; these options expire on termination
of employment or 2009.
We have negotiated the terms of a proposed written employment agreement
with Chris Riggio. If the agreement is signed, he will be paid a base salary of
$84,000 per year (his current salary under an oral employment arrangement). He
also would receive nonqualified stock options to purchase 500,000 shares of
common stock at $3.00, to vest 20% per year. We have not yet signed the proposed
written agreement. Separate from the proposed agreement, Mr. Riggio has an
option (which is qualified) to purchase 25,000 shares of common stock at $3.00
per share; these latter options expire in 2001. Mr. Riggio has separate
qualified options to buy 11,032 shares at $5.62 and 25,000 shares at $2.88;
these options expire on termination of employment or 2009.
Mr. Millspaugh has a five year employment agreement, at a base salary
of $84,000 per year. He received nonqualified stock options to purchase 100,000
shares of common stock at $5.625, which will vest 20% per year. Mr. Millspaugh
has separate qualified options to buy 3,203 shares at $5.62 and 25,000 shares at
$2.88; these options expire on termination of employment or 2009.
STOCK OPTION PLAN
We have adopted an incentive stock option plan for the issuance of up
to 3.5 million shares of common stock; the options are intended to qualify under
section 422 of the Internal Revenue Code. To date, we have issued to our
employees (other than officers) options to purchase 288,057 shares of common
stock. The options are vested and exercisable at different prices from $2.88 to
$6.18 per share (equal to or above market prices when the options were issued),
and will expire if the employee leaves us or when the options expire (at
different times from 2001 to 2009).
Separate from the qualified plan, we have issued an option to Thomas
Glaza, a director, to purchase 10,000 shares for $2.88 per share; this option
expires in 2002 and is vested.
47
COMPENSATION OF DIRECTORS
Each of our present directors who is also an employee of the receives
no additional compensation for acting as a director or attending meetings of
directors. We presently pay $100 per meeting to non-employee directors, plus
their travel expenses.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation paid or accrued by us to or for the account of the Chief Executive
Officer and the Chief Operating Officer (also the President) for services and
bonuses rendered in all capacities to us during each of the fiscal years ended
December 30, 1999, 1998 and 1997. No other executive officer received total
annual salary and bonus in excess of $100,000. We do not have any long term
compensation plan, other than options for restricted stock.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-----------------------------------------
OTHER ANNUAL
NAME AND POSITION YEAR SALARY BONUSES COMPENSATION
----------------- ---- ------ ------- ------------
Larry Arnold, Chief Executive Officer 1999 $72,000 $36,000 $0
1998 $72,000 $0 $0
1997 $72,000 $0 $0
Kris Budinger, Chief Operating Officer 1999 $72,000 $36,000 $0
and President 1998 $72,000 $0 $0
1997 $72,000 $0 $0
CERTAIN TRANSACTIONS
From time to time since 1998 we have borrowed money from our officers
to sustain operations and pay other expenses. At December 31, 1999 these loans
had been paid off, in the amounts of $231,750 plus $15,098 interest which was
paid in cash to Larry G. Arnold (annual interest at 10%), and $150,000 (plus
annual interest at 12%) which was paid in stock to a trust controlled by a
member of Mr. Budinger's family. The trust had loaned the $150,000 to us in
December 1998 to pay a settlement to a bankruptcy trustee. The loan from the
Budinger trust was paid by issuing 53,571 shares of restricted common stock at
market value.
In 1999 we borrowed $88,000 from Falcon Financial Benefit Pension Plan.
We paid off this loan plus annual interest at 18% in 1999. One of the trustees
of this Plan is James Glaza, brother to Thomas Glaza who is one of our
directors. James Glaza is associated with Northstar Securities,
48
Inc., a registered broker-dealer which has helped us raise money from time to
time in private placements of our securities. In 1998 and 1999, Northstar has
paid James Glaza approximately $299,919 in net sales commissions related to our
sales of securities for his services as a stock broker. These were part of the
gross commissions we paid to Northstar. The financing activities at Northstar to
a large extent predated Thomas Glaza's appointment to our board of directors.
Neither Thomas Glaza nor James Glaza are affiliated with Northstar, nor do
either of them own any stock in Northstar, and Thomas Glaza is not an employee
or affiliate or stockholder of the Plan.
At December 31, 1999 we owed $101,081 in gross commissions to Northstar
Securities, Inc. for services related to our private placement offerings of
common stock in the last two quarters of 1999. Part of this payable is due to
James Glaza but the exact amount he will receive from Northstar presently is not
known to us.
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue 50,000,000 shares of common stock ($.0001
par value) of which 16,954,119 shares are issued and outstanding (including
shares subject to rescission).
Holders of common stock are entitled to one vote per share on each
matter submitted to a vote at any meeting of shareholders. Shares of common
stock carry cumulative voting rights in elections of directors, and, therefore,
holders of a minority of the outstanding shares of common stock may be able to
elect a director to the board of directors. Votes are cumulated by multiplying
the number of shares held by the number of candidates to be elected, then
casting all the votes for one candidate. However, if the number of shares held
by minority shareholders is too small in relation to the total outstanding
shares, cumulation will not enable such shareholders to elect even one director
to the board of directors.
Our board of directors has authority, without action by the
shareholders, to issue all or any portion of the authorized but unissued shares
of common stock, which would reduce the percentage ownership of its present
shareholders and which may dilute the book value of the common stock.
Shareholders have no pre-emptive rights to acquire additional shares of
common stock. The common stock is not subject to redemption and carries no
subscription or conversion rights. In the event of liquidation, the shares of
common stock are entitled to share equally in corporate assets after
satisfaction of all liabilities.
Holders of common stock are entitled to receive such dividends as the
board of directors may from time to time declare out of funds legally available
for the payment of dividends.
49
PREFERRED STOCK
We are authorized to issue 1,000,000 shares of preferred stock. The
board of directors has authority, without action by the shareholders, to issue
preferred stock in one or more series and to determine the voting rights,
preferences as to dividends and liquidation, conversion rights, and other rights
of such series. Preferred stock may carry rights superior to those of the common
stock.
In 1992, we issued 520,972 shares of preferred stock, without
designation as a series, convertible to common stock at the rate of 1 share of
common stock for each 5 shares of preferred stock. These shares of preferred
stock have no voting rights. There presently are 10,467 shares of this preferred
stock outstanding, which are convertible into 2,093 shares of common stock.
We have designated 250,000 shares of series A preferred stock, bearing
an annual dividend of 6% on the stated value of $2.00. The 6% dividend is
payable in cash or in additional shares of the same series A stock. The series A
preferred stock has no voting rights, but the holders have the right to convert
each series A share into two shares of common stock for up to one year after the
date of issuance; after one year, any series A stock not previously converted is
automatically converted by us into common stock. In December 1999, we paid a
dividend of 7,860 shares of series A preferred stock on the 131,000 shares of
series A outstanding as of December 13, 1999. Also as of that date, all of these
shares of series A preferred stock were converted into a total of 277,720 shares
of common stock. Presently, there are no shares of series A preferred stock
outstanding.
We have designated 200,000 shares of series B preferred stock, bearing
an annual dividend of 6% on the stated value of $2.00. The 6% dividend is
payable in cash or in additional shares of the same series B stock. The series B
preferred stock has no voting rights, but the holders have the right to convert
each series B share into two shares of common stock for up to one year after the
date of issuance; after one year, any series B stock not previously converted is
automatically converted by us into common stock. In December 1999, we paid a
dividend of 26,574 shares of series B preferred stock on the 442,700 shares of
series B outstanding as of December 13, 1999. Also as of that date, all of these
shares of series B preferred stock were converted into a total of 938,548 shares
of common stock. Presently, there are no shares of series B preferred stock
outstanding.
TRANSFER AGENT
The transfer agent for our stock is Corporate Stock Transfer, Inc.,
Denver, Colorado.
INDEMNIFICATION
We have agreed to indemnify our officers and directors with respect to
certain liabilities including liabilities which may arise under the 1933 Act.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to directors, officers and controlling persons pursuant to any
charter, provision, by-law, contract, arrangements, statue or otherwise, we have
been advised
50
that in the opinion of the Commission, such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by a director, officer, or
controlling person in the successful defense of any such action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our 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 1933 Act and will be governed by
the final adjudication on such issue.
LITIGATION
RELATED TO BANKRUPTCY TRUSTEE. In June 1994, we entered into agreements
to merge with MaxMusic, Inc., a Colorado corporation, whereby MaxMusic would
acquire our assets and certain of our liabilities. These agreements were
terminated in December 1994. MaxMusic, Inc. subsequently filed a voluntary
chapter 7 bankruptcy petition in 1995, Case No. 95-11101 SBB, in the United
States Bankruptcy Court for the District of Colorado. In December 1997, the
trustee for the bankruptcy estate filed a complaint against us on behalf of the
bankruptcy estate seeking damages in the amount of $392,000, plus interest and
penalties, for alleged payments that had benefited us. In December 1998, we paid
$150,000 to the trustee to settle the claims (and interest and penalties) sought
by the Trustee. This money was loaned to us by a trust maintained by a family
member of Kris M. Budinger, president.
