UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2000
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to ______.
Commission file number 0-29669
---------
OnLine Power Supply, Inc.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in its charter)
Nevada 84-1176494
- --------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6909 South Holly Circle, #200, Englewood, CO 80112
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number 303.741.5641
--------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the Registrant was required to
filed such reports) YES X, and (2) has been subject to such filing requirements
for the past 90 days. NO X
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan by a court.
Yes_____ No_____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Outstanding on May 15, 2000
- --------------------------------------- -----------------------------------
Common Stock, Par Value $.001. 17,133,500 shares
Transitional Small Business Disclosure Format (Check one): Yes___ No X .
1
CONTENTS
PAGE NO.
--------
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Balance sheets 4-5
Statements of operations 6
Statements of changes in stockholders' deficit 7
Statements of cash flows 8
Notes to financial statements 9-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS 14-16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
2
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Except for the historical information, all of the information which is
contained in this Form 10-QSB 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 Report (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
Report 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.
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,
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.
3
ONLINE POWER SUPPLY, INC.
BALANCE SHEETS
March 31, December 31,
2000 1999
----------- ------------
(unaudited)
ASSETS
Current assets
Cash $ 114,090 $ 1,941,367
Certificates of deposit 4,682,672 3,100,000
Accounts receivable, net of allowance for uncollectible
accounts of $187 (2000) and $364 (1999) 6,504 6,048
Accrued Interest Receivable 43,013 --
Inventory, at cost 63,860 66,713
Prepaid expenses 88,855 2,780
-------------- --------------
Total current assets 4,998,994 5,116,908
-------------- --------------
Property and equipment, less accumulated depreciation
of $81,664 (2000) and $66,135 (1999) 287,961 251,114
Equipment under capital leases, less accumulated
depreciation of $9,387 (2000) and $3,771 (1999) 81,570 74,190
Goodwill, less accumulated amortization of $117,807
(2000) and $104,718 (1999) 143,987 157,076
Acquired technology costs, less accumulated amortization
of $57,330 (2000) and $50,960 (1999) 70,070 76,440
Patent, less accumulated amortization
of $1,769 (2000) and $492 (1999) 23,762 25,039
Other assets 1,512 1,512
-------------- --------------
Total assets $ 5,607,856 $ 5,702,279
============== ==============
See notes to financial statements.
4
ONLINE POWER SUPPLY, INC.
BALANCE SHEETS
March 31, December 31,
2000 1999
--------------- --------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 150,329 $ 245,772
Accounts payable, related parties 78,815 101,081
Bank line-of-credit 585,000 731
Notes payable, current maturity 16,100 --
Current maturities on capital lease obligations 25,495 20,017
Accrued interest payable 19,063 26,012
Bonuses payable, related parties -- 72,000
Retirement liability, related parties, current maturity 162,000 --
Other 65,942 100,772
--------------- --------------
Total current liabilities 1,102,744 566,385
Long-term liabilities
Capital lease obligations, less current maturities 50,337 48,583
Notes payable, less current maturity 40,993 --
Retirement liability, less current maturity 67,500 --
--------------- --------------
Total liabilities 1,261,574 614,968
--------------- --------------
Liability for common stock subject to rescission, 0 (2000)
and 1,243,151 shares (1999) -- 1,281,815
--------------- --------------
Commitments and contingencies
Shareholders' equity
Preferred stock, $.0001 par value; 1,000,000 shares
authorized; 3,600 (2000) and 10,467 (1999) shares
issued and outstanding 0 1
Common stock; $.0001 par value; 50,000,000 shares
authorized; 17,029,495 (2000) and 16,954,119 (1999)
shares issued and outstanding (including rescission shares) 1,703 1,571
Additional paid-in capital 21,254,015 19,914,828
Retained deficit (16,909,436) (16,110,904)
--------------- --------------
Total shareholders' equity 4,346,282 3,805,496
--------------- --------------
Total liabilities and shareholders' equity $ 5,607,856 $ 5,702,279
=============== ==============
See notes to financial statements.
