As filed with the Securities and Exchange Commission on December 14, 1999
Registration No. 333-93341
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
PRE-EFFECTIVE AM. NO. 1
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) dentification 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. [ ]
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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
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
Common Stock 1,259,947 $5.00 $6,299,735 $1,750.00
Shares
Total Fee $1,750.00
</TABLE>
(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.
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 be come 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.
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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
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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 NOT APPLICABLE
Accountants on Accounting and
Financial Disclosure
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ONLINE POWER SUPPLY, INC. SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
DATED JANUARY 5, 2000
RESCISSION OFFER TO PAY $1,436,280 CASH FOR 1,259,947 SHARES OF COMMON STOCK
OnLine Power Supply, Inc. (the "Company") may have violated the
Securities Act of 1933 (the "1933 Act") and the securities laws of some states
(the "state laws"), when the Company sold securities in 1998 and 1999. To
eliminate the uncertainty involving these possible violations, we are now
offering to buy from you, for cash, the shares of common stock held by the
former holders of the series A and series B preferred stock who invested cash in
the Company in 1998 and 1999 (these shares were converted to common stock in
December 1999), and the shares of common stock held by those persons who
invested cash in the Company in early 1998. In this prospectus, all of these
shares of common stock which we offer to buy are referred to as the "rescission
shares." This offer is open to the holders of record of the rescission shares as
of the date of this original prospectus (January __, 2000, referred to as the
"record date"), and to those persons who owned rescission shares but who have
sold or otherwise disposed of their original shares before the record date,
subject to state laws. However, because of certain state laws, we may not be
able to make this offer to all eligible shareholders. In this prospectus, "you"
means the shareholders who are eligible for this offer and to whom this offer
can be made under state laws. This offer is not open to any other shareholder of
the Company. See "The Rescission Offer."
Subject to the terms and conditions stated in this prospectus, and in
the letter of transmittal which is included in this prospectus, you have the
right to a refund in cash of what you originally paid for your rescission
shares, plus interest at the rate you are entitled to receive under state laws.
If you no longer own all your 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. 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, plus interest, your decision will be irrevocable and
cannot be withdrawn.
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. This purchase offer will not be made
again. Your shares will be continue to be "restricted securities" under the 1933
Act and SEC rule 144. An investment in the Company is subject to significant
risks. Please read the "Risk Factors" in this prospectus carefully before making
your decision. No commissions will be paid to anyone in connection with this
offer. This offer is made by the officers and directors of your Company. None of
the officers or directors, or any owner of 5% of more of the common stock, own
any rescission shares, and therefore none of them will participate in this
offer. do
Our common stock is traded on the OTCBB ("ONLN"). The last reported
sales price was $__ on January __, 2000. Most of the rescission shares were sold
at an effective price of $1.00 per
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<PAGE>
share (for the series A and series B preferred stock, which have been converted
to common stock); some of the rescission shares were sold for $4.00 and $5.00
per share.
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.
This rescission offer will be open until the close of business on March
__, 1999 (the 35th calendar day after the date of this prospectus, referred to
as the "Expiration Date" subject to an extension of up to 30 days). Refund
requests will be processed and paid as the completed letters of transmittal are
received.
The date of this Prospectus is January __, 2000
Beneficial owners of rescission shares (i.e., persons who hold their
stock in "street name") must contact their broker, dealer, commercial bank,
trust company or other nominee if the beneficial owners want to participate in
this offer.
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 the affairs
of the Company, 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.
WHERE YOU CAN FIND MORE INFORMATION
GOVERNMENT FILINGS. Since January __, 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
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<PAGE>
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.
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,
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.
PROSPECTUS SUMMARY
Except for the information under "The Rescission Offer" and "Price
Range of Common Stock and Related Stockholder Matters," the information
presented below is a summary which is provided for your convenience. The summary
information is qualified in its entirety by reference to the full text and more
specific details contained in this prospectus and the letter of transmittal. In
this prospectus, "we,""us," "our," "OnLine" and "Company" refer to OnLine Power
Supply, Inc.
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<PAGE>
BUSINESS OF ONLINE - SUMMARY
THE COMPANY. The Company originally was a Colorado corporation
organized in 1991 under the name "Roth Financial Fitness, Inc." to sell personal
financial improvement programs to consumers. In 1995 we changed our business to
the entertainment industry to sell music and film to consumers; we changed our
name to "OnLine Entertainment, Inc." and changed our state of incorporation to
Nevada in 1995. In 1996, we merged with Glitch Master Marketing, Inc. and
changed our business focus again to the electrical power supply industry. This
merger was accounted for as a reverse acquisition. On December 2, 1999 we
changed our name to "OnLine Power Supply, Inc." to better reflect our current
business model. Through September 30, 1999 we conducted our business through two
wholly-owned subsidiaries: Glitch Master Marketing, Inc. and OnLine Power
Supply, Inc. In December 1999 we transferred the assets of the subsidiaries and
dissolved them. This action was taken to simplify our accounting systems and
will not affect our operations or consolidated financial statements.
We employ 20 people and will hire more technical personnel in 2000. Our
offices are located at 6909 South Holly Circle, suite 200, Englewood, Colorado
80112; telephone 303.741.5641 (fax 303.741.5679).
OPS LINE. We have developed proprietary technology for what we believe
are better power supply systems for electronic devices. The electrical current
(power supply) going into such devices has to be converted and controlled so
that the power is constantly supplied in the right format and amounts, with
little or no surge or sag. 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, industrial applications, telecommunication switching stations, and a
host of other commercial, government and medical uses.
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
8
<PAGE>
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%.
We have filed applications to patent our OPS technology, and one patent
has been issued. Some of our products have been certified by Underwriters
Laboratories and have passed rigorous tests designed to measure the life span of
the products in the field.
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. In December 1999 we
established a manufacturing agrrement Saturn Electronics and Engineering, Inc.
to have that company make our products for us. Our marketing is conducted both
by employees and through a network of independent distributors.
We have estimated 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
power supply systems in Europe and Asia every year. We believe this volume will
increase over the next several years. Our business model projects that our
products will become the new standard for power supply systems, meaning that our
OPS line will be "designed into" new generations of advanced electronic devices.
Our competitors' current products will not fit the new standard of efficiency,
size and weight, which should enable us to capture a share of the annual market.
Presently we are estimating that if we obtain contracts for the OPS
products, our per unit sales price would be from $150 to $500. Our potential
customers may order from 50,000 to 150,000 units in 2000 and 2001. 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.
PPC LINE. For several years we have been selling the "Glitch Master"
power circuit which is installed in computers to protect and maintain the power
supply system. The main target is users
9
<PAGE>
of personal computers and workstations. The circuit is installed to prevent
damage resulting from momentary power outages which lead to data loss, hardware
and software damage, and resulting delays in operations from having to restart
computer systems after failure. The Glitch Master power circuit has been made
for us by independent manufacturers.
In 2000 we will be incorporating some of the features of the Glitch
Master power circuit into a new power protection circuit ("PPC") which will be
built into the OPS line of products. We have recorded revenues from sales of the
Glitch Master product in 1998 and 1999, but presently are not predicting sales
revenues in 2000 because our technology is being incorporated into the PPC and
we don't have a sales history for this new product.
SUMMARY OF RESCISSION OFFER (see "The Rescission Offer" for complete
information).
Record Date and Eligible holders of shares of common stock on
Expiration Date January __, 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 you
accept 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 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 ("ONLN").
The last reported sales price was $__ on January
__, 2000. See "Price Range of Common Stock and
Related Stockholder Matters."
Conditions If you accept our offer, we must receive your
letter of transmittal and your stock certificate
before the Expiration Date. If we don't receive
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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.
Delivery of If you accept our offer, your letter of transmittal
Documents and your stock certificate must be returned to our
Rescission transfer agent, Corporate Stock Transfer, Inc.,
Offer Agent 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.
CAPITALIZATION
We have prepared a table showing our capitalization at September 30,
1999, and adjusted as of that date (1) to reflect a range of acceptance of the
rescission offer (25%, 50% and 100%), as if the offer had occurred and been
finished as of September 30, 1999, and (2) to reflect the December 1999 issue of
a 6% dividend in preferred stock on the series A and series B preferred stock,
and the December 1999 conversion of all series A and series B preferred stock to
common stock, all as if the dividend issue and conversion of the two series of
stock had occurred as of September 30, 1999. The costs of this offer are not
reflected in the table (approximately $50,000, being legal and accounting fees,
filing fees, etc.).
You will note that due to the nominal par value of the common stock
($.0001) there is little change in stated value of the common stock as a result
of the rescission offer.
Because of the December 1999 conversion of all series A and series B
preferred stock into common stock, the table reflects the rescission offer as
only affecting the common stock, total stockholders' equity, and total
capitalization. Additional capitalization from sales of more common stock for
cash subsequent to September 30, 1999, and possible issuance of common stock on
exercise of options held by management, are not reflected in the table.
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<TABLE>
<CAPTION>
OFFER ACCEPTANCE
ACTUAL AT ----------------------------------------------------
9/30/99 25% 50% 100%
<S> <C> <C> <C> <C>
Long-term Liabilities $ 92,950 $ 92,950 $ 92,950 $ 92,950
Stockholders' Equity
Preferred Stock
No Designation Preferred
$.0001 par value
Stated value 1 1 1 1
12,467 shares issued
and outstanding
actual and adjusted
Series A Preferred
$2.00 stated value
250,000 shares authorized
131,000 shares issued
and outstanding actual, $ 262,000
-0- issued and outstanding
as adjusted $ -0- -0- -0-
Series B Preferred
$2.00 stated value
200,000 shares authorized
450,634 shares issued and
outstanding actual, $ 901,268
-0- issued and outstanding
as adjusted $ -0- -0- -0-
Common Stock
Common , $.0001 par value $
50,000,000 shares authorized
12,765,676 shares issued and
outstanding actual 1,277 1,260 1,244 1,206
13,681,863 shares issued and
outstanding adjusted for 25%
13,367,506 shares issued and
outstanding adjusted for 50%
12,738,793 shares issued and
outstanding adjusted for 100%
Additional Paid-in-Capital $ 9,791,657 $ 10,680,959 $ 10,339,718 $ 9,657,242
Total Shareholders' Equity (Deficit) (787,590) 101,712 (239,529) (922,005)
Retained Deficit (10,579,247) (10,579,247) (10,579,247) (10,579,247)
-------------- ------------- ------------- ---------------
Total Capitalization (Deficit) $ (787,590) $ 101,702 $ (239,529 ) $ (922,005)
============== ============= ============== ===============
</TABLE>
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SUMMARY FINANCIAL INFORMATION
The Company was formed in 1991. From that date through mid-1996 we
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 September 30, 1999, we have raised
approximately $3,400,000 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, 1998 and September
30, 1999, and for the two years ended December 31, 1998 and the nine months
ended September 30, 1999. You should note that the information at and for the
nine months ended September 30, 1999 is not necessarily indicative of the
results of our operations to be expected for the full year ending December 31,
1999, because we may make year-end adjustments to the nine month data. Presently
we don't know of any such adjustments which we will be making, however.
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.
<TABLE>
<CAPTION>
BALANCE SHEET DATA SEPTEMBER 30, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
- ------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C>
Assets $ 1,076,474 $ 742,784 $ 612,934
Liabilities $ 699,518 $ 634,335 $ 228,384
Working Capital
(Deficit) $ (736) $ (295,869) $ 52,001
Stockholders' Equity $ 376,956 $ 108,450 $ 384,550
</TABLE>
<TABLE>
<CAPTION>
OPERATING DATA SEPTEMBER 30, 1999 YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
- --------------- ------------------ ----------------- -----------------
<S> <C> <C> <C>
Revenue $ 258,978 $ 262,564 $ 180,559
Loss from Operations $ (917,175) $ (1,240,241) $ (599,395)
Net Loss $ (957,486) $ (1,449,530) $ (1,441,487)
Basic and Diluted Loss
per Common Share $ (0.08) $ (0.14) $ (0.17)
Shares of Common
Stock Used in
Computing Data(1) 12,168,109 11,062,039 8,428,377
</TABLE>
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<PAGE>
(1) Does not reflect the December 1999 conversion of series A and
series B preferred stock into common stock. On a pro forma basis, there would
have been 13,398,653 shares of common stock issued and outstanding as of
September 30, 1999 if the conversion of preferred stock is deemed to have
occurred as of that date.