In April 1999 the trustee filed an action in United States District
Court (Denver, Colorado) seeking enforcement (through a garnishment proceeding)
against us of a judgement obtained by the trustee against a former officer and
director (who resigned in February 1996) for the same amount originally sought
to be recovered against us, less the $150,000 paid by us in December 1998. The
amount now being sought by the trustee is approximately $390,000; recovery is
sought based on a 1996 agreement by us to indemnify the former officer and
director against certain liabilities. We are resisting the trustee's attempts to
collect the balance of the claims, and believe the trustee's efforts are wholly
without merit.
After extensive hearings, on November 19, 1999 the United States
Magistrate Judge, United States District Court entered findings of fact and
conclusions of law to the effects that the trustee's garnishment claims are
barred by the 1998 settlement with us and our payment in the underlying
adversary proceeding in Bankruptcy Court, and that the indemnification
provisions of the 1996 agreement between us and the former officer and director
are not applicable or enforceable in connection with the bankruptcy proceedings.
The Magistrate has recommended that the District Court enter judgement in our
favor on the garnishment claims.
The trustee has filed objections to the Magistrate's findings and
conclusions, and to his recommendations, and we have filed a reply with the
Magistrate. We believe our position will prevail, but as in any litigation
proceedings, the ultimate resolution is uncertain.
51
OTHER. Since 1996 we have been defending a lawsuit by Fox Sports, Inc.
which is pending in California Superior court, (file number BC20946). Fox seeks
approximately $150,000 in damages for alleged breach of a contract to distribute
film; the dispute arose out of arrangements discussed between us and Fox to
distribute video film products when we were involved in the entertainment
business in 1996. Discovery is in process. A trial date has been for April 2000.
We are vigorously defending these claims. In January 2000 we agreed to settle
this matter by paying approximately $28,000, and we expect this settlement to be
finalized in late February or early March 2000.
LEGAL MATTERS
The validity of the issuance of the shares offered hereby will be passed
upon for us by The Law Firm of Stephen E. Rounds, Denver, Colorado.
EXPERTS
Our financial statements as of December 31, 1998 and for the 12 months
then ended have been included in this prospectus in reliance on the report of
Cordovano and Harvey, P.C. {"C&H"), Denver, Colorado, which firm served as our
independent certified public accountants until December 1999. C&H's report is
included upon the authority of such firm as experts in accounting and auditing.
Our financial statements as of December 31, 1999 and for the 12 months
then ended have been included in this prospectus in reliance on the report of
Ehrhardt Keefe Steiner & Hottman PC. ("EKS&H"), Denver, Colorado. The firm EKS&H
serves as our independent certified public accounting firm. EKS&H's report is
included upon the authority of such firm as experts in accounting and auditing.
CHANGE OF ACCOUNTING FIRM
On January 12, 2000 we terminated our relationship with C&H, which had
audited our financial statements for fiscal 1996, 1997 and 1998. C&H's audit
reports on our financial statements for each of those years contained a "going
concern qualification" that because of our recurring losses and lack of working
capital, there was substantial doubt about our ability to continue as a going
concern. Except for the uncertainty associated with the "going concern
qualification," C&H's audit reports for those three years did not contain an
adverse opinion or disclaimer of opinion, or modification as to uncertainty,
audit scope or accounting principles. Our board of directors approved the
termination of our relationship with C&H and our engagement of the firm Ehrhardt
Keefe Steiner & Hottman PC., Denver, Colorado.
We have never had any disagreements with C&H on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved to
52
C&H's satisfaction, would have caused C&H to make reference to the subject
matter of the disagreement in connection with its reports.
WHERE YOU CAN FIND MORE INFORMATION
Since February ___, 2000, we have been registered with the Securities
and Exchange Commission (the "Commission" or the "SEC") under section 12(g) of
the Securities Exchange Act of 1934 (the "Exchange Act"). Our SEC file number is
000-___. Since that date, we have been filing quarterly and special reports, and
will soon be filing with the SEC our annual reports (by March 31, 2000). Our
fiscal year ends on December 31. Our filings are available to the public over
the Internet at the SEC's web site located at http://www.sec.gov. This
prospectus is part of our registration statement (SEC file no. 333-93341) which
we filed with the Commission. The exhibits and a limited amount of other
information which was filed with the registration statement are not included in
this prospectus. The entire registration statement is available to you over the
SEC's web site. Also, you may read and copy any document we file at the SEC's
public reference room located at 450 Fifth Street, N.W., Washington, D.C. 20549.
Information about that reference room in Washington, D.C. can be obtained by
calling the SEC at 1.800.SEC.0330.
53
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
Item 22. Financial Statements
TABLE OF CONTENTS
Page
----
Independent Auditors' Report..............................................55
Independent Auditors' Report..............................................56
Consolidated Financial Statements
Consolidated Balance Sheets...........................................57
Consolidated Statements of Operations.................................59
Consolidated Statement of Shareholders' Equity (Deficit)..............60
Consolidated Statements of Cash Flows.................................62
Notes to Consolidated Financial Statements................................64
54
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
OnLine Power Supply, Inc. and Subsidiaries
Englewood, Colorado
We have audited the accompanying consolidated balance sheet of OnLine Power
Supply, Inc., and Subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These consolidated 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards required that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of OnLine Power Supply,
Inc. and Subsidiaries as of December 31, 1999 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
January 31, 2000
Denver, Colorado
55
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
OnLine Power Supply, Inc. (Formerly OnLine Entertainment, Inc.)
We have audited the accompanying balance sheet of OnLine Power Supply, Inc.
(Formerly OnLine Entertainment, Inc.) and Subsidiaries, as of December 31, 1998,
and the related statements of operations, stockholders' equity and cash flows
for the year then ended. The financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides 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 OnLine Power Supply, Inc.
(Formerly OnLine Entertainment, Inc.) and Subsidiaries as of December 31, 1998
and the results of their operations and their cash flows for the year then ended
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has suffered recurring losses from
operations and at December 31, 1998 has a working capital deficit, which raises
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Cordovano and Harvey, P.C.
Cordovano and Harvey, P.C.