5
ONLINE POWER SUPPLY, INC.
STATEMENTS OF OPERATIONS
For the Three Months Ended
March 31,
---------------------------------
2000 1999
-------------- --------------
(unaudited) (unaudited)
Net sales $ 12,434 $ 71,436
Cost of sales 7,452 49,804
-------------- -------------
Gross profit 4,982 21,632
-------------- -------------
Research and development 261,620 81,622
Selling, general and administrative expenses 624,666 201,430
-------------- -------------
886,286 283,052
-------------- -------------
Loss from operations (881,304) (261,420)
-------------- -------------
Interest income 95,775 --
Interest (expense) (13,003) (9,796)
-------------- -------------
Net loss available to common shareholders $ (798,532) $ (271,216)
============== =============
Basic weighted average common shares 16,353,688 12,069,203
outstanding
Basic loss per common share $ (0.05) $ (0.02)
============== =============
Diluted loss per common share 16,353,688 12,069,203
============== =============
Diluted loss per common share $ (0.05) $ (0.02)
============== =============
See notes to financial statements.
6
ONLINE POWER SUPPLY, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
JANUARY 1, 2000 THROUGH MARCH 31, 2000 (UNAUDITED)
Preferred Stock Common Stock Additional Total
------------------ -------------------- Paid-in Retained Shareholders'
Shares Par Value Shares Par Value Capital (Deficit) Equity
------ --------- ---------- --------- ------------ ------------ -------------
Balance, January 1, 2000 10,467 $ 1 15,710,968 $ 1,571 $ 19,914,828 $(16,110,904) $ 3,805,496
Common stock issued
for sales commission -- -- 36,624 4 73,244 -- 73,248
Conversion of non-cumulative
preferred stock to common stock (6,867) (1) 13,734 1 -- -- --
Stock offering costs -- -- -- -- (65,780) -- (65,780)
Common stock issued in private
placement (Note 12) -- -- 25,018 3 50,032 -- 50,035
Reverse rescission liability (Note 5) -- -- 1,243,151 124 1,281,691 -- 1,281,815
Net loss for the Quarter ended
March 31, 2000 -- -- -- -- -- (798,532) (798,532)
------- -------- ------------ -------- ------------ ------------ ------------
Balance, March 31, 2000 3,600 $ 0 17,029,495 $ 1,703 $ 21,254,015 $(16,909,436) $ 4,346,282
======= ======== ============ ======== ============ ------------ ============
See notes to financial statements.
7
ONLINE POWER SUPPLY, INC.
STATEMENTS OF CASH FLOWS
For the Three Months Ended
March 31,
----------------------------------
2000 1999
--------------- --------------
(unaudited) (unaudited)
Cash flows from operating activities
Net loss $ (798,532) $ (271,216)
-------------- -------------
Adjustments to reconcile net loss to net cash
used by operating activities
Depreciation and amortization 43,075 27,673
Changes in certain assets and liabilities
Receivables, inventory
and other current assets (126,691) (7,672)
Accounts payable and
other current liabilities 79,761 (13,017)
-------------- -------------
(3,855) 6,984
-------------- -------------
Net cash (used in) operating activities (802,387) (264,232)
-------------- -------------
Cash flows from investing activities
Purchases of equipment (36,258) (8,500)
Payments to acquire patent -- (1,080)
Purchases of certificates of deposit (1,582,672) (86,600)
-------------- -------------
Net cash (used in) investing activities (1,618,930) (96,180)
-------------- -------------
Cash flows from financing activities
Proceeds from sale of stock 50,034 84,700
Payments for offering costs (74,280) (2,488)
Principal payments on capital leases (5,763) --
Proceeds from Line of Credit 585,000 24,500
Principal LOC payments (731) (2,644)
Proceeds from debt issuance 42,687 123,000
Principal debt payments (2,907) -
-------------- -------------
Net cash provided by financing activities 594,040 227,068
-------------- -------------
Net decrease in cash (1,827,277) (133,344)
Cash - beginning of period 1,941,367 151,341
-------------- -------------
Cash - end of period $ 114,090 $ 17,997
============== =============
Supplemental disclosure of cash flow information:
Cash paid for interest during three months ended March 31, 2000 and 1999 was
$19,952 and $2,319.