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 ("OTCBB") under the symbol ("ONLN"). 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 December 13, 1999 we had _____ shareholders of record owning 12,467
shares of preferred stock (without designation), and ____ shareholders of record
owning 16,426,566 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. See "Description of Securities." If the
rescission offer is accepted at the following levels, we would have issued and
outstanding shares of common stock: 15,265,676 shares if 100%; 15,813,738 shares
if 50%; and 16,154,978 shares at 25%.
We have not declared any dividends 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 CONTINGENT LIABILITY. From September 1997 through September 1999, the
Company sold securities to 182 investors for $1,845,050 in cash: 135,932 shares
of common stock (at $5.00 per share) which includes 26,882 of the rescission
shares, and 581,634 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 34,898 shares of preferred
stock which we issued to pay the 6%
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<PAGE>
annual dividend on the series A and series B stock, for a total of 616,532
preferred shares, into a total of 1,233,064 shares of common stock. See
"Description of Securities." At the time, we believed that these shares had been
sold in three separate securities offerings ("private placements") and we
believed each these offerings was exempt from SEC registration under provisions
of the 1933 Act and under similar registration exemptions of the state
securities laws.
During this period of time we issued other shares of common stock (for
cash, to pay for services, pay off some debt, acquire Renaissance Systems, Inc.
and its power supply technology, and pay commissions). Please see the financial
Statements (consolidated statement of shareholders' equity) for information on
these transactions. these shares were issued in transactions which we believe
were exempt from SEC registration under the 1933 Act and state securities laws
and these shares are not part of the "private placements rescission shares"
which we offer to buy from you under this prospectus.
Facts recently coming to our attention have created some uncertainty
whether the exemptions from SEC registration under the 1933 Act were available
to the Company for the rescission shares sold in the private placement.
Specifically, the Company had sold other securities in the 12 month period
before September 1997. In addition, considered as a group, there were more than
35 "nonaccredited investors" among the investors who paid the last $134,000 of
the money raised from sale of shares of common stock in the first part of 1998.
Further, there were more than 35 "nonaccredited investors" in the group of
investors who paid all of the money raised from sale of shares of series A and
series B preferred stock. 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).
Based on the foregoing facts, we believe it is uncertain whether the
Company in fact had an exemption from SEC registration available to it with
respect to the last $134,413 raised from the sale of shares of common stock in
the first few months of 1998. We also believe it is uncertain whether an
exemption from registration was available to the Company with respect to all of
the $1,165,390 raised from the sale of shares of preferred stock. Therefore, we
believe the Company may have a contingent liability of approximately $1,436,280
(based on $1,299,803 of original investment plus $136,480 of interest for 18
months at an average annual rate of 7%). This amount will change as interest
accrues at the state law rates. A "contingent liability" is a potential
financial liability to pay an amount in the future, depending on the outcome of
future events which cannot be predicted.
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
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Act. 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 the Company's 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 $134,000 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 the Company to get their money back, under either federal or
state laws.
PURPOSE OF THIS RESCISSION OFFER. 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 whether the Company
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 because 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 claims is usually not acceptable as a use of 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.
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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 the Company (or, if you don't own 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.
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
the Company 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. See "Resale of Shares Under Rule 144" below.
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 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 __% in California,
__% in New Mexico; __% in Pennsylvania, __% in Texas, and __% 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.
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SOURCE OF FUNDS TO PAY THE RESCISSION OFFER; IMPACT ON OUTSTANDING SECURITIES
The Company has enough cash on hand to pay the estimated $1,436,280
which would be required to purchase all the rescission shares that you own. The
Company would still have enough cash to pay operations through 2000 without any
positive cash flow from operations. See "Management's Discussion and Analysis of
Operations." We believe that if the market price for our common stock stays
within the trading range of $4.00 to $5.50 which has been experienced since
early September 1999, many of you may elect to keep your shares, which would
reduce the payout and increase cash available for working capital going forward.
There are no loan agreements or other restrictions on our ability to
pay cash in this rescission offer. Also, the Company is 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, there are ____ shares of common stock issued and
outstanding. If all eligible shareholders accept the rescission offer, the
Company will have purchased 1,259,947 shares of common stock (which will be
retired and canceled), and then there would be ___ shares of common stock issued
and outstanding.
RESALE OF SHARES UNDER RULE 144
The Company never has 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. The Company never has sold free trading
shares of common or preferred stock or any other securities under a registration
statement filed with the Commission. Approximately 4,710,000 shares of common
stock (currently the "public float") were sold by the Company rom 1991 to 1996
to persons not now affiliated with the Company. These shares are (or could be)
free trading because the resale restriction under rule 144 has expired and the
restriction has been or could be removed from the shares. Shares of the Company
which are traded in the OTCBB market are part of these shares. All of the other
shares of common stock are restricted securities under rule 144, including the
shares of common stock into which the shares of series A and series B preferred
stock was 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
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securities which have been held by nonaffiliates of the issuer for at least two
years may be sold 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 the Company). 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 2001 tax return.
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.
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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 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 the common stock of the Company 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.
Any of the risks described below could materially and adversely affect
our business, operating results, financial condition, and the market price of
our common stock. Other risks may develop in the future which we cannot identify
at the present time.
RISK FACTORS RELATING TO OUR COMPANY
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 $1,240,241 net loss recorded for fiscal
1998. For the nine months ended September 30, 1999, we lost $917,175 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.
We have only recently had working capital available to us to keep
operations going for a while. At September 30, 1999 and December 31, 1998, we
had a working capital deficit of $736 and $295,869, respectively, which meant
that we did not have adequate capital and our current liabilities then exceeded
our current assets by these amounts. However, at December 13, 1999 working
capital was approximately $3,350,000, which reflects additional capital which
was obtained from the sale of restricted shares of common stock in the fourth
quarter of 1999. This additional capital was raised after the independent
certified public accounting firm which audited our financial statements as of
December 31, 1998 issued their audit report dated March 2, 1999. The auditors
Cordovano and Harvey P.C. questioned our ability to continue as a going concern
when they issued their audit opinion for our 1998 financial statements.
Our business is unproven and we may not achieve profitability. The
profit potential of our business model is unproven. Our revenue for the
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.
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We may depend on a single source of supply for one or more components
of our principal OPS product line. We have identified one supplier of one of the
parts 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.
We may need more capital in 2000. Working capital now on hand and to a
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 Company still anticipates a loss from
operations for fiscal 1999, and through June 30, 2000, even if contracts for
sale of the OPS products are signed early in the first quarter of 2000.
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.
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. 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 money in the future from issuing 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 or exchangeable securities may have rights, preferences and
privileges more favorable to the holders than those of the common stock.
The Company is authorized to issue preferred stock. The preferred stock
may be issued in series from time to time with such designations, rights,
preferences, and limitations as the board of directors of the Company may
determine by resolution. The Company has only a few shares of preferred stock
outstanding, but more could be issued under Nevada law and our articles of
incorporation without shareholder approval.
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We don't have any contracts to sell our main product line. Since the
end of 1998, we have had ongoing discussions with many manufacturers who have
expressed interest in buying OPS power supply systems to incorporate as
components into their own products. However, so far we have not signed any
contracts and it is possible no contracts will be signed. Even if contracts are
signed, we might not make any significant profits on those contracts, and could
even lose money on them.
We may face capacity constraints in the OPS sector. 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.
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. The Company has key person life insurance on Messrs. Arnold,
Budinger and Woodland 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
employments agreements with all of the officers except Mr. Millspaugh and Mr.
Riggio, but these agreements would not prevent any of them with employment
agreements from leaving us.
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. We 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 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
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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.
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.
RISK FACTORS INVOLVING THIS OFFERING.
The market for our common stock may be illiquid. Our common stock is
currently trading on the Over-the-Counter Bulletin Board ("OTCBB"). 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. 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 the Company. 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
We have a February 24, 2000 deadline to meet. Nasd Regulation, Inc. has
adopted a rule requiring that all companies listed for trading on the OTCBB must
be "reporting companies" (fully registered under section 12(g) of the Securities
Exchange Act of 1934) which file reports with the Commission. Those companies
which were then listed on the OTCBB in January 1999 (as was the Company) must be
registered with the Commission according to a schedule adopted by Nasd
Regulation, Inc. The Company's deadline for registration with the Commission is
February 24, 2000. If we do not meet the deadline, the Company would be delisted
from OTCBB, which would lead to most market making broker-dealer firms leaving
the market. Trading in our common stock would be hurt because few broker-dealer
firms are allowed to make markets in unlisted securities.
If our stock price drops below $5.00, trading interest may be reduced.
For most of the time over the last 24 months 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
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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 the Company's securities, and therefore may
impact your ability to sell your stock.
Our certificate of incorporation and Nevada law provide director and
officer indemnification, and limit their liability. We may have to spend
significant resources indemnifying our officers and directors or paying for
damages caused by their conduct. Nevada law (and the law of almost all
jurisdictions in the United States) provides for broad indemnification by
corporations of their officers and directors and permits a corporation to
exculpate those persons for their actions (subject to certain conditions like
the absence of intentional misconduct). Our certificate of incorporation
implement these provisions to the fullest extent permitted. Consequently,
subject to certain conditions as provided in the law, none of our directors or
officers will be liable to us or to our stockholders for monetary damages
resulting from their conduct. For the Commission's position on indemnification
for 1933 Act maters, please see "Indemnification" below.
When we sold the rescission shares, we established the original
offering prices of the rescission shares ($1.00 for the shares of common stock
converted from series A and series B preferred stock, and $5.00 for the common
stock) by taking into account our internal estimates of the value of the
Company's "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 the assets, book value, or net
worth of the Company or any other generally accepted criteria of value. These
offering prices for the rescission shares should not be considered to be an
indication of the actual value of the Company. For information on historical
stock prices in the market, please see "Price Range for Common Stock and Related
Stockholder Matters."
DILUTION AND COMPARATIVE DATA
As of September 30, 1999, the net tangible book value of the Company
was $376,956 or $.04 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 all of the rescission shares
had been bought back by the Company as of
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September 30, 1999, the net tangible book value (deficit) of the Company would
have been $(922,005) or $(.08) 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 $4.96 (99%) in the net tangible
book value of your shares. If your rescission shares are shares of common stock
from which the preferred stock was converted, you will realize immediate and
substantial dilution of $5.07 (101%) in the net tangible book value of your
shares. These calculations are based on the Company's financial information as
of September 30, 1999, minus the amounts paid for the rescission shares as well
as the number of shares of stock then outstanding.
Because we have sold 2,182,500 shares of common stock from September
30, 1999 to December 13, 1999 we have approximately $4,365,000 more in
stockholders' equity as of December 13, 1999. Therefore, the net tangible book
value per share at that date is approximately $.24 per share of common stock,
which would change the dilution for $5.00 investors to $4.76 per share and for
the original series A and series B investors to $.76 per share.
We have had losses in two of the last three fiscal years, and our
officers and directors and other persons have acquired stock in the Company (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 13, 1999:
<TABLE>
<CAPTION>
TOTAL TOTAL AVERAGE PRICE
SHARES PURCHASED CONSIDERATION PER SHARE
------------------------ ----------------------- --------------
Number % Amount %
<S> <C> <C> <C> <C> <C>
Present Shareholders(1) 14,948,176 100% $14,062,648 % $.94
Rescission Investors(2) 1,259,947(1) 8%(1) $1,299,803(1) % $1.03
<FN>
(1) Equal to total rescission shares of common stock, including the shares
issued on conversion of series A and series B preferred stock.
(2) Equal to total rescission shares of common stock, including the shares
issued on conversion of series A and series B preferred stock.