March 2, 1999
Denver, Colorado
56
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
1999 1998
------------ ------------
Assets
Current assets
Cash $ 1,941,367 $ 151,341
Certificates of deposit 3,100,000 -
Accounts receivable, net of allowance for uncollectible
accounts totaling $364 (1999) and $1,328 (1998) 6,048 26,247
Other receivable, net of allowance for uncollectible
accounts totaling $62,889 (1999 and 1998) (Note 11) - -
Inventory, at cost 66,713 90,037
Prepaid expenses 2,780 -
----------- -----------
Total current assets 5,116,908 267,625
----------- ------------
Property and equipment, less accumulated depreciation
of $66,135 (1999) and $34,764 (1998) (Note 2) 251,114 161,719
Equipment under capital leases, less accumulated depreciation
of $3,771 (1999) and $0 (1998) (Note 2) 74,190 -
Goodwill, less accumulated amortization of
$104,718 (1999) and $52,359 (1998) 157,076 209,435
Acquired technology costs, less accumulated amortization
of $50,960 (1999) and $25,480 (1998) 76,440 101,920
Patent, less accumulated amortization of $492 (1999) and $181 (1998) 25,039 1,373
Other assets 1,512 712
----------- ------------
Total assets $ 5,702,279 $ 742,784
=========== ============
See notes to consolidated financial statements
57
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
December 31,
------------------------------
1999 1998
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 245,772 $ 86,639
Accounts payable, related parties (Note 8) 101,081 -
Bank line-of-credit (Note 3) 731 40,500
Notes payable, related parties (Notes 3 and 8) - 292,750
Current maturities on capital lease obligations (Note 2) 20,017 -
Accrued interest payable 26,012 26,658
Accrued interest payable, related parties (Note 8) - 4,630
Bonuses payable, related parties (Note 8) 72,000 -
Other (Note 4) 100,772 183,157
------------- ------------
Total current liabilities 566,385 634,334
Long-term liabilities
Capital lease obligations, less current maturities (Note 2) 48,583 -
------------- ------------
Total liabilities 614,968 634,334
------------- ------------
Liability for common stock subject to rescission,
1,243,151 shares (1999) (Note 5) 1,281,815 550,700
------------- ------------
Commitments and contingencies (Notes 5 and 10)
Shareholders' equity (deficit) (Notes 5, 6, 7 and 12)
Preferred stock, $.0001
par value; 1,000,000 shares authorized 10,467
(1999) and 12,467 (1998) shares issued and outstanding 1 1
Series A cumulative, convertible preferred stock,
$.0001 par value, $2.00 stated value; 250,000 shares authorized;
0 (1999) and 125,000 (1998) shares issued and outstanding - 250,000
Series B cumulative, convertible preferred stock,
$.0001 par value, $2.00 stated value; 200,000 shares authorized;
no shares issued and outstanding - -
Common stock; $.0001 par value; 50,000,000 shares authorized;
16,954,119 (1999) and 11,846,826 (1998) shares issued
and outstanding (including rescission shares) 1,571 1,185
Additional paid-in capital 19,914,828 8,879,706
Retained deficit (16,110,904) (9,573,142)
------------- ------------
3,805,496 (442,250)
------------- ------------
Total shareholders' equity (deficit)
Total liabilities and shareholders' equity (deficit) $ 5,702,279 $ 742,784
============== ============
See notes to consolidated financial statements
58
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
-----------------------------
1999 1998
------------ ------------
Net sales $ 299,408 $ 262,564
Cost of sales 233,386 194,383
------------ ------------
Gross profit 66,022 68,181
------------ ------------
Other operating costs and expenses
Research and development 455,435 319,559
Stock-based compensation (Note 7) 62,839 59,799
Selling, general and administrative expenses 1,034,015 867,042
Provision for doubtful accounts 37 74,217
Other general expenses
Loss on sale of asset 437 38
Impairment loss on fixed asset (Note 6) - 11,018
Loss on write-off of inventory 41,616 -
Gain on settlement of accounts payable (3,314) (23,251)
------------ ------------
1,591,065 1,308,422
------------ ------------
Loss from operations (1,525,043) (1,240,241)
------------ ------------
Interest income 15,421 -
Interest (expense) (50,733) (19,289)
Losses from litigation settlements (Note 11) (28,000) (190,000)
------------ ------------
Net loss (1,588,355) (1,449,530)
Preferred stock dividends (Note 6) (4,949,407) (18,399)
------------ ------------
Net loss available to common shareholders $ (6,537,762) $ (1,467,929)
============ ============
Basic weighted average common shares outstanding 12,491,158 11,062,039
============ ============
Basic loss per common share $ (0.13) $ (0.13)
============ ============
Diluted weighted average common shares outstanding 12,491,158 11,062,039
============ ============
Diluted loss per common share $ (0.13) $ (0.13)
============ ============
See notes to consolidated financial statements
59
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
JANUARY 1, 1998 THROUGH DECEMBER 31, 1999
Series A Cumulative Series B Cumulative
Preferred Stock Preferred Stock Preferred Stock
-------------------- ------------------- -----------------------
Stated Stated
Shares Par Value Shares Value Shares Value
-------- --------- -------- --------- --------- -----------
Balance, January 1, 1998 19,467 $ 2 125,000 $ 250,000 - $ -
Sale of common stock (Note 6) - - - - - -
Common stock issued for services (Note 7) - - - - - -
Common stock issued for equipment (Note 7) - - - - - -
Common stock issued to broker for
commissions related to offerings (Note 7) - - - - - -
Sale of common stock in private placement - - - - - -
(Note 12)
Cumulative preferred stock issued in private - - 105,400 210,800 169,950 339,900
placement (Note 12)
Stock subject to rescission (Note 5) - - (105,400) (210,800) (169,950) (339,900)
Stock offering costs - - - - - -
Conversion of non-cumulative preferred stock to
common stock (Note 6) (7,000) (1) - - - -
Net (loss) for the year ended December 31, 1998 - - - - - -
----------- -------- -------- ---------- ---------- ----------
Balance, December 31, 1998 12,467 1 125,000 250,000 - -
See notes to consolidated financial statements
60a
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
JANUARY 1, 1998 THROUGH DECEMBER 31, 1999
Common Stock Additional Total
-------------------------- Paid-in Retained Shareholders'
Shares Par Value Capital (Deficit) Equity
------------- ------------ ------------- ------------ -------------
Balance, January 1, 1998 10,347,585 $ 1,034 $ 8,238,727 $ (8,105,213) $ 384,550
Sale of common stock (Note 6) 185,427 19 75,425 - 75,444
Common stock issued for services (Note 7) 79,732 8 59,791 - 59,799
Common stock issued for equipment (Note 7) 14,162 1 23,012 - 23,013
Common stock issued to broker for
commissions related to offerings (Note 7) 1,106,660 111 864,190 - 864,301
Sale of common stock in private placement 99,260 10 496,290 - 496,300
(Note 12)
Cumulative preferred stock issued in private - - - - 550,700
placement (Note 12)
Stock subject to rescission (Note 5) - - - - (550,700)
Stock offering costs - - (877,729) - (877,729)
Conversion of non-cumulative preferred stock to
common stock (Note 6) 14,000 2 - - 1
Net (loss) for the year ended December 31, 1998 - - - (1,467,929) (1,467,929)
-------------- ---------- ------------- ------------- --------------
Balance, December 31, 1998 11,846,826 1,185 8,879,706 (9,573,142) (442,250)
See notes to consolidated financial statements.
60b
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
JANUARY 1, 1998 THROUGH DECEMBER 31, 1999
Series A Cumulative Series B Cumulative
Preferred Stock Preferred Stock Preferred Stock
---------------------- ----------------------- -------------------------
Stated Stated
Shares Par Value Shares Value Shares Value
--------- ---------- ---------- ------------ ---------- ------------
Balance, December 31, 1998 12,467 $ 1 125,000 $ 250,000 - $ -
Cumulative preferred stock issued in private - - 25,600 51,200 272,750 545,501
placement (Note 12)
Common stock issued for services (Note 7) - - - - - -
Common stock issued for sales commissions (Note 7) - - - - - -
Conversion of non-cumulative preferred stock
to common stock (Note 6) (2,000) - (125,000) (250,000) - -
Common stock issued for retirement of debt (Note 6) - - - - - -
Common stock issued in private placement (Note 12) - - - - - -
Stock offering costs - - - - - -
Stock subject to rescission (Note 5) - - - - - -
Declaration of 6% preferred stock dividend on
cumulative preferred stock (Note 6) - - 7,860 15,720 26,574 53,148
Conversion of cumulative preferred stock to
common stock (Note 6) - - (33,460) (66,920) (299,324) (598,649)
Net (loss) for the year ended December 31, 1999 - - - - - -
--------- ------- --------- ------------ ---------- ------------
Balance, December 31, 1999 10,467 $ 1 - $ - - $ -
========= ======= ========= ============ ========== ============
See notes to consolidated financial statements
61a
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
JANUARY 1, 1998 THROUGH DECEMBER 31, 1999
Common Stock
------------------------ Additional Total
Paid-in Retained Shareholders'
Shares Par Value Capital (Deficit) Equity
---------- ---------- ------------- ------------- --------------
Balance, December 31, 1998 11,846,826 $ 1,185 $ 8,879,706 $ (9,573,142) $ (442,250)
Cumulative preferred stock issued in private - - - - 596,701
placement (Note 12)
Common stock issued for services (Note 7) 25,000 2 62,835 - 62,837
Common stock issued for sales commissions (Note 7) 336,350 34 252,229 - 252,263
Conversion of non-cumulative preferred stock
to common stock (Note 6) 254,000 25 249,975 - -
Common stock issued for retirement of debt (Note 6) 53,571 5 149,995 - 150,000
Common stock issued in private placement (Note 12) 3,222,104 322 6,443,891 - 6,444,213
Stock offering costs - - (959,699) - (959,699)
Stock subject to rescission (Note 5) (1,243,151) (124) (1,281,691) - (1,281,815)
Declaration of 6% preferred stock dividend on
cumulative preferred stock (Note 6) - - - - 68,868
Conversion of cumulative preferred stock to
common stock (Note 6) 1,216,268 122 6,117,587 - 5,452,140
Net (loss) for the year ended December 31, 1999 - - - (6,537,762) (6,537,762)
----------- ---------- ------------ -------------- -------------
Balance, December 31, 1999 15,710,968 $ 1,571 $ 19,914,828 $ (16,110,904) $ 3,805,496
=========== ========== ============ ============= =============
See notes to consolidated financial statements
61b
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
----------------------------------
1999 1998
--------------- --------------
Cash flows from operating activities
Net loss $ (1,588,355) $ (1,449,530)
-------------- -------------
Adjustments to reconcile net loss to net cash used by operating activities
Depreciation and amortization 116,821 93,372
Gain on write-off of accounts payable (3,314) (23,251)
Common stock issued for services 62,839 59,799
Debt issued for services - 102,750
Writedown of inventory for obsolescence 41,616 -
Write-off of organization costs - 3,702
Loss on sale of asset 437 37
Impairment loss on fixed assets - 11,018
Changes in certain assets and liabilities
Receivables, inventory and other current assets (1,673) 42,396
Accounts payable and other current liabilities 58,213 170,881
-------------- -------------
274,939 460,704
-------------- -------------
Net cash (used in) operating activities (1,313,416) (988,826)
-------------- -------------
Cash flows from investing activities
Purchases of equipment (125,641) (98,408)
Payments to acquire patent (23,977) (1,554)
Purchases of certificates of deposit (3,100,000) -
Proceeds from sale of equipment - 70
-------------- -------------
Net cash (used in) investing activities (3,249,618) (99,892)
-------------- -------------
Cash flows from financing activities
Proceeds from sale of stock 7,040,914 1,122,445
Payments for offering costs (495,973) (13,428)
Principal payments on capital leases (9,362) -
Proceeds from debt issuance 177,000 152,956
Principal debt payments (359,519) (47,830)
------------- -------------
Net cash provided by financing activities 6,353,060 1,214,143
------------- -------------
Net increase in cash 1,790,026 125,425
Cash - beginning of year 151,341 25,916
-------------- -------------
Cash - end of year $ 1,941,367 $ 151,341
============== =============
See notes to consolidated financial statements
62
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Supplemental disclosure of cash flow information:
Cash paid for interest during the years ended December 31, 1999
and 1998 was $56,009 and $5,186, respectively.