Non-cash investing and financing transactions:
Acquisition of equipment under capital leases for the three months ended
March 31, 2000 and 1999 was $12,995 and $0.
Acquisition of equipment financed with long-term debt totalled $17,313 and $0
for the three months ended March 31, 2000 and 1999, respectively.
See notes to financial statements.
8
ONLINE POWER SUPPLY, INC.
FOOTNOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Basis of Presentation
- ---------------------
The financial statements include the accounts of OnLine Power Supply, Inc.
(formerly OnLine Entertainment, Inc.). Two wholly owned subsidiaries, Glitch
Master Marketing, Inc. and OnLine Power Supply, Inc. (a separate domestic
Colorado corporation) were liquidated into the parent corporation on December
31, 1999 and the remaining assets and liabilities are now included with the
accounts of OnLine Power Supply Inc. (a Nevada domiciled corporation).
Earnings (Loss) Per Common Share
- --------------------------------
SFAS 128 "Earnings per Share" requires a dual presentation of earning 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 all outstanding stock options.
All periods presented have been restated to reflect the adoption of this
standard. At December 31, 1999, March 31, 2000 and 1999, 1,966,568, 2,575,142
and 2,036,367 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(1999), 18,928,830 (1st Qtr 2000) and
14,105,570 (1st Qtr 1999), respectively.
Nature of Organization
- ----------------------
The company has been operating as OnLine Power Supply Inc. since January 1,
2000. The activities include the ongoing development of the company's patent
pending new power supplies for sales to a few, but large, corporations. These
original equipment manufacturers will incorporate our products into their own
product lines. Management is estimating that volume sales will occur during the
fourth quarter of the year 2000.
NOTE 2 - INTERIM FINANCIAL STATEMENTS
-------------------------------------
The financial statements included herein are presented in accordance with the
requirements of SEC Form 10- QSB and therefore do not include all of the
disclosures made in the Company's SEC form 10-KSB annual report filing. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's 1999 annual report filing on SEC
Form 10-KSB. The quarterly financial statements have not been audited by the
company's independent accountants, but in the opinion of management reflect all
adjustments necessary for the fair presentation of the operations of the company
for the periods reported. The results of operations for the three months ended
March 31, 2000 are not necessarily indicative of the results for the entire
year.
NOTE 3 - NOTES PAYABLE & LINE-OF-CREDIT
- ----------------------------------------
Bank Loan
- ---------
The company acquired a $60,000 bank loan during the first quarter of 2000 for
equipment and working capital. The note carries an annual interest rate of 7.3%
and matures in January of 2003.
9
Line-of-Credit
- --------------
The company has a $750,000 revolving bank line-of-credit, of which, $165,000 was
unused as of March 31, 2000. Advances on the line carry an interest rate of 8%.
It is collateralized by the pledging of a $ 1,000,000 certificate of deposit.
NOTE 4 - OTHER LIABILITIES
- --------------------------
As part of their executive employment agreements, two executive officers earned
performance bonuses equivalent to 50% of their annual 1999 compensation. The
bonuses totaling $ 72,000 were accrued at the end of 1999 and paid during the
first quarter, 2000.
NOTE 5 - RESCISSION OFFER
- -------------------------
The company gave certain common shareholders the right to rescind their
purchases due to the possible violation of the registration exemption provisions
of the Securities Act of 1933. A total potential rescission liability of
$1,281,813 was included in the December 31, 1999 financial statements; however,
none of the shareholders have requested a refund of their investments and the
response period has terminated. The liability for the rescission at March 31,
2000 has been reduced to zero and the liability reclassified as common stock
equity on the balance sheet.