</FN>
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company was involved in the entertainment business prior to the
acquisition of 100% of the stock of Glitch Master Marketing, Inc. in 1996. The
Company's acquisition of the common stock of that entity in exchange for shares
of the Company's 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. OnLine Power
Supply, Inc. was formed as a 100% subsidiary in 1996 to develop new products in
the power supply business. In December 1999 the two subsidiaries transferred
their assets and liabilities to the Company 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 not
be consolidated.
LIQUIDITY AND CAPITAL RESOURCES, AND RESULTS OF OPERATIONS, FOR TWO
FISCAL YEARS 1997 AND 1998 AND THE 9 MONTHS ENDED SEPTEMBER 30, 1999. In 1997
and 1998 and the nine months ended September 30, 1999 the Company received
$3,398,056 in cash (net of offering costs) from the sale of preferred and common
stock. Over that 33 month period, these funds, plus gross operating profits
totaling $129,398 from sales of the Glitch Master Marketing, Inc. ("GMM")
product line, have been used to pay $2,211,392 in general and administrative
expense, $650,781 in OPS product research and development costs, and $190,000 in
litigation settlement costs in 1998 ($150,000 of these costs were borrowed from
a trust controlled by a member of the president's family).
Revenues from GMM sales in fiscal 1998 were $262,564 or 45% more from
the $180,559 recorded in 1997. We realized a gross profit from GMM sales of
$68,181 in 1998 and $3,976 in 1997. One GMM customer represented 39% of 1997
sales and 9% of sales in 1998. For the nine months ended September 30, 1999, the
Company recorded gross revenues of $258,978, with cost of sales of $201,737,
again from GMM business.
Losses from operations were $1,240,241 in 1998 compared to $599,395 in
1997. For the nine months ended September 30, 1999 losses from operations were
$917,175. Among the principal items causing the increased losses in fiscal 1998
and the nine month period ended September 30, 1999, compared to 1997, and our
expectations for such items in the future, were the following. Increased
expenditures planned for 2000 will 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.
o Salaries, commissions and payroll taxes increased in the first three
quarters of 1999 to a total of approximately $251,000 as we increased
staffing. This item was $306,000 in 1997 and $277,000 in 1998, and is
expected to increase more in 2000.
26
<PAGE>
o Approximately $320,000 in research and development (for our OPS product
line) in 1998 and $315,861 for research and development in the first
three quarters of 1999. We spent only $15,361 for this item in 1997.
For 2000 we may spend up to $750,000 for research and development of
new additions to our OPS line.
o We issued stock for services. In 1998 we recorded an expense of $59,799
for this item, compared to $15,373 in 1997. In the nine months ended
September 30, 1999 this item was $32,805. 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.
o $93,561 for advertising and promotion of our new OPS product line in
1998. We spent only $48,002 in 1997 for this item, and only $14,554 in
the first three quarters of 1999. Our expenses for this item in 2000
may be up to $250,000.
o Legal expenses in 1998 were approximately $83,000 compared to $56,000
in 1997, and increased to $121,000 in the first three quarters of 1999.
The increases in 1998 and especially in 1999 were related to pending
litigation expense, which should decrease significantly after September
30, 1999. However, legal expenses associated with becoming registered
with the Commission under the Securities Exchange Act of 19341 may
offset expected savings in the litigation area.
o Investor relations and stock promotion expense was approximately
$144,000 in 1998. We spent nothing on this item in 1997 and only $7,950
in the first three quarters of 1999.
o In 1998 we recorded approximately $74,000 as uncollectible because of a
doubtful account receivable we wrote off. In 1997 we recorded $466 for
a similar item. We have not recorded any amounts so far for such items
in 1999.
o In the first three quarters of 1999 we recorded a loss of approximately
$32,000 for inventory we can't use (GMM products). We did not record
any amounts for such an item in 1998 or 1997.
Our net loss for 1998 was $1,449,530 compared to $1,441,487 in 1997.
One of the main reasons for the difference, other than different operating
losses in the years, is the $190,000 to settle a bankruptcy related matter in
1998 (we don't expect to pay more for this matter, which is still pending, in
2000 but refer you to disclosure under "Litigation" and to risk factors in the
Summary part of this prospectus). Other reasons which contributed to a greater
net loss in 1997 than we would have recorded from operations and non-operating
expenses was an extraordinary loss incurred when we extinguished a debt,
including accrued interest, by issuing common and preferred shares of stock to
the debtor. The amount of debt to be retired was $354,176 and the total fair
market value of the shares issued to extinguish the debt was $1,659,000 which
resulted in a net settlement loss of $1,304,824. The loss is characterized in
the financial statements as a $500,000 beneficial loss associated with the
conversion privileges of the preferred shares and a $804,824 loss
27
<PAGE>
resulting from the common share portion of the transaction. The $804,824 loss is
further reduced by the effective 37% net income tax benefit of $300,199 which
reduces the income taxes owed by the company when we eventually deduct this loss
for federal and state income tax purposes.
The contingent liability associated with the sale of some common stock,
and from sale of series A and series B preferred stock from 1997 into 1999, has
not been recorded on the Company's balance sheet. At the completion of the
rescission offer process, which is expected to be in March 2000, the amount paid
to repurchase these shares will be recorded on the financial statements and the
uncertainty associated with the sales will have been eliminated. The amount
could be substantial, but we will be able to continue operations through 2000.
Continuing losses are expected until the commercialization of OPS
products is completed. In this context, commercialization will mean contracts
for sale are signed and sufficiently performed to be profitable. It is possible
that commercialization will be realized in the first two quarters of 2000
through the OPS products PFC Front End and 500 Watt power supply units, which
may generate sufficient revenues to be profitable. However, even with contracts,
revenues and profits may not be recorded until later in 2000. Sales are forecast
by management to be in the range of $35.5 million per year for the PFC Front End
product, and $150 million per year for the 500 Watt power supply. However,
presently there are no contracts in hand and the profitability of contracts for
these products will not be predictable until production experience has been
obtained in 2000.
Expenses in fiscal 2000 will increase as the Company hires more
personnel to design its OPS products for customers and continues research and
development on future products. Without revenues from OPS products and not
including revenues expected in the first two quarters of 2000 from our current
GMM product line (which will be re-engineered into OPS products in 2000), we
estimate a loss of up to $3 million for fiscal 2000. This amount could increase
to the extent we have to pay to secure a source of supply or for the
manufacturing process. We can't quantify these added amounts until the future.
See below and also "Plan of Operations" below.
During 1998 the Company incurred additional current liabilities
(including loans from affiliates) to support the continuing R&D process, pay
ongoing general and administrative expense, fund the marketing and promotion
efforts for OPS products, and settle litigation-related obligations. At December
31, 1998 the Company had negative working capital, however, due to a large
component of current liabilities being comprised of debts to related parties
(officers and directors or their families), and proceeds from equity financings
from time to time in 1998 and through September 30, 1999, the Company to date
has been able to meet its obligations in a timely manner. Proceeds from equity
financing or additional loans have been used in 1997, 1998 and for the first
nine months of 1999 to sustain operations.
At December 13, 1999 working capital was approximately $3,350,000 which
reflects additional equity financing received in the fourth quarter. This
liquidity should eliminate the need for additional equity financing for
operations through 2000 and possibly into 2001, depending on the timing and
performance of contracts for OPS products in those years and how much we have to
pay to purchase rescission shares. Presently, management estimates that the
higher level of
28
<PAGE>
operations in 2000 will cost approximately $250,000 per month ($3 million in
2000). Added financing could be necessary, however, to secure a source of supply
for a critical component of the OPS products and possibly also in connection
with entering into manufacturing contracts with third parties.
Sales of the GMM products, and expected sales of the OPS products, have
not been and are not expected to be seasonal.
PLAN OF OPERATIONS
In 2000 the Company intends 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 the Company's 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 from these two products may generate as much
as $60 million of revenues in the first 12 months of production. However,
earnings (profits) from such revenues 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
Until recently, our Company's business has conducted through our
wholly-owned subsidiaries Glitch Master Marketing, Inc. and OnLine Power Supply,
Inc. We transferred the assets, liabilities and business of the subsidiaries to
the Company in December 1999. 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 but the technology
will be incorporated into OPS product lines.
29
<PAGE>
OPS has developed proprietary technology for unique power supply
designs. This 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. 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.
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.
POWER SUPPLY TECHNOLOGY
We believe the OPS technology will produce a new generation of power
supply devices. The new generation of devices started from the technology we
acquired in 1997 with the acquisition of Renaissance Systems, Inc. Since then we
have made substantial innovations to and enlarged the scope of that technology.
Chris A. Riggio, now an officer of the Company, was an stockholder and officer
of Renaissance before the acquisition. See note K to the Financial Statements.
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; 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.
OPS has applied a problem solving strategy to power supply systems, and
has designed and built new devices that will keep pace with advances in
electronic manufacturing. The new
30
<PAGE>
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.
OPS has completed its 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 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.
OPS has produced prototypes of the PFCFE module and obtained electrical
certifications for the prototypes. OPS is 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 unites 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 (see
below).
The initial patent application for the OPS PFCFE module has been
approved by the U.S. Patent and Trademark Office (Pat. No.5,798,671). This
patent approval is the first among several that the Company expects to receive
in the near future. Patents will help protect our proprietary technology. We
also use trade secret and confidentiality agreements to protect its intellectual
property.
31
<PAGE>
TECHNICAL COMPARISONS OF OPS AND TRADITIONAL POWER SUPPLY DEVICES
We believe the OPS technology of converting AC power to DC power will
have the following benefits as compared to current power supply systems.
<TABLE>
<CAPTION>
OPS POWER SUPPLY FEATURES/BENEFITS CONVENTIONAL SWITCH/LINEAR TECHNOLOGY
<S> <C>
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 in industry Fan required-high heat
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 to 100(degree)C 0(degree)C to 60(degree)C TYpical
No power deration due to temperature loss 50% of power 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
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
FEATURES/BENEFITS/DESCRIPTION
BENEFIT OPS PRODUCTS INDUSTRY STANDARDS
<S> <C> <C>
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.
</TABLE>
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 $21.5 billion, with North America accounting for $8.1 billion. According
to Darnell Group, the North America switching power supply market is expected to
continue growing at a rate of 11 % annually for the next four years.
33
<PAGE>
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. The Company's 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 the
Company about possible joint ventures or other ways of doing business together.
INDUSTRY TRENDS
Over the next five years, manufacturers will be forced to provide the
following power supply improvements: 1) lighter, 2) smaller, 3) more efficient,
4) more reliable, 5) cooler operating, and 6) lower cost. Providing only one or
two of these improvements will be insufficient to maintain market leadership.
The Company, through its new technological approach, believes it will
achieve all of the improvements. 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, OnLine's power supplies 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
The Company's 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 the Company's
products with their superior features and attributes. These initial markets have
the greatest impact for the Company 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.
A major sector of the Company's marketing arena will be OEM sales
(sales to "original equipment manufacturers" who put their own brand name on the
device). This requires that the Company work with the design department of OEMs
to satisfy the unique product specification demands.
34
<PAGE>
To assist in sales to OEM's and other industry markets, the Company
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. The Company has and will continue to
select those representatives and distribution companies who have significant
experience and expertise in the power supply industry. The Company believes 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 the Company's products.
Distributors will be compensated on the basis of 5% of sales.
This 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.
The Company expects to increase its in-house sales force to support its
network of distributors, representatives and OEMs. The Company's 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 people in this area as needed.
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 Company's
expectations. These manufacturers specialize in the design and manufacture of
power supplies for various applications to include but not limited to;
facsimiles, printers, disk drives, telecommunication equipment, test instruments
and personal computers. Dedicated, innovative and energetic workforces, 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.
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 manufacturing costs (inventory of parts and engineering at
Saturn), Saturn 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 handled through an
escrow arrangement so that Saturn will recover its advances first. Down payments
would be split 75% Saturn and 25% to us. Where necessary, we will execute first
tier sales agreements with Saturn to facilitate minority owned business credit
to customers (Saturn is a minority owned business). In these transactions,
Saturn will receive a 5% markup on sales.
35
<PAGE>
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 b price competitive within a 10% range of bids
from comparable manufactures 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 engineering charges incurred by Saturn's staff in
connection with the order. Delivery is expected in January 2000; products will
be used for demonstration and promotional purposes.