Non-cash investing and financing transactions:
Acquisition of property and equipment in exchange for the issuance
of common stock for the years ended December 31, 1999 and 1998 was
$0 and $23,012, respectively.
Conversion of debt to preferred and common stock for the years
ended December 31, 1999 and 1998 was $150,000 and $0, respectively
(Note 8).
Acquisition of property under vendor financing for the years ended
December 31, 1999 and 1998 was $0 and $32,044, respectively, (Note
2)
Acquisition of equipment under capital leases for the years ended
December 31, 1999 and 1998 was $77,962 and $0, respectively (Note
2).
See notes to consolidated financial statements
63
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
The consolidated financial statements include the accounts of OnLine Power
Supply, Inc., formerly known as OnLine Entertainment, Inc., and its wholly owned
subsidiaries, Glitch Master Marketing, Inc. and OnLine Power Supply, Inc.
(collectively, the "Company"). All significant intercompany transactions and
accounts were eliminated in the consolidated financial statements.
Use of Estimates
- ----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Accordingly, actual results could differ
from those estimates.
Cash Equivalents
- ----------------
For the purpose 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 consists of computer equipment and accessories purchased for resale
during the ordinary course of business. The inventory is stated at the lower of
cost or market. The cost is determined by the average cost method.
Property, Equipment and Depreciation
- ------------------------------------
Property and equipment is stated at cost and depreciated using the straight-line
method over the estimated useful lives of the assets (three to ten years).
Maintenance and repair costs are charged to expense as incurred. Gains or losses
on disposition of property and equipment are reflected in income.
Amortization
- ------------
Amortization of intangible assets is calculated using the straight-line method
over five years. Amortization expense for the years ended December 31, 1999 and
1998 totaled $78,150 and $78,020, respectively, and $25,791 (1999) and $25,480
(1998) of this expense is included in research and development costs.
64
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- ---------------------------------------------------------------
Research and Development
- ------------------------
Research and development costs for new products are charged to expense as
incurred. The cost of material and equipment that are acquired for research and
development activities and that have alternative future uses (in other research
and development projects or otherwise) are capitalized when acquired. The cost
of the materials consumed and the depreciation of the equipment used are charged
to research and development costs. Purchased research and development costs that
have alternative future uses (in other research and development projects or
otherwise) are capitalized as acquired technology and amortized as intangible
assets and charged to research and development costs.
Income Taxes
- ------------
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the recorded book basis and tax basis
of assets and liabilities for financial and income tax reporting. The deferred
tax assets and liabilities represented the future tax return consequences of
those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Deferred taxes are also recognized for
operating losses that are available to offset future taxable income and tax
credits that are available to offset future federal income taxes.
Revenue Recognition
- -------------------
Revenue is recognized as product is shipped or services rendered. The Company
provides a two-year warranty on its Glitch Master product. A liability is
provided for warranty expense based upon historical experience.
Reclassifications
- -----------------
Certain amounts in the prior year consolidated financial statements have been
reclassified for comparative purposes to conform with the presentation in the
current year consolidated financial statements.
Impairment of Long-lived Assets
- -------------------------------
The Company follows Statements of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long- lived Assets and for Long-lived Assets
to be Disposed of", which requires that an impairment loss be recognized when
the carrying amount of an asset exceeds the expected future undiscounted net
cash flows.
65
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- ---------------------------------------------------------------
Fair Value of Financial Instruments
- -----------------------------------
The Company has determined, based on available market information and
appropriate valuation methodologies, that the fair value of its financial
instruments approximates carrying value. The carrying amounts of cash,
receivables, payables and other current liabilities approximate fair value due
to the short-term maturity of the instruments.
Stock-based Compensation
- ------------------------
The Company accounts for any stock-based compensation plans using the intrinsic
value method prescribed by the Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). Compensation cost for stock
options, if any, is measured as the excess of the quoted market prices of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS 123) was issued in October 1995. This accounting standard
permits the use of either a fair value based method or the method defined in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 125) to account for stock-based compensation arrangements.
Companies that elect to use the method provided in APB 25 are required to
disclose the pro forma net income and earnings per share that would have
resulted from the use of the fair value based method. The Company has elected to
continue to determine the value of the stock-based compensation arrangements
under the provision of APB 25 and, accordingly, has included the pro forma
disclosures required under SFAS 123 in Note 6.
Earnings (Loss) Per Common Share
- --------------------------------
Effective December 31, 1997, SFAS 128 "Earnings per Share" requires a dual
presentation of earnings per share-basic and diluted. Basic earnings per common
share has been computed based on the weighted average number of common shares
outstanding. Diluted earnings per share reflects the increase in weighted
average common shares outstanding that would result from the assumed exercise of
outstanding stock options. All periods presented have been restated to reflect
the adoption of this standard. In 1999 and 1998, 1,966,568 and 1,076,784 shares,
respectively, were excluded from the diluted earnings per share calculation, as
these shares were anti-dilutive. Had these shares been included in the
calculation, diluted weighted average common shares outstanding would have
increased to 14,776,519 and 11,488,407 in 1999 and 1998, respectively.
66
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- ---------------------------------------------------------------
Concentrations and Credit Risk
- ------------------------------
Approximately 48% of the Company's net sales in 1999 were from sales to one
customer.
The Company has concentrated its credit risk for cash by maintaining deposits in
a financial institutions, which may at times, exceed the amounts covered by
insurance provided by the United States Federal Deposit Insurance Corporation
(FDIC). The maximum loss that would have resulted from that risk totaled
$4,847,344 at December 31, 1999, for the excess of the deposit liabilities
reported by financial institutions over the amount that would have been covered
by federal insurance. The Company has not experienced any losses to date in such
accounts and accordingly, believes it is not exposed to any significant credit
risk.
Nature of Organization
- ----------------------
The Company was incorporated in Colorado on August 7, 1991, as Roth Financial
Fitness, Inc. On January 12, 1995, the Company changed its name to OnLine
Entertainment, Inc. In June 1995, the Company re-domiciled in Nevada by merging
with a Nevada corporation formed for that specific purpose. The Company now
operates as a Nevada corporation doing business as a foreign corporation in
Colorado. On December 14, 1999, the Company changed its name to OnLine Power
Supply, Inc.
During 1999, the Company conducted its primary business activities through its
subsidiaries, Glitch Master Marketing, Inc. and OnLine Power Supply, Inc. On
December 31, 1999, the Company dissolved both of these entities. All assets,
liabilities and operations of these entities were consolidated into the Company.
Glitch Master Marketing, Inc. was incorporated in Colorado on September 7, 1990
to manufacture and market the proprietary Glitch Master (TM) product line of
power supplies for the personal computer.
OnLine Power Supply, Inc. was incorporated in Colorado on November 13, 1996. On
December 17, 1997, OnLine Power Supply, Inc. acquired Renaissance Systems, Inc.
by a common stock exchange. OnLine Power Supply, Inc. continued to develop a
proprietary power supply product line and related technology that was started by
Renaissance Systems, Inc. The development results became the technology that
produces the Company's new power supply product line.
67
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - PROPERTY AND EQUIPMENT
During 1999, the Company acquired equipment totaling $77,962 and executed
capital lease agreements for this equipment. Future minimum lease payments under
these capital leases are as follows:
2000 $ 28,369
2001 28,525
2002 20,195
--------------
77,089
Less amount representing interest (8489)
Net capital lease obligation $ 68,600
==============
During 1998, the Company acquired a trade show booth under vendor financing. The
cost of the booth was $84,963 of which the Company paid $52,919. The balance
owed on the booth totaling $32,044 was included as other current liabilities at
December 31, 1998 on the consolidated balance sheets.