NOTE 6 - SHAREHOLDERS' EQUITY
- ------------------------------
Non-Qualified Stock Options
- ---------------------------
A senior executive, with an employment agreement, retired on March 1, 2000 and,
by the terms of the agreement, will continue to receive stock option benefits
for a period of 18 months from his separation date. These benefits include the
performance option provisions that would result in the executive receiving
vested common stock options during the years ended 2000 and 2001 if certain
provisions for vesting are achieved.
On January 1, 2000, the board of directors granted 100,000 non-qualified
executive common stock options to one officer in accordance with the terms of
his employment agreement. The options are exercisable at $5.625 per share and
will vest over five years; none of the options have been exercised as of March
31, 2000 and will expire on December 2, 2009.
On September 1, 1999, the board of directors granted 500,000 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 and
vest over five years; none of the options have been exercised as of March 31,
2000 and will expire on September 1, 2009. The employment agreement was signed
in February of 2000.
On September 1, 1999, the board of directors granted 1,023,000 non-qualified
executive common stock options to one officer in accordance with the terms of
his employment agreement. 523,000 options are immediately vested and the rest of
500,000 shares will vest over five years. The options are exercisable at $3.00
per share; none of the options have been exercised as of March 31, 2000 and will
expire on September 1, 2009.
Qualified Stock Options
- -----------------------
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
10
compensation. The company is authorized to grant a total of 3,500,000 common
shares under this plan of which 209,124 and 11,362 were granted in 1999 and
during the three months ended March 31, 2000. These options are fully vested on
the date granted and are priced at or above the current over the counter share
trading price. They have a term of 10 years. None of the options were exercised
as of March 31, 2000.
The status of the Company's stock-option plan and executive employment options
is summarized as follows:
Weighted
Number Average
of Shares Exercise Price
--------- --------------
Outstanding at December 31, 1999 2,444,624 4.14
Granted in 2000 611,362 3.48
Canceled in 2000 0 0
-------------- ------
Outstanding at March 31, 2000 3,055,986 4.01
============== ======
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
and the executive employment options been determined based upon fair values at
the respective grant dates in accordance with SFAS 123, the company' net
earnings and earnings per share would have been reduced to the pro forma amounts
indicated below. The pro forma effects indicated below. The pro forma effects of
SFAS 123 are not indicative of future amount. Additional stock options awards
are anticipated in future years.
Net losses
As reported $ (798,532) $ (271,216)
Employee stock option plan (1,879,962) --
Executive employment options (58,254) --
-------------- ------------
Pro forma $ (2,736,748) $ (271,216)
============== ============
Loss per common share
As reported $ (0.05) $ (0.02)
Pro forma $ (0.17) $ (0.02)
The weighted average fair value of options granted during 2000 estimated on the
date of grant using the Black- Scholes option-pricing model was $3.17. 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
percent, risk-free interest rate of 6.65 percent, and an expected life of three
to ten years.
NOTE 7 - STOCK BASED COMPENSATION
- ----------------------------------
During the current quarter, the company issued 36,624 restricted common shares
to a broker for stock sales commissions related to prior private offerings. The
board of directors valued the issuance at the same price as the private offering
price. A total of $73,244 was recorded as offering expense in the financial
statements.
11
NOTE 8 - RELATED PARTIES
- ------------------------
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 March 31, 2000, the company owes unpaid commissions of $78,815 to the broker.
Retirement Liability
- --------------------
A senior executive, with an employment agreement, retired on March 1, 2000, and
by the terms of the agreement, will continue to receive salary and all other
benefits for a period of 18 months from his separation date. A liability of
$229,500 has been accrued for his future payments as of March 31, 2000. The
separation expense of $243,962 is included in the first quarter of 2000 and will
be a non-recurring expense.