In general, the Company believes that manufacturing by sub-contract
represents the most efficient cost effective manner to bring OPS products to
market. The Company intends to use trade secret, nondisclosure, and
non-circumvention agreements with its sub contractors including Saturn.
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. The Glitch Master was installed at the stores and
the problems have ceased.
36
<PAGE>
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 lead to significant business opportunities with customers such as
Novelle and Iomega. For the balance of 1999 and thereafter, the Company intends
to have GMM concentrate on custom power supplies markets and the new integrated
GMM short duration UPS (uninterruptible power supply). This technology will be
incorporated into the OPS product line. The Company's strategy is proving
moderately successful for the original GMM line, and GMM presently is fulfilling
(through March 2000) orders.
MANUFACTURING AND MARKETING
GMM uses an outside manufacturing company to manufacture and assemble
the Glitch MasterTM circuit. When these circuits are delivered, GMM inserts them
into switch mode power supplies. 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.
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 ("UPS"). The primary competition for the Glitch
Master product is a battery backup UPS. Management believes 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
37
<PAGE>
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
The Company's offices occupy 4,630 square feet of space and are leased
through January 2001 at $6,077 per month.
EMPLOYEES
We now employ 20 people including officers and technical personnel. We
may increase this number to 30 in 2000.
SECURITIES OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT
The following table sets forth certain information about beneficial
ownership of the Company's common stock as of December 13, 1999 by each person
or group who is known to own more than 5% of the Company's 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 conversion of all series A
and series B preferred stock to shares of common stock (for a total of
16,426,566 shares of common stock outstanding on December 13, 1999).
38
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT OF SHARES PERCENT OF CLASS
<S> <C> <C>
Larry G. Arnold* 1,424,119(1,2) 9%
6909 S. Holly Circle
Suite 200
Englewood, Colorado 80112
Kris M. Budinger* 855,541(2) 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 -0- -0-
6909 S. Holly Circle, Suite 200
Englewood, Colorado 80112
Chris A. Riggio -0- -0-
6909 S. Holly Circle, Suite 200
Englewood, Colorado 80112
All Officers and Directors as a 2,285,660 14%
Group (6 persons)
<FN>
* Director
(1) Does not include 385,222 shares owned by Mr. Arnold's wife, of
which he disclaims beneficial ownership.
(2) Does not include shares issuable upon exercise of stock
options (see "Management - Executive Compensation").
</FN>
</TABLE>
39
<PAGE>
MANAGEMENT
<TABLE>
<CAPTION>
NAME AGE POSITION DIRECTOR SINCE
<S> <C> <C> <C>
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
</TABLE>
LARRY G. ARNOLD was a Director of GMM since 1990 and was elected
President and Chairman of the Board of the Company 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 was Chairman, President, CEO of the Company from
February 12, 1996 to July 29, 1996. Prior to this he was a Director and
Vice-President of OnLine since 1994, and was employed by the Company since 1993.
Mr. Budinger has produced original direct response television programming, and
set up and managed product fulfillment, telemarketing, merchant banking, and
television distribution functions. 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.
40
<PAGE>
THOMAS L. GLAZA 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.
Mr. Glaza was the founder and Chief Operating Officer of GMD, Inc., a
CIM marketing and services organization. In addition, in his 26 year career with
IBM, he was responsible for the basic design and support for many of IBM's
"PICs" (production and information control) systems. He has received two IBM
"Outstanding contribution Awards" for innovative approaches to manufacturing
systems design and support. Mr. Glaza graduated from the University of Michigan
with a BBA and MBA in 1959. He is a member and Fellow of the American Production
and Information Control Society ("APICS").
RICHARD L. MILLSPAUGH , a certified public accountant (licensed in
Colorado) has been Chief Financial Officer for the Company 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 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 the Company in July 1996. Mr. Woodland is Vice
President- Engineering, Research and Development, since 1999. He has extensive
experience in technical application support and technical design in the power
supply industry for over 10 years. His experience extends to technical sales,
training and effective management of technical sales forces. He is a
knowledgeable electrical and audio engineer who is capable in most software
applications. His technical Marketing and Support expertise includes:
Integration, 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, he conducted macro programming and repair support
to managers and employee groups.
CHRIS A. RIGGIO joined the Company in 1996. Mr. Riggio is 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
41
<PAGE>
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.
Under the Nevada statutes, the number of directors may be fixed by or
in the manner provided in the Company's Articles or Bylaws. The Bylaws of the
Company provide that the number of directors be determined from time to time by
resolution of the Board of Directors. The Board of Directors currently consists
of three members, and the number of Directors may be changed from time to time
by action of the Board.
MANAGEMENT - INDEMNIFICATION
The Company indemnifies its 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 the Company pursuant to the foregoing provisions, the Company has
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 the Company on
a contract basis. Mr. Doyle provides services as requested by the Company for
independent reliability testing of its products. Mr. Doyle receives shares of
the Company's common stock for his services, at the average share price over the
90 day period in which he renders services. The Company has 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 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
42
<PAGE>
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 grants (a)
nonqualified stock options to purchase 500,000 shares of common stock at $5.50
per share (all now vested); and (b) other nonqualified stock options to purchase
500,000 shares of common stock at $2.375, vesting at the rate of 100,000 shares
each September 1 starting in 2000 equal to the stock price at December 30, 1998.
The fixed price for exercise and the five year vesting schedule replace earlier
performance based terms. 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
1999, Mr. Arnold and Mr. Budinger each will be paid a cash bonus of $36,000
based on stock prices for that year. The exercised price of the options under
(b) were reset by the board of directors after September 30, 1999 to be $2.48
which is 110% of the market price on September 30, 1999.
Garth Woodland has a five year employment agreement, at a base salary
of $60,000 per year. He received nonqualified stock options to purchase 523,000
shares of common stock at $2.90, 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. Riggio does not have an employment agreement at the
present time. He has an option (which is qualified) to purchase 25,000 shares of
common stock at $2.90 per share; these latter options expire in 2001.
Mr. Millspaugh is paid $54,000 per year. He presently does not have a
written employment agreement with the Company.
COMPENSATION OF DIRECTORS
Each of the present directors who is also an employee of the Company
receives no additional compensation for acting as a director or attending
meetings of directors. The Company presently pays $100 per meeting to
non-employee Directors, plus their travel expenses.
43
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation paid or accrued by the Company to or for the account of the Chief
Executive Officer and the President for services and bonuses rendered in all
capacities to the Company and its subsidiaries during each of the Company's
fiscal years ended December 30, 1999, 1998, and 1997. No other executive officer
received total annual salary and bonus in excess of $100,000. The Company does
not have any long term compensation plan, other than options for restricted
stock.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION1
-----------------------------------------
OTHER ANNUAL
NAME AND POSITION YEAR SALARY BONUSES COMPENSATION
----------------- ---- ------ ------- ------------
<S> <C> <C> <C> <C>
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
1998 $72,000 $0 $0
1997 $72,000 $0 $0
<FN>
1. This excludes automobile maintenance expenses paid to or on behalf of
the named individual by the Company, which did not exceed 10% of the
total of the annual salary and bonus. Excludes benefits generally
available to all employees on a non-discriminatory basis.
</FN>
</TABLE>
CERTAIN TRANSACTIONS
From time to time since 1997 we have borrowed money from our officers
to sustain operations and pay other expenses. At September 30, 1999 these loans
totaled $331,750 plus $15,098 interest; $181,750 was owed to Larry G. Arnold,
and $150,000 was owed to a trust controlled by a member of Mr. Budinger's
family, which was loaned in December 1998 to pay a settlement to a bankruptcy
trustee. Other amounts were loaned and paid during 1998 and 1999. The loans all
were made on unsecured, demand basis except the loan from the trust which is due
December 31, 1999 but may be renewed for another six months by the Company. For
further information, see notes B and P to the Financial Statements.
44
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of common stock
($.0001 par value) of which 16,426,566 shares are issued and outstanding.
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.
The Company's board of directors has authority, without action by the
Company's shareholders, to issue all or any portion of the authorized but
unissued shares of common stock, which would reduce the percentage ownership in
the Company of its shareholders and which may dilute the book value of the
common stock.
Shareholders of the Company 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 of
the Company, 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.
PREFERRED STOCK
The Company is 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, the Company 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 12,467 shares of this preferred
stock outstanding, which are convertible into 2,493 shares of common stock.
45
<PAGE>
The Company has 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 the Company into common stock. In
December 1999, the Company 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.
The Company has 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 the Company into common stock. In
December 1999, the Company paid a dividend of 27,038 shares of series B
preferred stock on the 449,445 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 952,822 shares of common stock. Presently, there are
no shares of series B preferred stock outstanding.
TRANSFER AGENT
The transfer agent for the Company's common and preferred stock is
Corporate Stock Transfer, Inc., Denver, Colorado.
INDEMNIFICATION
The Company has agreed to indemnify its 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 of the Company
pursuant to any charter, provision, by-law, contract, arrangements, statue or
otherwise, the Company has been advised 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 the Company of expenses
incurred or paid by a director, officer, or controlling person of the Company in
the successful defense of any such action, suit or proceeding) is asserted by
such director, officer or controlling person of the Company 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 1933 Act and will be governed by the
final adjudication on such issue.
46
<PAGE>
LITIGATION
RELATED TO BANKRUPTCY TRUSTEE. In June 1994, the Company entered into
agreements to merge with MaxMusic, Inc., a Colorado corporation, whereby
MaxMusic would acquire assets and certain liabilities of the Company. 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 the Company on
behalf of the bankruptcy estate seeking damages in the amount of $392,000, plus
interest and penalties, for alleged payments that had benefited the Company. In
December 1998, the Company paid $150,000 to the trustee to settle the claims
(and interest and penalties) sought by the Trustee. This money was loaned to the
Company by a trust maintained by a family member of Kris M. Budinger, president
of the Company.
In April 1999 the trustee filed an action in United States District
Court (Denver, Colorado) seeking enforcement (through a garnishment proceeding)
against the Company of a judgement obtained by the trustee against a former
officer and director of the Company (who resigned in February 1996) for the same
amount originally sought to be recovered against the Company, less the $150,000
paid by the Company in December 1998. The amount now being sought by the trustee
is approximately $390,000; recovery is sought based on a 1996 agreement by the
Company to indemnify the former officer and director against certain
liabilities. The Company is resisting the trustee's attempts to collect the
balance of the claims, and believes 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 the Company and its payment in the underlying
adversary proceeding in Bankruptcy Court, and that the indemnification
provisions of the 1996 agreement between the Company and a 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 favor of the Company on the garnishment claims.
The trustee has filed objections to the Magistrate's findings and
conclusions, and to his recommendations, and the Company has filed a reply with
the Magistrate. The Company believes its position will prevail, but as in any
litigation proceedings, the ultimate resolution is uncertain.
OTHER. Since 1996 the Company has 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 the Company and Fox to distribute video film products when the Company
was involved in the entertainment business in 1996. Discovery is in process. No
trial date has been set. Management will vigorously defend these claims.
47
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares offered hereby will be
passed upon for the Company by The Law Firm of Stephen E. Rounds, Denver,
Colorado.
EXPERTS
The Company's financial statements as of December 31, 1998 and 1997 and
for the 24 months ended December 31, 1998, have been included in this prospectus
in reliance on the report of Cordovano and Harvey, P.C., Denver, Colorado
(included in this prospectus), the Company's independent certified public
accounts, given on the authority of such firm as experts in accounting and
auditing.
48
<PAGE>
Item 22. Financial Statements
ONLINE ENTERTAINMENT, INC.
Index to Consolidated Financial Statements
Page
----
Independent auditors' report...............................................F-2
Consolidated balance sheets,
December 31, 1998 and 1997 and
September 30, 1999 (Unaudited)...........................................F-3
Consolidated statements of operations,
for the years ended December 31, 1998
and 1997 and for the nine months ended
September 30, 1999 and 1998 (unaudited)..................................F-5
Consolidated statement of shareholder's equity,
for the period from January 1, 1997
through September 30, 1999 and 1998 (unaudited)..........................F-7
Consolidated statements of cash flows,
for the years ended December 31, 1998
and 1997 and for the nine months ended
September 30, 1999 and 1998 (unaudited)..................................F-9
Summary of significant accounting policies.................................F-11
Notes to consolidated financial statements.................................F-13
49
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of OnLine Entertainment, Inc.