Property and equipment, including equipment under capital leases, consisted of
the following:
December 31,
---------------------------
1999 1998
----------- ------------
Furniture and fixtures $ 13,500 $ 12,119
Trade show exhibit equipment 96,343 96,343
Engineering and other equipment 181,740 52,838
Computers 79,162 30,343
Software 24,465 4,840
---------- -----------
395,210 196,483
Less accumulated depreciation (69,906) (34,764)
---------- -----------
$ 325,304 $ 161,719
========== ===========
Depreciation expense for the years ended December 31, 1999 and 1998 totaled
$38,671 and $15,352, respectively. In 1999 and 1998, $15,567 and $6,346,
respectively, of depreciation was included in research and development expense.
68
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - SHORT-TERM DEBT
Short-term debt consisted of the following notes payable and line-of-credit:
December 31,
---------------------------
1999 1998
----------- ------------
Note payable to officer, due on demand, interest at 10.00
percent, collateralized by receivables, inventory and patent
rights (Note 8). $ - $ 15,000
Note payable to officer, due on demand, interest at 10.00
percent, collateralized by receivables, inventory and patent
rights (Note 8). - 25,000
Note payable to officer, due on demand, interest at 10.00
percent, collateralized by receivables, inventory and patent
rights (Note 8). - 68,500
Note payable to officer, due on demand, interest at 10.00
percent, collateralized by receivables, inventory and patent
rights (Note 8). - 34,250
Note payable to an officer's family trust, matures December 21,
1999, interest at 12.00 percent, collateralized by 50,000 shares
of the Company's common stock (Note 8). - 150,000
----------- -----------
$ - $ 292,750
=========== ===========
Line-of-Credit
The Company has a $50,000 revolving line-of-credit, of which, $49,269 was unused
as of December 31, 1999. Advances on the line carry an interest rate of the
prime rate plus 6 percent (14.50% at December 31, 1999). The credit line is
collateralized by substantially all corporate assets and is personally
guaranteed by an officer of the Company. The Company indemnified the officer.
Payments on the line are due monthly and are equal to accrued interest plus 2.00
percent of outstanding principal at the end of the prior month.
69
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - OTHER LIABILITIES
- --------------------------
During 1994 and 1995, the Company incurred approximately $118,000 of liabilities
(payables) associated with a previous line of business. Management has settled
or written-off a total of $50,474 in prior years and through December 31, 1999.
The remaining liabilities total $65,340 at December 31, 1999; some are secured
by judgments against the Company, some are being paid negotiated monthly
payments and some of the creditors are not currently pursuing the payment of
their claims.
NOTE 5 - RESCISSION OFFER
- -------------------------
The Board of Directors approved, on December 1, 1999, the conversion of all
preferred A and B shares into two common shares for one preferred share. The
Board of Directors also approved an offer to rescind all original preferred
share and certain common share purchaser's investment plus interest because the
Company believes that these offerings may have been executed without a proper
exemption pursuant to the regulations in the Securities Act of 1933. A liability
has been accrued on the balance sheet in the amount of original shareholder's
investment. The original investment consists of $262,000 of preferred A,
$885,400 of preferred B and $134,415 of common stock. Management believes that
the probability of the shareholders rescinding their shares is unlikely because
the current market price of the shares exceeds their original cost plus any
interest which they would receive; therefore, the potential accrued interest on
the rescission offer of $134,590 has not been recorded in the accompanying
consolidated financial statements.
NOTE 6 - SHAREHOLDERS' EQUITY
- -----------------------------
Preferred Stock
- ---------------
On December 7, 1999, the Company's Board of Directors approved the payment of 6%
preferred stock dividend on 131,000 shares of preferred A and 442,700 shares of
preferred B stock. A total of 7,860 shares of preferred A and 26,574 shares of
preferred B were issued as stock dividends during 1999.
At the time of the conversion of the preferred shares into common shares, the
common shares were trading on the over the counter market at $5.03 per share.
The preferred A and preferred B shareholders have the privilege of converting
their shares into common stock at an effective investment cost $1.00 per common
share. The resulting conversion transaction resulted in a beneficial conversion
to the shareholders and an imputation of a preferred stock dividend of
$4,901,438 which is the difference of the market trading price per share and the
effective $1.00 per share investor cost times the number of common shares issued
as a result of the conversion.
70
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - SHAREHOLDERS' EQUITY (CONTINUED)
- -----------------------------------------
Preferred Stock (continued)
- ---------------------------
Roth Financial Fitness, Inc. issued preferred shares in 1992 with the right to
convert to common shares. At December 31, 1999, all except 10,467 shares of the
preferred shares have been converted by the shareholders.
Common Stock
- ------------
On August 12, 1998, the Company issued 14,162 shares of its restricted common
stock in exchange for equipment. The Board of Directors valued the transaction
at the market value of the stock issued on the date of the transaction of $.85
per share, or $23,013. The Company wrote-down the equipment to its net
realizable value at December 31, 1998, resulting in an impairment loss totaling
$11,018 for the year ended December 31, 1998.
Stock Options
- -------------
On September 1, 1999, the Board of Directors granted 523,000 non-qualified
executive common stock options to one officer in accordance with the terms of
his employment agreement. The options are exercisable at $3.00 per share; none
of the options have been exercised as of December 31, 1999 and will expire on
September 1, 2009.
The Board of Directors adopted a new Qualified Incentive Stock Option Plan on
December 1, 1999. The purpose for the plan is to have the ability to offer stock
incentives to key employees as a reward for past performance and to attract the
best qualified new employees by offering them stock options as a means of
compensation. The Company is authorized to grant a total of 3,500,000 common
shares under this plan of which 104,124 have been granted at December 31, 1999.
The 104,124 share options granted at December 31, 1999 are fully vested and
exercisable by the option holder at $5.62 per share. The options expire on
December 13, 2009. None of the options were exercised as of December 31, 1999.
On September 1, 1999, the Board of Directors granted 523,000 non-qualified
executive stock options to another officer in accordance with the terms of his
employment agreement. The options are exercisable at $3.00 per share and vest at
20% per year on each subsequent anniversary date. The options were valued on the
date of grant at the market value of the common stock on that date. Any expense
resulting form the valuation will be recognized over the vesting period.
On September 25, 1998, the Company granted options for 300,000 shares of its
common stock in exchange for public relations services. The options were fully
vested and exercisable at an average price of $3.39 per share and were to expire
on September 25, 2001, if not exercised. On the grant date, the bid price of the
Company's common stock on the over the counter exchange was $1.37. The Board of
Directors called the options on May 5, 1999, none were exercised and they were
cancelled.
71
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - SHAREHOLDERS' EQUITY (CONTINUED)
- -----------------------------------------
Stock Options (continued)
- -------------------------
On March 4, 1998, the Board of Directors granted nonqualified executive stock
options to purchase 1,000,000 shares of its common stock to two senior officers
in accordance with the terms of their employment agreements. The options are
vested and exercisable at $5.50 per share. None of the options were exercised as
of December 31, 1999 and will expire on March 4, 2004, if not exercised.
Management determined the fair value of the Company's common stock based on the
offer price of a common stock offering on the grant date. The options were
granted at 110% of the $5.00 offering price, or $5.50 per share. In accordance
with APB 25, no compensation expense related to the options was recognized in
1998.
The Company has a qualified stock option plan that provides for the granting of
stock options to all employees. The Company is authorized to grant 3,500,000
common shares under the plan, of which 212,500 have been granted in 1998 and an
additional 105,000 shares in 1999. All options are fully vested on the date
granted and are priced at or above the current over the counter share trading
price. All options granted during 1999 and 1998 were exercisable, at a weighted
average price of $3.04 per share; however, none of the options were exercised at
December 31, 1999. The options expire on December 16, 2001.
72
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - SHAREHOLDERS' EQUITY (CONTINUED)
- -----------------------------------------
Stock Options (continued)
- -------------------------
Weighted
Weighted Average
Incentive Executive Options Issued Average Weighted Exercise Price
Stock Employment Not Related Exercise Average Fair Currently - Currently
Options Options to a Plan Price Value Exercisable Exercisable
--------- ------------ ------------ --------- ---------- ------------ - ------------
Outstanding December 31, 1997 - - - $ - - $ -
------------ ----------
Options and warrants granted 212,500 1,000,000 300,000 4.64 1.58
--------- ------------ ------------ --------- ---------
Outstanding December 31, 1998 212,500 1,000,000 300,000 4.64 1,512,500 4.64
------------ -----------
Options cancelled - - (300,000) (3.00)
Options granted 209,124 1,023,000 - 3.38 2.77
--------- ------------ ------------ --------- ---------
Outstanding December 31, 1999 421,624 2,023,000 - $ 4.20 1,921,624 $ 4.53
========= ============ ============ ========= ============ ===========
All options in 1999 and 1998 were granted above their fair value.