NOTE 9 - INCOME TAXES
- ----------------------
A reconciliation of the US statutory federal income tax rate to the effective
rate follows:
March 31,
--------------------------------
2000 1999
----------- -----------
(unaudited) (unaudited)
----------- -----------
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 (0) (0)
Net operating loss for which no tax benefit
is currently available (37.3) (37.3)
------
- % - %
====== ======
Deferred taxes consisted of the following:
March 31
-------------------------------------
2000 1999
--------------- ----------------
(unaudited) (unaudited)
--------------- ----------------
Deferred tax asset, net operating loss $ 1,748,290 $ 980,047
carryforward
Valuation allowance (1,748,290) (980,047)
---------------- ---------------
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 quarters
ended March 31, 2000 and 1999 totaled $295,457 and $100,350 respectively. The
net operating loss carry-forwards expire through the year 2019.
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
12
decreased; 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.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
Manufacturing Agreement
- -----------------------
The company has entered into an agreement with Saturn Electronics and
Engineering Inc. for the manufacture of the initial power supplies developed by
the company. Saturn may, if asked by the company, internally finance certain
startup costs normally associated with the initial production process and be
reimbursed out of the proceeds of payment for the orders when received by the
company.
NOTE 11 - PRIVATE OFFERINGS
- ----------------------------
Common Stock
- ------------
In the last two quarters of fiscal 1999, the company circulated two separate
private offering memorandums of private stock. In the first quarter of 2000, the
company circulated a separate (SEC registered) rescission offering prospectus
relating to three earlier private offerings of common and preferred shares in
1998 and 1999. The rescission offer related to common stock, as all the
privately sold preferred stock had been converted to common stock in December
1999. The private offering in the last two quarters of 1999 were not registered
pursuant to the Securities Act of 1933, as amended (the "Act"), nor registered
under the securities act of any state. The securities dealers for all the
private offerings had been 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.
In the first quarter of 2000, we recorded $50,032 for stock which had been
subscribed for in the last two quarters of 1999 but not accepted until the first
quarter of 2000.
Following is a summary of the offerings undertaken in 1999:
Offering #1 Offering #2
----------- -----------
Date: Third Qtr. 1999 Fourth Qtr. 1999
Offering: $2.00/share $2.00/share
Minimum: $ 500,000 $ --
Maximum: $ 5,000,000 $ 2,500,000
Sold in 1999
Shares 2,473,533 748,571
Proceeds $ 4,947,066 $ 1,497,142
Sold in 2000
Shares 25,018
Proceeds $ 50,033
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the reviewed
quarterly financial statements filed with this report.
NATURE OF THE BUSINESS. 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.
RESULTS OF OPERATIONS. The operating nature of the company has changed
considerably from the first quarter 1999 compared to the current quarter ended
March 31, 2000. The operating focus during 1999 was on developing the
GlitchMaster product lines, but that line of business and effort was terminated
at December 31, 1999. The company is now re-focused on developing their newly
discovered (patent pending) power supply technology. The prototypes of the new
power supplies were introduced to the design engineers of numerous large
manufacturers in late 1998. From introduction until now, the company filed its
patent application in late 1999, received an initial UL approval and continues
to improve the performance characteristics of the initial product based on the
suggestions and criteria of potential customers and the power industry. The
upgraded and improved version of the power factor correction module just
recently received UL approval for operation at 85 degrees C baseplate as
required for one of our potential large customers. Final commercialized products
are anticipated in the next quarter followed by orders for product that could
lead to shipments in the fourth quarter, 2000. Until then the company has
operating losses ( and expects further losses for several months) due to the
costs of establishing the organizational structure and completing the in-house
research and development laboratory facility.
Revenues for the quarter consisted of the balance of the deliveries of
GlitchMaster custom power supply circuitry previously ordered by a few
customers. There have been no sales of the power factor modules or other power
supplies as a result of the new technology because it is still under
development. Interest income of $ 95,775 from $ 4,650,000 of Certificates of
Deposits is the only significant non-operating revenue for the company this
quarter. The funds invested are the results of several private placement
offerings for stock that were completed during 1999.