We have audited the accompanying consolidated balance sheets of Online
Entertainment, Inc. (a Nevada corporation) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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
financial statement presentation. We believe that our audits provide 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
Entertainment, Inc., and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years 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. As discussed in Note N to the financial
statements, 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. Management's plans in regard
to these matters are also described in Note N. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Cordovano and Harvey, P.C.
March 2, 1999
(except for Note O, as to
which the date is April 27, 1999)
50
<PAGE>
ONLINE ENTERTAINMENT, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------ ---------------
1998 1997 1999
------------- ------------ ---------------
(unaudited)
ASSETS
CURRENT ASSETS
<S> <C> <C> <C>
Cash................................................................ $ 151,341 $ 25,915 $ 466,063
Accounts receivable, net of allowance for uncollectible accounts
totaling $1,328, $445 and $360 (unaudited), respectively.......... 26,247 80,247 18,942
Other receivable, net of allowance for uncollectible
accounts totaling $62,889, $-0- and $62,889 (unaudited),
respectively (Note I)............................................ - - -
Due from officers (Note B).......................................... - 15,900 -
Inventory, at cost.................................................. 90,037 62,396 86,277
Prepaid expenses.................................................... - - 34,550
------------- ------------- -------------
TOTAL CURRENT ASSETS 267,625 184,458 605,832
PROPERTY AND EQUIPMENT, less accumulated
depreciation of $34,764, $19,412 and $56,211 (unaudited),
respectively (Note C)............................................... 161,719 34,731 151,871
EQUIPMENT UNDER CAPITAL LEASE, less
accumulated depreciation of $-0-, $-0- and $-0- (unaudited),
respectively (Note Q)............................................... - - 45,713
GOODWILL, less accumulated amortization of $52,359,
$-0- and $91,628 (unaudited), respectively (Note L)................. 209,435 261,794 170,166
RESEARCH AND DEVELOPMENT COSTS, less
accumulated amortization of $25,480, $-0- and $44,590
(unaudited), respectively (Note L).................................. 101,920 127,400 82,810
ORGANIZATION COSTS, less accumulated amortization
of $-0-, $3,239 and $-0- (unaudited), respectively.................. - 3,702 -
PATENT, less accumulated amortization
of $181, $-0- and $415 (unaudited), respectively.................... 1,373 - 18,570
OTHER ASSETS........................................................... 712 849 1,512
------------- ------------- -------------
$ 742,784 $ 612,934 $ 1,076,474
============= ============= =============
</TABLE>
See accompanying summary of significant accounting
policies and notes to the consolidated financial statements.
51
<PAGE>
ONLINE ENTERTAINMENT, INC.
Consolidated Balance Sheets, Continued
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------- --------------
1998 1997 1999
------------- ------------- --------------
(unaudited)
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts and notes payable
<S> <C> <C> <C>
Accounts payable.................................................... $ 86,639 $ 13,810 $ 144,605
Accounts payable, related parties (Note B).......................... - 449 -
Bank line of credit................................................. 40,500 - 806
Notes payable, related parties (Notes B&Q).......................... 292,750 - 331,750
Other current liabilities
Current maturities on long-term debt................................ - 76,449 -
Current maturities on capital lease obligations..................... - - 13,154
Accrued interest payable............................................ 26,658 16,873 24,150
Accrued interest payable, related parties (Notes B&Q)............... 4,630 696 15,098
Other (Notes C,F&K)................................................. 112,317 24,180 77,005
------------- ------------- -------------
TOTAL CURRENT LIABILITIES 563,494 132,457 606,568
LONG-TERM DEBT
Capital lease obligations, less current maturities (Note Q) - - 26,610
Other non-current liabilities (Note E) 70,840 95,927 66,340
------------- ------------- -------------
TOTAL LIABILITIES 634,335 228,384 699,518
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes I&Q)............................ - - -
SHAREHOLDERS' EQUITY (Notes F, G&Q)
Preferred stock, $.0001 par value; 1,000,000 shares
authorized; 12,467, 19,467 and 12,467 (unaudited) shares
issued and outstanding, respectively............................. 1 2 1
Series A cumulative, convertible preferred stock,
$.0001 par value, $2.00 stated value; 250,000 shares
authorized; 105,400, -0- and 131,000 (unaudited) shares
issued and outstanding, respectively............................. 210,800 - 262,000
Series B cumulative, convertible preferred stock,
$.0001 par value, $2.00 stated value; 200,000 shares
authorized; 294,950, 125,000 and 450,634 (unaudited) shares
issued and outstanding, respectively............................. 589,900 250,000 901,268
Common stock, $.0001 par value; 50,000,000 shares
authorized; 11,846,826, 10,347,585 and 12,765,676
(unaudited) shares issued and outstanding, respectively.......... 1,185 1,034 1,277
Additional paid-in capital.......................................... 8,879,706 8,238,727 9,791,657
Retained deficit.................................................... (9,573,142) (8,105,213) (10,579,247)
------------- ------------- -------------
TOTAL SHAREHOLDER'S EQUITY 108,450 384,550 376,956
------------- ------------- -------------
$ 742,784 $ 612,934 $ 1,076,474
============= ============= =============
</TABLE>
See accompanying summary of significant accounting policies and
notes to the consolidated financial statements.
52
<PAGE>
ONLINE ENTERTAINMENT, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For The Years Ended For the Nine Months Ended
December 31, September 30,
------------------------------- ------------------------------
1998 1997 1999 1998
-------------- --------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET SALES................................................. $ 262,564 $ 180,559 $ 258,978 $ 217,351
COST OF SALES............................................. 194,383 176,583 201,737 150,328
-------------- --------------- -------------- --------------
GROSS PROFIT 68,181 3,976 57,241 67,023
-------------- --------------- -------------- --------------
OTHER OPERATING COSTS AND EXPENSES
Research and development............................... 319,559 15,361 315,861 191,795
Stock-based compensation (Note G)...................... 59,799 15,373 32,805 59,799
SELLING, GENERAL AND ADMINISTRATIVE....................... 867,042 586,419 592,667 662,649
PROVISION FOR DOUBTFUL ACCOUNTS........................... 74,217 466 - -
OTHER GENERAL EXPENSES
Loss on sale of asset.................................. 38 - 437 -
Impairment loss on fixed assets (Note F)............... 11,018 - - 11,018
Loss on write-off of inventory............................ - - 32,646 -
Gain on write-off of accounts payable..................... (23,251) (14,248) - (5,653)
-------------- --------------- -------------- --------------
1,308,422 603,371 974,416 919,608
-------------- --------------- -------------- --------------
LOSS FROM OPERATIONS (1,240,241) (599,395) (917,175) (852,585)
NON-OPERATING INCOME ..................................... - - 1,110 -
INTEREST EXPENSE.......................................... (19,289) (37,268) (41,421) (4,984)
NON-OPERATING EXPENSES
Losses from litigation settlements (Note K)............ (190,000) - - -
-------------- --------------- -------------- --------------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEMS (1,449,530) (636,663) (957,486) (857,569)
INCOME TAXES (Notes H&Q).................................. - (300,199) - -
-------------- --------------- -------------- --------------
LOSS BEFORE EXTRAORDINARY ITEMS (1,449,530) (936,862) (957,486) (857,569)
Extraordinary loss related to extinguishment of debt,
net of income tax benefit of $300,199 (Note F)......... - (504,625) - -
-------------- --------------- -------------- --------------
NET LOSS (1,449,530) (1,441,487) (957,486) (857,569)
PREFERRED STOCK DIVIDENDS (Note F)........................ (18,399) (2,500) (48,619) (13,750)
ACCRETION OF BENEFICIAL CONVERSION
FEATURE OF PREFERRED STOCK (Note F).................... - (500,000) - -
-------------- --------------- -------------- --------------
NET LOSS AVAILABLE TO
COMMON SHAREHOLDERS $ (1,467,929) $ (1,943,987) $ (1,006,105) $ (871,319)
============== =============== ============== ==============
</TABLE>
See accompanying summary of significant accounting policies
and notes to the consolidated financial statements.
53
<PAGE>
ONLINE ENTERTAINMENT, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For The Years Ended For the Nine Months Ended
December 31, September 30,
------------------------------- -------------------------------
1998 1997 1999 1998
-------------- -------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Basic weighted average common shares outstanding.......... 11,062,039 8,428,377 12,168,109 10,850,218
============== =============== ============== ==============
Basic extraordinary loss per common share................. $ - $ (0.06) $ - $ -
============== =============== ============== ==============
Basic loss per common share............................... $ (0.13) $ (0.23) $ (0.08) $ (0.08)
============== =============== ============== ==============
Diluted weighted average common shares outstanding........ 11,062,039 8,428,377 12,168,109 10,850,218
============== =============== ============== ==============
Diluted extraordinary loss per common shares.............. $ - $ (0.06) $ - $ -
============== =============== ============== ==============
Diluted loss per common share............................. $ (0.13) $ (0.23) $ (0.08) $ (0.08)
============== =============== ============== ==============
</TABLE>
See accompanying summary of significant accounting policies and
notes to the consolidated financial statements.
54
<PAGE>
<TABLE>
<CAPTION>
ONLINE ENTERTAINMENT, INC.
Consolidated Statement of Shareholder's Equity
January 1, 1997 through September 30, 1999 (Unaudited)
Series A Series B
Cumulative Cumulative
Preferred Preferred Preferred
Stock Stock Stock Common Stock
-------------- -------------- ----------------- ----------------- Additional
Par Stated Stated Par Paid-in Retained Shareholders'
Shares Value Shares Value Shares Value Shares Value Capital Deficit Equity
------ ------- ------ ------ -------- -------- ---------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 ... 28,967 $ 3 -- $ -- -- $ -- 7,905,092 $ 790 $5,514,052 $(6,161,226) $ (646,381)
Sale of common stock ....... -- -- -- -- -- -- 149,333 15 65,985 -- 66,000
Common stock issued for
services (Note G) ........ -- -- -- -- -- -- 5,124 1 15,372 -- 15,373
Common stock issued as
payment for debt
(Note F) ................. -- -- -- -- 125,000 250,000 303,000 30 1,408,970 -- 1,659,000
Common stock issued in
private placements,
less offering costs
totaling $159,912
(Note M) ................. -- -- -- -- -- -- 941,718 94 961,950 -- 962,044
Conversion of preferred
shares to common shares .. (9,500) (1) -- -- -- -- 19,000 2 -- -- 1
Common stock issued in
merger with Renaissance
Systems, Inc. (Note L) ... -- -- -- -- -- -- 1,024,318 102 272,398 -- 272,500
Net income (loss) for the year
ended December 31, 1997... -- -- -- -- -- -- -- -- -- (1,943,987) (1,943,987)
-------- ------- ------ ------- -------- -------- ---------- ------ ---------- ------------ ------------
BALANCE, DECEMBER 31, 1997 19,467 2 -- -- 125,000 250,000 10,347,585 1,034 8,238,727 (8,105,213) 384,550
Sale of common stock ....... -- -- -- -- -- -- 185,427 19 75,425 -- 75,444
Common stock issued for
services (Note G) ........ -- -- -- -- -- -- 79,732 8 59,791 -- 59,799
Common stock issued for
equipment (Note F) ....... -- -- -- -- -- -- 14,162 1 23,012 -- 23,013
Common stock issued to
broker for commissions
related to offerings
(Note G) ................. -- -- -- -- -- -- 1,106,660 111 864,190 -- 864,301
Sale of common stock in
private placement ........ -- -- -- -- -- -- 99,260 10 496,290 -- 496,300
<FN>
See accompanying summary of significant accounting policies and notes to the consolidated financial statements.
</FN>
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
ONLINE ENTERTAINMENT, INC.