December 31, 1999
--------------------------------------------------------------------------
Options Outstanding Options Exercisable
--------------------------------------------- --------------------------
Weighted Weighted Average Weighted
Average Remaining Average
Number Exercise Contractual Number Exercise
Range of Exercisable Price Outstanding Price Life Exercisable Price
----------- ---------- ---------- ------------- --------
$2.88 - $3.00 1,260,500 $ 2.98 6.25 737,500 $ 2.96
$5.44 - $5.62 1,184,124 5.51 7.96 1,184,124 5.51
----------- ---------- ---------- ------------- --------
2,444,624 4.2 7.08 1,921,624 4.53
=========== ========== ========== ============= ========
73
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - SHAREHOLDERS' EQUITY (CONTINUED)
- -----------------------------------------
Stock Options (continued)
- -------------------------
The Company continues to account for stock-based compensation using the
intrinsic value method prescribed by APB 25, under which no compensation cost
for stock options is recognized for stock option awards granted at or above the
fair market value. Had compensation expense for the Company's stock option plan,
executive employment options and options under the public relations agreement
been determined based upon fair values at the respective grant dates in
accordance with SFAS 123, the Company's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below. The pro forma
effects of SFAS 123 are not indicative of future amounts. Additional stock
options awards are anticipated in future years.
For the Year Ended
December 31,
------------------------------------
1999 1998
---------------- -----------------
Net losses
As reported $ (1,588,355) $ (1,513,197)
Increased loss due to
Employee stock option plan (834,656) (266,688)
Executive employment options (2,578,743) (2,054,000)
Public relations agreement options - (66,550)
--------------- ----------------
Pro forma $ (5,001,754) $ (3,900,435)
=============== ================
Loss per common share
As reported $ (0.13) $ (0.13)
Pro forma $ (0.40) $ (0.35)
The weighted average fair value of options granted during 1999 and 1998
estimated on the date of grant using the Black- Scholes option-pricing model was
$2.77 and $1.58, respectively. The fair value of the options granted is
estimated on the date of grant using the following assumptions: dividend yield
of zero, expected volatility of 97.16 (1999) and 60.47 (1998) percent, risk-free
interest rate of 6.623 (1999) and 4.525 (1998) percent, and an expected life of
three years.
NOTE 7 - STOCK BASED COMPENSATION
- ---------------------------------
During 1999, the Company issued 336,350 shares of its restricted common stock
for commissions expense related to various preferred stock offerings. The Board
of Directors measured the value of the transaction by equating the commission
obligation to the number of shares required based on the current fair market
value of the common shares on the date of the execution of the selling
agreement, dated October 23, 1998, equal to $.75 per common share. The Company
recorded a beneficial conversion charge equal to $.30 per common share exchanged
as additional offering costs in the accompanying consolidated financial
statements. A total of $252,263 was recorded as stock offering costs.
74
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - STOCK BASED COMPENSATION (CONTINUED)
- ---------------------------------------------
During 1999, the Company issued 25,000 shares of its restricted common stock to
various providers in exchange for their services. Management valued the service
at $62,837, the amount of the total invoices. The resulting expenses are
included in the accompanying consolidated financial statements.
On May 20, 1998, the Company issued 1,106,660 shares of its restricted common
stock to brokers as payment for $117,626 in commissions expense related to a
common stock offering. Management valued the transaction at the fair market
value of the stock on the date of the broker agreement, September 8, 1997, or
$.78 per share. The resulting $864,301 of commission expense is included in the
accompanying consolidated financial statements as stock offering costs.
On October 30, 1998 the Company issued 79,732 shares of its restricted common
stock as payment for $134,484 in advertising and consulting services. Management
valued the transaction at the fair market value of the stock on the date of the
exchange or $59,799. The resulting expense is included in the accompanying
consolidated financial statements.
NOTE 8 - RELATED PARTIES
- ------------------------
As of January 1, 1998, the Company was indebted to an officer for $62,000 in
connection with four promissory notes executed in 1997. In 1998, the Company
borrowed from two officers an additional $35,000 for working capital purposes.
The Company also executed two additional promissory notes to an officer in the
amount of $102,750 for expenses paid on behalf of the Company. During 1999, the
Company borrowed an additional $89,000 from an officer. All notes had an
interest rate of 10% and were due on demand. The Company repaid notes to the
officers of $231,750 in 1999 and $57,000 in 1998. All notes were paid in full as
of December 31, 1999.
On March 2, 1999, the Company borrowed $88,000 from an affiliated party for
working capital purposes. The note had an interest rate of 18% and was due on
demand. The note was paid in full as of December 31, 1999.
During 1999, the Company paid stock offering commissions of $299,919 to a
broker. The broker is an affiliated party by virtue of his relationship to a
member of the Company's board of directors. The broker received 10% commission
on equity funds raised pursuant to a selling agreement signed by the Company. As
of December 31, 1999, the Company owes unpaid commissions of $101,081 to the
broker.
On December 21, 1998, the Company borrowed $150,000 from the family trust of an
officer of the Company. The $150,000 promissory note had an interest of 12
percent per annum and was due on December 21, 1999. On October 4, 1999, the
family trust elected to accept 53,571 shares of common stock, measured at a
market value of $2.80 per share, to satisfy the debt. The note was paid in full
on December 31, 1999.
75
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - RELATED PARTIES (CONTINUED)
- ------------------------------------
Included in the executive employment agreements of two officers is a performance
bonus based on the increase of the trading price per share of the common stock
from trades in December 1998 to trades in December 1999. The bonus was earned
and is equal to 50% of their total compensation for 1999 payable in the first
quarter of 2000. A current liability of $72,000 for related party bonuses is
recorded on the balance sheet at December 31, 1999.
NOTE 9 - INCOME TAXES
- ---------------------
A reconciliation of the U.S. statutory federal income tax rate to the effective
rate follows:
December 31,
-----------------------
1999 1998
--------- ---------
U.S. statutory federal rate 34.00% 34.00%
State income tax rate, net of federal benefit 3.30 3.30
Provision for bad debts - (1.99)
Net operating loss for which no tax benefit
is currently available (37.30) (35.31)
--------- --------
- % - %
========= ========
Deferred taxes consisted of the following:
December 31,
--------------------------------
1999 1998
--------------- --------------
Deferred tax asset, net operating loss carryforward $ 1,452,833 $ 879,697
Valuation allowance (1,452,833) (879,697)
--------------- --------------
Net deferred taxes $ - $ -
=============== ==============
The valuation allowance offsets the deferred tax assets for which there is no
assurance of recovery. The change in the valuation allowance for the years ended
December 31, 1999 and 1998 totaled $573,136 and $534,381, respectively. The net
operating loss carryforwards expire through the year 2019. In addition, the
utilization of the carryforwards may be limited due to certain change in control
events which have occurred in prior periods.
The valuation allowance will be evaluated at the end of each year, considering
positive and negative evidence about whether the deferred tax asset will be
realized. At that time, the allowance will either be increased or reduced;
reduction could result in the complete elimination of the allowance if positive
evidence indicates that the value of the deferred tax assets is no longer
impaired and the allowance is no longer required.
76
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
Office Lease
- ------------
The Company leases office space under a non-cancelable operating lease that
expires on January 31, 2001. Total office rent expense for the years ended
December 31, 1999 and 1998 totaled $61,033 and $36,942, respectively. Future
minimum rental payments under the office lease are as follows:
December 31,
2000 $ 83,404
2001 7,030
--------------
$ 90,434
==============
Officer Employment Agreement
- ----------------------------
As part of their executive employment agreements, two executive officers were
granted options to purchase 500,000 shares each of the Company's common stock on
September 1, 1999. These options were granted at the current fair market value
of the common stock and will expire on September 1, 2004. These options will
become vested 20% per year on the anniversary date of the grant. The options are
exercisable at $3.00 per share.
As part of their executive employment agreements, two senior officers shall
become fully vested to receive options to purchase 500,000 shares each of the
Company's common stock if the following corporate goals are achieved:
1. If the Company's consolidated gross revenues exceed $3,000,000
by December 31, 1999, the executives vest in 35 percent of the
options;
2. If the Company's consolidated gross revenues exceed $6,000,000
by December 31, 2000, the executives vest in an additional 35
percent of the options;
3. If the Company's consolidated gross revenues exceed $9,000,000
by December 31, 2001, the executives vest in the remaining 30
percent of the options:
These options will be valued at the market value of the common stock on the date
the contingency of the corporate goal is achieved, thus allowing the options to
vest.
The options are exercisable at $.0001 per share and expire on March 4, 2009.
None of the options have been exercised at December 31, 1999.
77
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
- ---------------------------------------------------
Manufacturing Agreement
- -----------------------
In December 1999, the Company entered into an exclusive manufacturing agreement
with Saturn Electronics and Engineering, Inc. ("Saturn") for the production of
the power supply products developed by the Company. Under the terms of the
agreement, Saturn will finance the costs of start-up and production of the
products with the Company's customer purchase orders and accounts receivable as
security.