14
General and administrative expenses for the two quarters 2000 and 1999
included officers' salaries: $96,705 and $ 39,426; administrative salaries
$44,139 and $ 29,683; sales salaries $25,047 and $15,528; research and
development salaries $ 157,865 and $ 58,244. A non-recurring expense was
recorded during the March 31, 2000 quarter , totaling $ 243,337, and was the
result of recording the retirement benefits that will be paid over the next 17
months to a retiring executive pursuant to his written employment agreement.
Research and development costs, including all direct and indirect costs of
salaries, materials, subcontracts and overhead, totaled $ 261,620 during the
current quarter and was necessary to continue the development of the products.
The comparable costs for the March 31, 1999 quarter were less than $ 81,622 and
consisted mostly of salaries for technicians.
Losses from business development were $798,532 in 2000 compared to losses
as a result of product development of $ 271,216 in 1999. Among the principal
items causing the increased losses from 1999 to 2000 were increased expenses for
laboratory personnel and equipment, management and administrative salaries, the
cost of the retirement of a senior executive and related office expenses. In
2000 we have been fully developing the corporate infrastructure needed to become
a large volume maker of power supply systems.
We issued stock in exchange for services. In 2000, we recorded an expense
(offering costs that offset equity capital on the balance sheet) of $ 73,244 for
stock sales commissions in exchange for restricted common shares valued for the
transaction at the underlying placement selling price of $ 2.00 per share. We
may be issuing more stock for commissions to the brokerage firms that placed the
offerings for us.
The legal and accounting expenses of $ 31,724 in 1999 were related
primarily to litigation costs resulting from claims of a prior line of business,
which should decrease significantly after 2000. However, legal and accounting
expenses of $ 67,321 in 2000, primarily associated with becoming registered with
the Commission under the Securities Exchange Act of 1934, will offset expected
savings of legal costs in the litigation area to some extent.
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 product development to be
completed or 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 sales orders are signed and
sufficiently performed to be profitable. At the present time there are no signed
orders in hand.
Administrative and development costs and other expenses will increase in
2000 as additional staff is hired and we expand our facilities. Research and
development costs will probably continue to increase as a result of the
acceleration of the program for releasing new products.
LIQUIDITY AND CAPITAL RESOURCES. Additional working capital was obtained by
private equity offerings in 1999 resulting in cash and certificates of deposit
totaling $4,796,672 and $5,041,367 at March 31, 2000 and December 31, 1999
respectively. Proceeds from these equity financings will allow us to meet our
obligations in a timely manner in 2000, as our working capital at March 31, 2000
was $ 3,896,249.
We do not foresee the need for additional financing in 2000 at this time
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. By contracting with Saturn Electronics and
Engineering, Inc. to manufacture our products for us on a "turn-key" basis,
there should not be a greater than anticipated need for additional financing.
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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 second quarter of 2000.
Additional testing and refinement of the products will be completed in 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 because we
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. We could have as many as 30 employees in 2000.
More products are planned, 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Since 1996 we have been defending a lawsuit filed by Fox Sports, Inc.
(which is pending in California Superior Court (file number BC20946)). Fox
sought approximately $150,000 in damages for alleged breach of a contract by us
to distribute films. The dispute arose out of the arrangements between OnLine
Entertainment Inc. and Fox to distribute video film products when we were
involved in the entertainment business in 1996. In January, 2000, the parties
negotiated a settlement of this matter whereby OnLine paid $28,000 as full and
final satisfaction of the claims made in the lawsuit; the attorneys are now
executing the necessary agreements to withdraw the court filings and provide us
with a satisfactory release of liability.
As previously reported in our last 10-KSB Report, litigation continues with
respect to certain Bankruptcy Court proceedings. There has been no change in
this matter since our last 10-KSB Report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description Page No.
----------- ----------- --------
27.0 Financial Data Schedule 17
(b) Reports on Form 8-K.
We filed three reports on Form 8-K during the quarter ended March 31, 2000
reporting events of February 28, 2000, February 29, 2000 and March 17, 2000.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ONLINE POWER SUPPLY, INC.
(Registrant)
Date: May 15, 2000 By: /s/ Kris M. Budinger
--------------------------------
Kris M. Budinger, President
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