Consolidated Statement of Shareholder's Equity
January 1, 1997 through September 30, 1999 (Unaudited)
Series A Series B
Cumulative Cumulative
Preferred Preferred Preferred
Stock Stock Stock Common Stock
-------------- -------------- ----------------- ----------------- Additional
Par Stated Stated Par Paid-in Retained Shareholders'
Shares Value Shares Value Shares Value Shares Value Capital Deficit Equity
------ ------- ------ ------ -------- -------- ---------- ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cumulative preferred
stock issued in
private placement...... -- -- 105,400 210,800 169,950 339,900 -- -- -- -- 550,700
Stock offering costs..... -- -- -- -- -- -- -- -- (877,729) -- (877,729)
Conversion of non-
cumulative preferred
stock to common stock.. (7,000) (1) -- - -- -- 14,000 2 -- -- 1
Net income (loss) for
the year ended
December 31, 1998...... -- -- -- -- -- -- -- -- -- (1,467,929) (1,467,929)
-------- ----- ------- ------- ------- -------- ---------- ------ ---------- ------------ ------------
BALANCE,
DECEMBER 31, 1998 12,467 1 105,400 210,800 294,950 589,900 11,846,826 1,185 8,879,706 (9,573,142) 108,450
Cumulative preferred
stock issued in
private placement ..... -- -- 25,600 51,200 280,684 561,368 -- -- -- -- 612,568
Common stock issued
for services (Note Q).. -- -- -- -- -- -- 15,000 1 32,804 -- 32,805
Common stock issued
for sales commissions
(Note Q)............... -- -- -- -- -- -- 336,350 34 252,229 -- 252,263
Common stock issued
in private placement .. -- -- -- -- -- -- 317,500 32 634,968 -- 635,000
Stock offering costs..... -- -- -- -- -- -- -- -- (258,025) -- (258,025)
Conversion of cumulative
preferred stock
to common stock........ -- -- -- -- (125,000) (250,000) 250,000 25 249,975 -- --
Net income (loss) for
nine the months ended
September 30, 1999
(Unaudited)............ -- -- -- -- -- -- -- -- -- (1,006,105) (1,006,105)
-------- ----- ------- -------- -------- -------- ---------- ------ ---------- ------------ ------------
BALANCE,
SEPTEMBER 30, 1999
(Unaudited) 12,467 $ 1 131,000 $262,000 450,634 $901,268 12,765,676 $1,277 $9,791,657 $(10,579,247) $ 376,956
======== ===== ======= ======== ======== ======== ========== ====== ========== ============= ===========
<FN>
See accompanying summary of significant accounting policies and notes to the consolidated financial statements.
</FN>
</TABLE>
56
<PAGE>
ONLINE ENTERTAINMENT, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For The Years Ended For the Nine Months Ended
December 31, September 30,
-------------------------------- -------------------------------
1998 1997 1999 1998
-------------- --------------- -------------- --------------
(unaudited) (unaudited)
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net loss............................................... $ (1,449,530) $ (1,441,487) $ (957,486) $ (857,569)
Transactions not requiring cash:
Depreciation and amortization........................ 93,372 8,319 80,060 67,265
Gain on write-off of accounts payable................ (23,251) (14,248) - (23,251)
Common stock issued for services (Note G) 59,799 - 32,805 59,799
Debt issued for services............................. 102,750 - - 62,647
Write-off of organization costs...................... 3,702 - - 926
Loss on sale of asset................................ 37 - 437 -
Impairment loss on fixed assets (Note F) 11,018 - - -
Extraordinary loss on extinguishment of debt (Note F) - 804,824 - -
Reclassification of current liabilities to long-term - (95,927) - -
Changes in current assets and current liabilities:
(Increase)/decrease in receivables, inventory
and other current assets.......................... 42,396 (76,957) (24,285) (54,943)
Increase/(decrease) in accounts payable and other
current liabilities............................... 170,882 (267,037) 12,495 118,831
-------------- --------------- -------------- --------------
NET CASH (USED IN) OPERATING ACTIVITIES (988,825) (1,082,513) (855,974) (626,295)
-------------- --------------- -------------- --------------
INVESTING ACTIVITIES
Purchases of equipment................................. (98,408) (17,598) (14,440) (16,379)
Payments to acquire patent............................. (1,554) - (17,431) -
Proceeds from sale of equipment........................ 70 - 800 -
Payments for capitalized research and development costs - (127,400) - -
-------------- --------------- -------------- --------------
NET CASH (USED IN) INVESTING ACTIVITIES (99,892) (144,998) (31,071) (16,379)
-------------- --------------- -------------- --------------
FINANCING ACTIVITIES
Proceeds from sale of stock............................ 1,122,445 1,327,506 1,241,806 682,996
Payments for offering costs............................ (13,428) (159,912) - (13,428)
Principal payments on capital leases................... - - (4,345) -
Proceeds from debt issuance............................ 152,956 116,500 50,000 14,814
Principal debt payments................................ (47,830) (182,837) (85,694) (47,830)
-------------- --------------- -------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,214,143 1,101,257 1,201,767 636,552
-------------- --------------- -------------- --------------
NET CHANGE IN CASH 125,425 (126,254) 314,722 (6,122)
Cash, beginning of period................................. 25,195 152,169 151,341 25,915
-------------- --------------- -------------- --------------
CASH, END OF PERIOD $ 151,340 $ 25,915 $ 466,063 $ 19,793
============== =============== ============== ==============
</TABLE>
See accompanying summary of significant accounting policies and
notes to the consolidated financial statements.
57
<PAGE>
ONLINE ENTERTAINMENT, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For The Years Ended For the Nine Months Ended
December 31, September 30,
----------------------------- -----------------------------
1998 1997 1999 1998
------------ ----------- ------------- ------------
(unaudited) (unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
<S> <C> <C> <C> <C>
Interest................................................. $ 5,186 $ 22,522 $ 20,859 $ 4,984
============ ============ ============ ===========
Income taxes............................................. $ - $ - $ - $ -
============ ============ ============ ===========
Non-cash investing and financing transactions:
Acquisition of property and research and development costs
in exchange for the issuance of common stock $ 23,012 $ 272,500 $ - $ 23,013
============ ============ ============ ================
Conversion of debt to preferred and common stock $ - $ 354,176 $ - $ -
============ ============ ============ ================
Acquisition of property under vendor financing (Note C) $ 32,044 $ - $ - $ 32,044
============ ============ ============ ================
Acquisition of equipment under capital leases (Note Q) $ - $ - $ 44,109 $ -
============ ============ ============ ================
</TABLE>
See accompanying summary of significant accounting policies
and notes to the consolidated financial statements.
58
<PAGE>
ONLINE ENTERTAINMENT, INC. Summary of Significant Accounting Policies
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of 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
consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities,
disclosures of contingent 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. 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, 1998 and
1997 totaled $78,020 and $1,388. Amortization expense totaling $25,661, related
to research and development and patent costs in 1998, was reclassified to
research and development.
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 represent 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.
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.
59
<PAGE>
ONLINE ENTERTAINMENT, INC.
Summary of Significant Accounting Policies
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.
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 price 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 25) 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 provisions of APB 25 and, accordingly, has included the pro forma
disclosures required under SFAS 123 in Note F.
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. 1,076,784 shares 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 11,488,407 in 1998.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company has adopted the following new accounting pronouncements for the year
ended December 31, 1998. There was no effect on the financial statements
presented from the adoption of the new pronouncements. SFAS No. 130, "Reporting
Comprehensive Income," requires the reporting and display of total comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is based on the "management" approach for reporting segments. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosure about the Company's products, the geographic areas in which it earns
revenue and holds long-lived assets, and its major customers. SFAS No. 132,
"Employers' Disclosures about Pensions and Other Post-retirement Benefits,"
which requires additional disclosures about pension and other post-retirement
benefit plans, but does not change the measurement or recognition of those
plans.
60
<PAGE>
ONLINE ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
NOTE A: 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.
The Company's primary business activities are conducted through its
subsidiaries, Glitch Master Marketing, Inc. ("GMM") and OnLine Power Supply,
Inc. ("OPS").
GMM was formed in Colorado on September 7, 1990. GMM manufactures the Glitch
Master product line, which includes the Glitch Master power supply.
OPS was formed in Colorado on November 13, 1996. On December 17, 1997, OPS
acquired Renaissance Systems, Inc. ("RSI"), which was formed to develop and
market power supply technology (see Note K).
NOTE B: RELATED PARTY TRANSACTIONS
1998
As of January 1, 1998, the Company was indebted to an officer for $62,000 in
connection with four promissory notes executed in 1997. The notes bear interest
at 10.00 percent and are due on demand. The Company made principal payments of
$22,000 during the year ended December 31, 1998. The remaining balance of
$40,000 is included in notes payable, related parties in the accompanying
consolidated balance sheets. Accrued interest on the notes totaled $2,032 at
December 31, 1998, which is included in accrued interest payable, related
parties in the accompanying consolidated balance sheets. In addition, two
officers loaned $35,000 to the Company during 1998, which was repaid in full as
of December 31, 1998.
On December 21, 1998, the Company borrowed $150,000 from the family trust of the
Company's President. The $150,000 promissory note bears interest at 10.00
percent and matures on December 21, 1999. The $150,000 is included in notes
payable, related parties in the accompanying consolidated balance sheets.
Accrued interest on the note totaled $616 at December 31, 1998, which is
included in accrued interest payable, related parties in the accompanying
consolidated balance sheets.
On October 16, 1998, an officer paid $102,750 in investor relations expenses on
behalf of the Company. The officer received promissory notes totaling $68,500
and $34,250 in exchange for making the payment. The notes bear interest at 10
percent and are due on demand. The $102,750 is included in notes payable,
related parties in the accompanying consolidated balance sheets. Accrued
interest on the notes totaled $1,982 at December 31, 1998, which is included in
accrued interest payable, related parties in the accompanying consolidated
balance sheets.
1997
As of January 1, 1997, the Company owed an officer $30,378 for three promissory
notes executed during 1995 and 1996. The notes bear interest at 10 percent and
are due on demand. The Company repaid the $30,378 during the year ended December
31, 1997. Accrued interest on the notes totaled $696 at December 31, 1997, which
is included in accrued interest payable, related parties in the accompanying
consolidated balance sheets. The officer also loaned an additional $62,000 to
the Company in 1997, which is included in notes payable, related parties in the
accompanying consolidated balance sheets.
61
<PAGE>
ONLINE ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
NOTE B: RELATED PARTY TRANSACTIONS, CONTINUED
1997, CONTINUED
During the year ended December 31, 1997, the Company advanced officers $15,900.
The officers repaid the advances during the year ended December 31, 1998.
As of December 31, 1997, the Company owed an officer $449 for third-party
expenses paid on behalf of the Company. The $449 is included in the accompanying
consolidated balance sheets as accounts payable, related party.
NOTE C: PROPERTY AND EQUIPMENT
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 is included as other current liabilities on
the consolidated balance sheets. Accrued interest on the vendor financing
totaled $4,214 at December 31, 1998.
Property and equipment consisted of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Furniture and fixtures............................ $ 12,119 $ 9,795
Trade show exhibit equipment...................... 96,343 -
Engineering and other equipment................... 52,838 15,208
Computers......................................... 30,343 26,768
Software.......................................... 4,840 2,372
------------- -------------
196,483 54,143
Less: accumulated depreciation.................... (34,764) (19,412)
------------- -------------
$ 161,719 $ 34,731
============= =============
</TABLE>
Depreciation expense for the years ended December 31, 1998 and 1997 totaled
$15,352 and $6,931, respectively. $6,346 of depreciation in 1998 was
reclassified to research and development.