NOTE 11 - LITIGATION AND SETTLEMENTS
- ------------------------------------
Since 1996, the Company has been defending a lawsuit by Fox Sports, Inc. which
is pending in California Superior court. Fox seeks damages for alleged breach of
a contract to distribute film; dispute arose out of arrangements discussed
between the Company and Fox to distribute video film products when the Company
was involved in the entertainment business in 1996. A trial date has been set
for May 8, 2000. Subsequent to December 31, 1999, the matter has been settled in
principle, subject merely to documentation of the settlement. As part of the
settlement, the Company shall pay Fox $28,000. This amount is recorded in other
liabilities as of December 31, 1999. If for some reason the settlement is not
completed, the Company will continue to vigorously defend itself in this matter.
During the year ended December 31, 1998, the Company signed a settlement
agreement in a lawsuit related to the Chapter 7 bankruptcy of Max Music, Inc.,
whereby the Company agreed to pay $150,000. The Company made the $150,000
payment on December 21, 1998, with proceeds from the $150,000 promissory note
from the family trust of the Company's President (Note 8). However, in April
1999, the trustee filed an action in United States District Court (Denver,
Colorado) seeking enforcement (through garnishment proceeding) against the
Company of a judgment obtained by the trustee against a former officer and
director of the Company (who resigned in February 1996) for the same amount
originally sought less the $150,000 paid in December 1998. The Company is
contesting the trustee's claim citing the earlier settlement as full
satisfaction and will resist all attempts to collect the balance. The ultimate
potential liability is between $400,000 and $500,000; however, legal counsel and
management believe that the Company will prevail in this matter and the
likelihood of owing any additional money is extremely unlikely.
During the year ended December 31, 1998, the Company settled a lawsuit related
to an account payable owed to a trade vendor, whereby the Company agreed to pay
$15,000. The Company paid $5,000 on December 1, 1998 with the remaining $10,000
during 1999.
Subsequent to December 31, 1998, the Company settled a third lawsuit for
$25,000, and the balance was paid in full as of December 31, 1999.
78
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - LITIGATION AND SETTLEMENTS (CONTINUED)
- ------------------------------------------------
The total losses from various litigation settlements totaled $28,000 (1999) and
$190,000 (1998) and are included as losses on litigation settlements in the
accompanying consolidated statements of operations.
Glitch Master Marketing, Inc. ("GMM") and the Company's Chief Executive Officer
("CEO") have been named as defendants in a lawsuit in which the plaintiff was
claiming the sum of $96,000. The debt was a personal obligation of the CEO. The
CEO obligated GMM as a guarantor of the note. The lawsuit was settled on April
22, 1999 for $98,170, and the Company did not incur any of the financial
liability.
On December 2, 1998, the Company was awarded a judgment in the amount of $62,889
against a customer of Glitch Master Marketing, Inc. An allowance of 100 percent
of the receivable of $62,889 as of December 31, 1998 and 1999 has been recorded
due to the uncertainty of collection.
The Company is involved in other various claims and lawsuits arising in the
normal course of business. Management believes that any financial responsibility
that may be incurred in settlement of such claims and lawsuits would not be
material to the Company's financial position.
NOTE 12 - PRIVATE OFFERINGS
- ---------------------------
Common Stock
- ------------
The Company circulated three separate private offering memorandums relating to
the private offering of shares of the $.0001 par value common stock of the
Company during 1999 and 1998. The securities have not been registered pursuant
to this Securities Act of 1933, as amended (the "Act"), nor have they been
registered under the securities act of any state. These securities were offered
under an exemption from registration requirements of the Act and exemptions from
registration provided by applicable state securities laws. The securities
dealers were paid a commission up to ten percent of the subscriptions accepted
by the Company. Offering commissions were paid through a combination of cash and
the issuance of restricted common stock. The officers and directors of the
Company did not receive any commissions for the sales of stock or compensation
for services from these offerings. As a result of potential violations of the
exemption provisions of the regulations of the Act, the Company is offering to
rescind 26,883 shares of common stock investments totaling $134,413 plus
interest. A rescission liability has been recorded on the balance sheet at
December 31, 1999 accordingly (Note 5).
79
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - PRIVATE OFFERINGS (CONTINUED)
Following is a summary of the offerings undertaken in 1999 and 1998.
Offering #1 Offering #2 Offering #3
----------- ----------- -----------
Date: September 11, 1997 June 17, 1999 November 12, 1999
Offering: $5.00/share $2.00/share $2.00/share
Minimum: $ 25,000 $ 500,000 $ -
Maximum: $ 1,000,000 $ 5,000,000 $ -
Offering #1 Offering #2 Offering #3
----------- ----------- -----------
Sold in 1997
Shares 36,672 - -
Proceeds $ 183,361 $ - $ -
Sold in 1998
Shares 99,260 - -
Proceeds $ 496,300 $ - $ -
Sold in 1999
Shares - 2,473,533 748,571
Proceeds $ - $ 4,947,066 $ 1,497,142
Preferred Stock
- ---------------
The Company circulated two separate private offering memorandums relating to the
private offering of shares of the Series A and B $.0001 par value, $2.00 stated
value, cumulative, convertible preferred stock of the Company during 1998. The
securities have not been registered pursuant to the Securities Act of 1933, as
amended (the "Act"), nor have they been registered under the securities act of
any state. These securities were offered pursuant to an exemption from
registration requirements of the Act and exemptions from registration provided
by applicable state securities laws. The securities were offered on a "best
efforts" basis through securities dealers and others who may lawfully offer and
sell securities. The securities dealers were paid a commission up to ten percent
of the subscriptions accepted by the Company. Offering commissions were paid
through a combination of cash and the issuance of common stock. Management of
the Company did not receive any commissions or compensation for offering or
selling the securities.
80
ONLINE POWER SUPPLY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - PRIVATE OFFERINGS (CONTINUED)
- ---------------------------------------
Preferred Stock (continued)
- ---------------------------
Following is a summary of the offerings conducted in 1999 and 1998:
Offering #1 Offering #2
Series B Series A
-------- --------
Date October 12, November 19,
1998 1998
Offer $2.00/share $2.00/share
Sold in 1998
Shares 169,950 105,400
Proceeds $339,900 $210,800
Sold in 1999
Shares 272,750 25,600
Proceeds $545,500 $ 51,200
NOTE 13 - GOING CONCERN
- -----------------------
The Company has suffered recurring losses from operations since inception and at
December 31, 1998 had a working capital deficit. These conditions raised
substantial doubt about the Company's ability to continue as a going concern in
1999. However, the Company has successfully raised equity capital during 1999 to
enable to the Company to sustain the operations through the year 2000. The
Company's ability to continue as a going concern in 1999 has improved since
1998. The financial statements, therefore, do not include any adjustments that
might result from the outcome of this uncertainty. The 1999 audit report dated
January 31, 2000 does not contain a going concern emphasis.
81
TABLE OF CONTENTS
Page
----
Prospectus Summary........................................................7
Summary of Rescission Offer...............................................8
Summary of Financial Information..........................................9
Price Range of Common Stock and Related Stockholder Matters..............10
The Rescission Offer.....................................................11
Risk Factors.............................................................19
Management's Discussion and Analysis.....................................26
Business of OnLine.......................................................29
Securities Ownership of Certain Owners and Management....................42
Management...............................................................43
Description of Securities................................................49
Litigation...............................................................51
Legal Matters............................................................52
Experts..................................................................52
Where You Can Find More Information......................................53
Index to Financial Statements............................................54
82
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation (the "Articles") provides that a director
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except, (I) for any breach
of the duty of loyalty; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or knowing violations of laws; (iii) for
liability under the Nevada Corporation Act (the "Nevada Act") (for actions
relating to certain unlawful dividends, stock repurchases or redemptions); or
(iv) for any transaction from which the director derived an improper personal
benefit. The Articles provides that the Company shall indemnify each director
and the officers, employees and agents to the fullest extent provided by the
Nevada Act.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated expenses in connection with the issuance and distribution of
the securities being registered:
Securities and Exchange Commission registration fee......................1,750
National Association of Securities Dealers, Inc. examination fee...........n/a
Accounting ..............................................................2,000
Legal fees and expenses.................................................30,000
Printing ................................................................. 300
Blue Sky fees and expenses (excluding legal fees)........................5,000
Transfer agent ..........................................................1,000
Escrow agent.............................................................. n/a
Miscellaneous............................................................9,950
Total..................................................................$50,000
The Registrant will pay all of these expenses.
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ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. In the 36 months ending
December 31, 1999, the registrant has sold the following unregistered
securities:
A. 1997.
(1) For cash: 1,091,051 common shares for $1,028,044:
4/97-7/97
941,718 restricted shares at $1.00
in rule 504 offerings to
approximately 61 investors (40
accredited, 21 nonaccredited). Issue
was self-underwritten by management
of issuer for part of the shares and
placed by Northstar Securities, Inc.
for the balance. Investors received
disclosure documents including
audited financial information.