62
<PAGE>
ONLINE ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
NOTE D: SHORT-TERM DEBT
Short-term debt consisted of the following notes payable and line of credit at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
NOTES PAYABLE
Note payable, due in monthly installments of $1,500 plus interest,
interest at 12.50 percent, maturing August 1999,
unsecured ........................................................ $ -- $ 14,449
Note payable to officer, due on demand,
interest at 10.00 percent, unsecured
(see Note B) ..................................................... -- 7,000
Note payable to officer, due on demand,
interest at 10.00 percent, unsecured
(see Note B) ..................................................... -- 15,000
Note payable to officer, due on demand, interest at 10.00 percent,
collateralized by receivables, inventory and patent rights
(see Note B) ..................................................... 15,000 15,000
Note payable to officer, due on demand, interest at 10.00 percent,
collateralized by receivables, inventory and patent rights
(see Note B) ..................................................... 25,000 25,000
Note payable to officer, due on demand, interest at 10.00 percent,
collateralized by receivables, inventory and patent rights
(see Note B) ..................................................... 68,500 --
Note payable to officer, due on demand, interest at 10.00 percent,
collateralized by receivables, inventory and patent rights
(see Note B) ..................................................... 34,250 --
Note payable to President's family trust, matures December 21,
1999, interest at 10.00 percent, collateralized by 50,000 shares
of the Company's common stock
(see Note B) ..................................................... 150,000 --
-------- --------
$292,750 $ 76,449
======== ========
</TABLE>
63
<PAGE>
ONLINE ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
NOTE D: SHORT-TERM DEBT, CONTINUED
LINE OF CREDIT
The Company has a $50,000 revolving line of credit, of which, $10,310 was unused
as of December 31, 1998. Advances on the line carry an interest rate of 13.75
percent. 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. Accrued interest on
the credit line totaled $646 at December 31, 1998.
NOTE E: OTHER NON-CURRENT 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 $47,160 as of December 31, 1998. Liabilities for which creditors
have no longer pursued their claims, approximately $70,840, will be written-off
as the legal obligation to pay expires.
NOTE F: SHAREHOLDERS' EQUITY
PREFERRED STOCK
Each share of the Series A preferred stock is convertible to two shares of the
Company's common stock and, at the election of the Company's directors, will pay
a 6.00 percent cumulative dividend payable in cash and/or the Company's common
stock. The cumulative unpaid dividend on Series A preferred stock totaled $1,054
and $-0- at December 31, 1998 and 1997, respectively. The cumulative dividend is
included in the accompanying financial statements.
Each share of the Series B preferred stock is convertible to two shares of the
Company's common stock and, at the election of the Company's directors, will pay
a 6.00 percent cumulative dividend payable in cash and/or the Company's common
stock. The cumulative unpaid dividend on Series B preferred stock totaled
$18,399 and $2,500 at December 31, 1998 and 1997, respectively. The cumulative
dividend is included in the accompanying financial statements.
Holders of the preferred stocks have liquidation rights that entitle them to
receive payment for the stated value per share and any accrued and unpaid
dividends prior to distribution to any junior stock. Preferred shareholders have
no voting rights.
COMMON STOCK
On August 12, 1998, the Company issued 14,162 shares of its restricted common
stock in exchange for equipment. Management 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.
64
<PAGE>
ONLINE ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
NOTE F: SHAREHOLDERS' EQUITY, CONTINUED
On October 24, 1997, the Company issued 303,000 shares of its restricted common
stock and 125,000 shares of its Series B cumulative, convertible preferred stock
to extinguish debt totaling $354,176. On October 24, 1997 the market value of
the Company's common stock was $3.00 per share and each share of Series B
preferred stock was convertible to two shares of common stock. Management valued
the transaction at the market value of the common stock issued of $3.00 per
share, or $1,659,000 (after converting each share of preferred to two shares of
common). The $1,659,000 includes a beneficial conversion charge of $500,000 for
the conversion of the preferred stock to common stock and an extraordinary loss
on the extinguishment of debt totaling $804,824. The remaining $354,176
eliminated the debt balance.
STOCK OPTIONS
On September 25, 1998, the Company granted options for 300,000 shares of its
common stock for services in accordance with the terms of its public relations
agreement. The options were vested and exercisable as of the grant date and
expire on September 25, 2001. No options were exercised as of December 31, 1998.
Following is a schedule of the options and the related strike prices:
Option Number Exercise
Group of shares Price
----------- --------------- -----------------
#1 50,000 $ 1.87
#2 50,000 $ 2.37
#3 50,000 $ 2.87
#4 50,000 $ 3.37
#5 50,000 $ 3.87
#6 50,000 $ 6.00
The weighted average exercise price for the options was $3.39 at December 31,
1998. On the grant date, the bid price of the Company's common stock was $1.37.
On March 4, 1998, the Company granted options to purchase 1,000,000 shares of
its common stock to two officers in accordance with the terms of its executive
employment agreements. The options were vested and exercisable as of the grant
date and expire on March 4, 2003. All 1,000,000 options were exercisable at
$5.50 per share as of December 31, 1998. No options were exercised as of
December 31, 1998. 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.
Management priced the options based on the $5.00 offering price. Therefore 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 stock option plan that provides for the granting of stock
options to employees. The objectives of this plan includes attracting and
retaining the best personnel, providing for additional performance incentives,
and promoting the success of the Company by providing employees the opportunity
to acquire common stock. The Company is authorized to grant 500,000 common
shares under the plan, of which 212,500 have been granted. Options outstanding
under the plan have been granted at prices that are either equal to or above the
market value of the stock on the date of grant. All options are fully vested on
the grant date. All 212,500 options were exercisable at December 31, 1998 at
$2.875 per share. The options expire on December 16, 2001.
65
<PAGE>
ONLINE ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
NOTE F: SHAREHOLDERS' EQUITY, CONTINUED
The status of the Company's stock-option plan and executive employment options
is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise
of Shares Price
-------------- -------------
<S> <C> <C>
Outstanding at December 31, 1997.................. - $ -
Granted........................................... 1,212,500 5.04
Exercised......................................... - -
Canceled.......................................... - -
-------------- -------------
Outstanding at December 31, 1998.................. 1,212,500 $ 5.04
============== =============
</TABLE>
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 grated 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
option awards are anticipated in future years.
For The
Year Ended
December 31,
1998
--------------
Net losses
As reported.......................................... $ (1,513,197)
Increased loss due to:
Employee stock option plan....................... (266,688)
Executive employment options..................... (2,054,000)
Public relations agreement options............... (66,550)
--------------
Proforma............................................. $ (3,900,435)
==============
Loss per common share
As reported.......................................... $ (0.14)
Proforma............................................. $ (0.35)
The waverage fair value of options granted during 1998 estimated on the date of
grant using the Black-Scholes option-pricing model was $1.58. 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 60.47 percent,
risk-free interest rate of 4.525 percent, and an expected life of three years.
66
<PAGE>
ONLINE ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
NOTE G: STOCK-BASED COMPENSATION
1998
On May 20, 1998, the Company issued 1,106,660 shares of its restricted common
stock as payment for $117,626 in commissions related to its common stock
offering. Management valued the transaction at the market value of the stock
issued on the date of the broker agreement, September 8, 1997, of $.78 per
share, or $864,301. The $864,301 is included in the accompanying 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 market value of the stock issued of $.75 per
share, or $59,799.
1997
On October 1, 1997, the Company issued 5,124 shares of its restricted common
stock as payment for $15,373 in advertising and consulting services. Management
valued the transaction at the market value of the stock issued of $3.00 per
share, or $15,373.
NOTE H: INCOME TAXES
A reconciliation of the U.S. statutory federal income tax rate to the effective
rate follows for the years ended December 31, 1998 and 1997:
December 31,
----------------------------
1998 1997
----------- -----------
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% 0.00%
Net operating loss for which no
tax benefit is currently available -35.31% -37.30%
----------- -----------
0.00% 0.00%
=========== ===========
Deferred taxes consisted of the following at December 31, 1998 and 1997:
December 31,
------------------------------
1998 1997
------------- -------------
Deferred tax asset,
Net operating loss carryforward $ 879,697 $ 345,316
Valuation allowance..................... (879,697) (345,316)
------------- -------------
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, 1998 and 1997 totaled $534,381 and $237,475, respectively. The net
operating loss carryforward expires through the year 2018.
67
<PAGE>
ONLINE ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
NOTE H: INCOME TAXES, CONTINUED
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.
NOTE I: 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, 1998 and 1997 totaled $36,942 and $28,057, respectively. Future
minimum rental payments under the office lease are as follows:
December 31,
------------
1999.................................. $ 53,236
2000.................................. $ 54,038
2001.................................. $ 4,503
The Company has liabilities at December 31, 1998 totaling $70,840, which were
incurred in 1994 and 1995 and were associated with a previous line of business.
These liabilities, for which creditors have no longer pursued their claims, will
be written off as the legal obligation to pay expires. Accrued interest on the
liabilities totaled $21,798 at December 31, 1998.
OFFICER EMPLOYMENT AGREEMENTS
As part of the officer employment agreements, each officer shall become fully
vested to receive options to purchase 500,000 shares (one million in total) of
the Company's common stock upon the achieving the following performance goals:
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;
The options are exercisable at $.0001 per share and expire on March 4, 2003.
LEGAL MATTERS
GMM and the Company's Chief Executive Officer ("CEO") have been named as
defendants in a lawsuit in which the plaintiff is 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 subsequent to December 31, 1998.
See Note O - Subsequent Event.
On December 2, 1998, the Company was awarded a judgment in the amount of $62,889
against a customer. The Company began collection efforts following the
customer's default on the judgement. Management of the Company decided to record
an allowance against 100 percent of the judgement receivable as of December 31,
1998, due to the uncertainty of collection.
68
<PAGE>
ONLINE ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
NOTE I: COMMITMENTS AND CONTINGENCIES, CONTINUED
LEGAL MATTERS, CONTINUED
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 J: CONCENTRATIONS OF CREDIT RISK
CUSTOMERS
Approximately 39 percent of the Company's total revenues earned in 1997 were
from contracts with one customer.
CASH
The Company has concentrated its credit risk for cash by maintaining deposits in
a financial institution, which may at times, exceed the amounts covered by
insurance provided by the Unites States Federal Deposit Insurance Corporation
(FDIC). The maximum loss that would have resulted from that risk totaled $61,300
at December 31, 1998, for the excess of the deposit liabilities reported by the
financial institution over the amount that would have been covered by federal
insurance. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk to cash.
NOTE K: LITIGATION AND SETTLEMENTS
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 (see Note B). 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 judgement 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
resisting the trustee's attempts to collect the balance and believes the
likelihood that the Company will incur additional losses related to this lawsuit
are remote.
During the year ended December 31, 1998, the Company settled a lawsuit related
to an account payable with Topower Computer (USA), Inc., whereby the Company
agreed to pay $15,000. The Company paid $5,000 of the $15,000 settlement on
December 1, 1998. The remaining $10,000 is due in five equal installments of
$2,000 on the first of the month from January 1999 to May 1999. The $10,000 owed
at December 31, 1998 is included as other current liabilities in the
accompanying consolidated balance sheets.
Subsequent to December 31, 1998, the Company settled a third lawsuit for
$25,000. The balance of the settlement is due on or before October 1, 1999. The
$25,000 is included as other current liabilities in the accompanying
consolidated balance sheets.
The total loss from litigation settlements of $190,000 is included as losses on
litigation settlements in the accompanying consolidated statements of
operations.
69
<PAGE>
ONLINE ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
NOTE L: ACQUISITION OF RENAISSANCE SYSTEMS, INC.
On December 17, 1997, OPS acquired substantially all of the outstanding common
stock of a private company, Renaissance Systems, Inc. ("RSI"), in exchange for
$122,500 cash and 1,024,318 shares of the Company's $.0001 par value common
stock, valued at $272,500, for a total purchase price of $395,000. The
transaction has been accounted for as a purchase in accordance with Accounting
Principles Board Opinion No. 16. Following the allocation of a portion of the
purchase price to the tangible assets and to the acquired research and
development associated with the power supply technology of $5,806 and $127,400,
respectively, the remaining balance of the purchase price over the fair value of
all assets was recorded as goodwill in the amount of $261,794. It is
management's expectation that the acquired research and development will have an
alternative future use. All future research and development costs associated
with the power supply technology will be expensed in the period in which they
occur.