149,333 restricted shares at $.44 in
section 4(2) transactions to 4
investors (2 accredited, 2
nonaccredited). No commission paid.
(2) For Services: 5,124 restricted common shares at
6/97 $3.00 for $15,373 of services from a
nonaffiliate vendor, in section 4(2)
transaction. Vendor received
information about the issuer. No
commission paid.
(3) To pay debt: 303,000 restricted common shares and
8/97 125,000 restricted shares of series
B preferred stock at $.034 to pay
off $145,520 of debt plus interest
to nonaffiliates in section 4(2)
transaction. The nonaffiliate
received information about the
issuer, including audited financial
information. No commission paid.
(4) To acquire
company: 1,024,318 restricted common shares
12/97 at $.27 to acquire 100% of the stock
of Renaissance Systems, Inc. from 5
nonaccredited investors in section
4(2) transaction. RSI shareholders
received disclosure documents from
the issuer, including audited
financial information. No commission
paid.
(5) To convert
preferred: 19,000 restricted common shares at
12/97 $1.00 to convert undesignated pre-
stock held by an accredited
investor. No section 2(a)(3) sale
event was involved under 1933 Act
because no added consideration paid.
(6) For cash: 125,000 shares of restricted series
12/97 B preferred stock at $2.00 to 1
accredited investor in a negotiated
transaction. There was an exemption
from section 5 registration for
these offers and sales under section
4(2) and also section 4(6). No
commission paid.
84
B. 1998.
B. 1998.
(1) For cash: 284,687 restricted common shares for $571,744:
9/97-3/98
99,260 restricted shares at $5.00.
Of these shares, 72,337 were sold in
a rule 504 offering to approximately
193 investors (19 accredited and 132
nonaccredited). The offer and sale
of these shares was exempt under
rule 504. The balance of 26,883
shares (which then were believed to
have been part of the same offering)
were sold to investors (including 40
nonaccredited investors). All of the
investors for these 284,687 total
common shares received disclosure
documents including audited
financial statements. Under the "how
to count" provisions of rule
504(b)(2), the offer and sale of the
26,800 shares (for $134,415) in 3/98
may not have been exempt under rule
504 from registration under section
5 of the 1933 Act, and there may not
be any other registration exemption
available for these transactions.
Therefore, these 26,800 common
shares are part of the rescission
shares to which this registration
statement relates.
(2) For services: A significant amount of the common
10/98 shares covered by above paragraph
B(1), as well as the preferred
shares covered by paragraph B(5),
were placed by Northstar Securities,
Inc., a registered broker-dealer.
Northstar received 1,106,660 shares
of restricted common stock at $.11
to pay its commissions on the common
and preferred stock placed by it.
These shares were issued to the
broker-dealer or persons associated
therewith, in reliance on the
section 4(2) exemption from
registration under section 5 of the
1933 Act; the total number of such
associated persons was less than 8.
(3) For services: 79,732 restricted common shares at
10/98 $1.69 for $134,484 of services from
nonaffiliated vendors, in section
4(2) transactions. The vendors
received information about the
issuer. No commissions were paid.
(4) To convert
preferred: 14,000 restricted common shares at
11/98 $1.00 to convert undesignated
preferred stock held by an
accredited investor. No "sale" was
involved under 1933 Act and rule
144, because no added consideration
paid and therefore no sale event
under section 2(a)(3) of the Act.
85
(5) For
equipment: 14,162 restricted common shares at
12/98 $.85 to buy office equipment, in
a section 4(2) transaction. The
vendor received information about
the issuer including audited
financial information.
(6) For cash: 275,350 shares of restricted
10/98-12/98 preferred stock (105,400 series A
and 169,950 series B) at $2.00 to 33
accredited investors and 24
nonaccredited investors. There may
not have been an exemption from
section 5 registration for these
offers and sales. Therefore, the
shares of common stock into which
these preferred shares were
converted are part of the rescission
shares to which this registration
statement relates.
C. 1999.
(1) For cash: 298,350 shares of restricted
1/99-6/99 preferred stock (25,600 series A and
272,750 series B) at $2.00 to
accredited and 45 nonaccredited
investors. There may not have been
an exemption from section 5
registration for these offers and
sales. Therefore, the shares of
common stock into which these
preferred shares were converted are
part of the rescission shares to
which this registration statement
relates.
7/99-11/99 2,500,000 shares of restricted
common stock at $2.00 per share to
54 accredited investors under a
section 4(6) exemption. The majority
of these shares were placed by
Northstar Securities, Inc. for a 10%
commission. The remainder was placed
by officers of the issuer without
commission.
(2) For services: 336,350 shares of restricted common
8/99 stock to Northstar Securities, Inc.
at $.45 to pay its commissions on
the series A and series B preferred
stock and common stock placed by it
in 1999. These shares were issued to
the broker-dealer or persons
associated therewith, in reliance on
the section 4(2) exemption from
registration under section 5 of the
1933 Act; the total number of such
associated persons was less than 10.
(3) For services: 25,000 shares of restricted common
7/99 stock at $2.51 per share to an
attorney for legal services related
to litigation in which issuer was
involved. Information about the
issuer including audited financial
information was provided to the
attorney. This transaction is
believed to have been exempt under
section 4(2).
86
(4) For dividend
on preferred: A total of 34,434 shares of series A
12/99 and series B preferred, as 6% annual
dividend. No "sale" was involved
under 1933 Act and rule 144, because
no added consideration paid.
(5) For conversion
of undesignated
preferred: 250,000 shares of restricted common
12/99 stock to the holder of undesignated
preferred stock. No "sale" was
involved under 1933 Act and rule
144, because no added consideration
paid.
(6) For conversion
of preferred: A total of 1,216,268 shares of
12/99 restricted common stock to holders
of series A and series B preferred
stock. No offer or sale of
securities was involved because no
additional consideration was
involved and hence there was no sale
event under section 2(a)(3) of the
1933 Act.
(7) For cash: Approximately 722,000 shares of
11/99-12/99 restricted common stock, at $2.00,
to approximately 100 accredited
investors, under a rule 506 offering
only to accredited investors
(nonaccredited persons did not
receive offers). Information about
the issuer including audited
financial information was provided
to the investors. The majority of
the shares were placed by Northstar
Securities, Inc. for a 10%
commission.
(8) To pay debt: 53,571 shares of restricted common
12/99 stock to a trust controlled by a
family member of an officer. The
shares were issued in a section 4(2)
transaction, valued at market at
exchange of debt-for-stock date
equal to $2.80 per share. All
information about the issuer was
provided, including audited
financial information.
No general solicitation or advertising was used in the preceding
transactions, and all investors supplied information which the issuer believed
qualified such investors as sophisticated investors or accredited investors.
Stop transfer instructions were issued for the securities as "restricted" under
rule 144.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
3.1 Articles of Incorporation (1)
3.2 By-Laws (1)
3.3 Certificate of Amendment to Articles of Incorporation (1)
4.1 Preferred Stock Designation - Series A (1)
4.2 Preferred Stock Designation - Series B (1)
5.1 Opinion of Counsel (1)
87
10.1 Agreement with Saturn (1)
10.2 Employment Agreement with Amendments - Larry G. Arnold (1)
10.3 Employment Agreement with Amendments - Kris M. Budinger (1)
10.4 Employment Agreement - Richard L. Millspaugh (1)
10.5 Employment Agreement - Garth Woodland (1)
10.6 Consulting Agreement - Doyle & Associates, Inc. (1)
16.1 Letter from Cordovano & Harvey re change of accounting firms (1)
23.1 New Consent of Cordovano and Harvey P.C. (1)
23.2 Consent of Counsel (1)
23.3 Consent of Ehrhardt Keefe Steiner & Hottman P.C. (1)
27.1 Financial Data Schedule per Item 601(c) of Reg. S-B (1)
99.1 Letter to eligible shareholders re rescission offer (2)
- ----------
(1) Previously filed.
(2) Filed herewith.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933, as amended (the "Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereto) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
88
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, 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 Securities
and Exchange 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 of 1933, as amended, and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, 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.
(2) For the purpose of determining any liability under the Securities
Act of 1933, 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.
89
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all the requirements of filing on this Form SB-2 and authorizes this
Amendment No. 3 to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Englewood, State of
Colorado, on February 22, 2000.
OnLine Power Supply, Inc.
/s/ Larry G. Arnold
------------------------------------
Larry G. Arnold,
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement on Form SB-2 has been signed by the following persons in
the capacities and on the dates stated.
Signature Capacity Date
/s/ Larry G. Arnold Chairman of the Board, 01/22/00
- ----------------------------- Chief Executive Officer
Larry G. Arnold
/s/ Kris M. Budinger Director, President, 01/22/00
- ------------------------------ Secretary
Kris M. Budinger
Thomas Glaza Director
90