OPS entered into a license agreement with RSI in January 1997, prior to the
acquisition, whereby OPS would acquire the rights to a certain power supply
technology, developed by RSI, for $395,000 in cash and 75,000 shares of the
Company's common stock. Once the technology was out of the development stage,
the Company would pay additional amounts for the license agreement. During 1997
and prior to the end of the development stage and the acquisition of RSI, the
Company made payments, related to the license agreement, totaling $122,500 in
cash and 75,000 shares of the Company's common stock. Substantially all of RSI's
revenues were earned through transactions with OPS during 1997; therefore, all
pre- affiliation transactions were eliminated with the recording of the
acquisition.
RSI had previously granted stock options to three individuals for a total of
181,000 shares of RSI's common stock. Two options expired in 1998 and the third
expired January 15, 1999. No shares were issued in conjunction with the RSI
options.
NOTE M: 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 1998 and 1997. 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
under 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 that 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. Following is a summary of
the offerings conducted in 1998 and 1997:
70
<PAGE>
ONLINE ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
NOTE M: PRIVATE OFFERINGS, CONTINUED
Offering #1 Offering #2 Offering #3
----------- ----------- -----------
Date: June 30, 1996 April 2, 1997 September 11, 1997
Offer: $.50/share $5.00/share $5.00/share
Minimum: None $ 5,000 $ 25,000
Maximum: $ 500,000 $ 500,000 $1,000,000
Sold in 1997:
Shares: 795,798 109,248 36,672
Proceeds: $ 392,138 $ 546,240 $ 183,361
Sold in 1998:
Shares -- -- 99,260
Proceeds: $ -- $ -- $ 496,300
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 that 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. Following is a summary of the offerings conducted in
1998:
Offering #1 Offering #2
Series B Series A
----------------- ------------------
Date: October 12, 1998 November 19, 1998
Offer: $2.00/share $2.00/share
Sold in 1998
Shares: 169,950 105,400
Proceeds: $ 339,900 $ 210,800
71
<PAGE>
ONLINE ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
NOTE N: YEAR 2000 COMPLIANCE
The Year 2000 issue (Y2K) is the result of computer programs written using two
digits rather than four to define the applicable year. Any of the Company's
computer and telecommunications programs that have date sensitive software may
recognize a date using "00" as the year 1900 instead of 2000. This could result
in system failure or miscalculations causing disruptions in operations,
including the ability to process transactions, send invoices, or engage in
similar normal business activities.
Products produced by the Company do not contain date sensitive software;
however, the Company cannot determine the extent to which the Company is
vulnerable to third parties' failure to remediate their own Y2K problems. As a
result, there can be no guarantee that the systems of other companies on which
the Company's business relies will be timely converted, or that failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would have a material adverse affect on the Company. In view
of the foregoing, there can be no assurance that the Y2K issue will not have a
material adverse effect on the Company's business.
NOTE O: GOING CONCERN
The Company has suffered recurring losses from operations since inception and at
December 31, 1998 has a working capital deficit. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The Company plans to develop operations in connection with research and
development related to power supply technology acquired in December 1997. The
Company plans to raise funds through additional sales of its preferred and
common stocks to support the Company's business plan and to fund losses until it
can achieve profitable operations. In addition, the Company receives working
capital advances from officers and directors on an as needed basis. The
Company's ability to continue as a going concern is dependent upon successful
completion of additional financings and ultimately, upon achieving profitable
operations. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
NOTE P: SUBSEQUENT EVENT
On April 22, 1999 the CEO entered into a settlement agreement with a plaintiff
who had filed suit against both the CEO and GMM for default of the CEO's
personal $96,000 note payable dated October 1995, due and payable March 19,
1996, in which the CEO had obligated GMM as guarantor. The settlement was for
$98,170 and agreed to by the plaintiff , the CEO, GMM and the Company. The CEO
personally paid the settlement on April 23, 1999.
NOTE Q: UNAUDITED INTERIM FINANCIAL INFORMATION
RELATED PARTY TRANSACTIONS
As of September 30, 1999, the Company owed an officer $181,750 for eight
promissory notes executed in from December 1997 through August 1999. The officer
advanced $89,000 to the Company during the nine months ended September 30, 1999
and the Company repaid $50,000 during the same period. The $181,750 balance is
included in notes payable, related parties in the accompanying unaudited
consolidated balance sheet. Accrued interest on the notes totaled $15,098 at
September 30, 1999, which is included as accrued interest payable, related
parties in the accompanying unaudited consolidated balance sheet.
72
<PAGE>
ONLINE ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
NOTE Q: UNAUDITED INTERIM FINANCIAL INFORMATION, CONTINUED
RELATED PARTY TRANSACTIONS, CONTINUED
As of September 30, 1999, the Company owed $150,000 to the family trust of the
Company's President. No principal payments were made on the note during the nine
months ended September 30, 1999; however, the Company made interest payments
totaling $10,634. The $150,000 is included in notes payable, related parties in
the accompanying unaudited consolidated balance sheet. Accrued interest on the
note totaled $-0- at September 30, 1999.
CAPITAL LEASE OBLIGATIONS
Capital leases consisted of the following at September 30, 1999:
Lease payable, due in 36 monthly installments
of $453, interest at 7.90 percent, maturing
June 2002, collateralized by equipment $ 13,262
Lease payable, due in 36 monthly installments
of $954, interest at 12.50 percent, maturing
June 2002, collateralized by equipment 26,502
------------
39,764
Less: current maturities............................. (13,154)
------------
$ 26,610
============
Maturities on capital lease obligations as of September 30 are as follows:
2000...................................... $ 13,154
2001...................................... $ 14,666
2002...................................... $ 12,069
SHAREHOLDERS' EQUITY
On July 16, 1999, the Company's board of directors authorized a private offering
of 2,500,000 shares of its $.0001 par value, common stock at a cost of $2.00 per
share. 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 are offered pursuant to an exemption from
registration requirements of the Act and exemptions from registration provided
by applicable state securities laws. The securities are offered on a "best
efforts" basis through securities dealers and others that may lawfully offer and
sell securities and are paid a commission up to ten percent of the subscriptions
accepted by the Company. Management of the Company, who is not paid any
commission or compensation for offering or selling the securities, also sells
the securities.
73
<PAGE>
ONLINE ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
NOTE Q: UNAUDITED INTERIM FINANCIAL INFORMATION, CONTINUED
SHAREHOLDERS' EQUITY, CONTINUED
The minimum number of shares to be sold in the offering is 250,000, resulting in
gross proceeds of $500,000. The maximum number is 2,500,000 shares, resulting in
$5,000,000 of gross proceeds. As of September 30, 1999, the Company had sold
317,500 shares for gross proceeds totaling $635,000. Of the $635,000 in total
proceeds collected, the Company held $500,000 and $135,000 were held in escrow.
The Company incurred $157,120 of costs associated with the common stock
offering. $151,358 of the offering costs was paid through the issuance of common
stock.
During the nine months ended September 30, 1999, the Company issued 15,000
shares of its common stock as payment for legal services valued at $15,407.
INCOME TAXES
At September 30, 1999, deferred taxes consisted of a net tax asset totaling
$1,216,776 due to a net operating loss carryforwards. The valuation allowance
offsets net deferred tax asset for which there is no assurance of recovery. The
change in the valuation allowance for the nine months ended September 30, 1999
was $336,979, which increased the valuation allowance to $1,216,776. Net
operating loss carryforwards expire through the year 2019.
STOCK-BASED COMPENSATION
On June 29, 1999, the Company issued 336,350 shares of its restricted common
stock as payment for $151,358 in commissions related to its common stock
offering. Management valued the transaction at the market value of the stock
issued on the date of the broker agreement, October 23, 1998, of $.75 per share,
or $252,263. The $252,263 is included in the accompanying financial statements
as stock offering costs.
On August 20, 1999, the Company issued 15,000 shares of its restricted common
stock as payment for $15,407 in legal services. Management valued the
transaction at the market value of the stock issued of $2.19 per share, or
$32,805.
CONCENTRATION OF CREDIT RISK
The Company has concentrated its credit risk for cash by maintaining deposits in
a financial institution, which may at times, exceed the amounts covered by
insurance provided by the Unites States Federal Deposit Insurance Corporation
(FDIC). The maximum loss that would have resulted from that risk totaled
$728,270 at September 30, 1999, for the excess of the deposit liabilities
reported by the financial institution over the amount that would have been
covered by federal insurance. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk to cash.
74
<PAGE>
ONLINE ENTERTAINMENT, INC.
Notes to Consolidated Financial Statements
NOTE Q: UNAUDITED INTERIM FINANCIAL INFORMATION, CONTINUED
CONTINGENCIES
The Company may be contingently liable to certain shareholders who purchased
common and preferred stock during 1997, 1998 and 1999 if they elect to have the
transactions rescinded pursuant to the offer of rescission to be made by the
Company. According to management and legal counsel, these share offerings may
have been conducted in violation of the registration requirements of the
Securities Act of 1933, as amended (the "Act"). To remedy this situation, the
Company intends to file a registration statement with the Securities and
Exchange Commission, which would include a rescission offer to those
shareholders who purchased the securities under an offering that was deemed to
be in violation of the Act. If 100 percent of the suspected transactions were
rescinded, the Company would owe the affected shareholders a total of
approximately $1,299,803 plus $136,480 of interest. Management believes that the
amount of the ultimate liability as a result of the offer to rescind could be
considerably less. The amount or probability of any financial liability could
not be reasonably estimated at September 30, 1999.
GOING CONCERN
The Company has suffered recurring losses from operations since inception and at
December 31, 1998 had a working capital deficit. In addition, the Company
continues to experience operating losses through September 30, 1999 (unaudited).
Development costs, fixed overhead and lack of sales have been the main causes
for the net operating losses. The Company's first new product was released in
October 1999 to prospective customers and distributors for product evaluation.
The Company's business plan is to secure orders and begin manufacturing in the
fourth quarter of 1999 followed by shipment of product during the first quarter
of 2000. Further, management has forecasted sufficient sales of the new power
supplies in the year 2000 that should eliminate any further net operating
losses. The Company's ability to continue as a going concern is ultimately
dependent upon achieving profitable operations. There is no assurance the
Company will be successful in manufacturing and selling its new power supplies
or in achieving profitable operations. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
75
<PAGE>
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...............................................................950
Total..................................................................$ 41,000
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:
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 $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 125,000
restricted shares of series B preferred stock at
$.034 to pay off $104,146 of debt 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 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 $1.00 to
convert undesignated preferred 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 series B preferred stock at
$2.00 to 1 accredited investor. There may not have
been an exemption from section 5 registration for
these offers and sales.
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B. 1998.
(1) For cash: 284,687 restricted common shares for $571,744:
99,260 restricted shares at $5.00. Of these
shares, 72,460 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 26,800 shares (which
then were believed to have ben part of the
same offering) were sold to investors
(including 30 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 $134,000) 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 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 $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 $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.
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(5) For
equipment: 14,162 restricted common shares at $.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 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: 306,284 shares of restricted preferred stock
(25,600 series A and 280,684 series B) at $2.00 to
accredited and more than 35 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.
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 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: 15,000 shares of restricted common stock at $1.03
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.
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(4) For dividend
on preferred: A total of 34,827 share of series A 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 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 1,230,543 shares of 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 532,234 shares of 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.
For such transactions, the Company relied upon Section 4(2) of the
Securities Act of 1933 as an exemption available from the registration
requirements of Section 5 of the Securities Act of 1933 for transactions by an
issuer not involving a public offering. The securities were issued to a
purchaser who represented, in a manner satisfactory to the Company, that it had
acquired the securities for investment and not with the view of the distribution
thereof. No advertising or general solicitation was employed by the Company in
offering the securities and no commissions were paid in connection with the
sales thereof. The securities of the Company issued to the purchasers have been
embossed with the legend restricting transfer of such securities. A stop
transfer order against transfer of the certificates representing all the common
stock issued and outstanding as indicated above has been noted on the Company's
stock transfer ledger.
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 (3)
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10.1 Agreement with Saturn (2)
23.1 Consent of Cordovano and Harvey P.C. (1)
23.2 Consent of Counsel (3)
(1) Previously filed.
(2) Filed herewith.
(3) To be filed by amendment.
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.
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
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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.
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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.1 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 January 10, 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, 01/10/00
- ------------------------------- Chief Executive Officer,
Larry G. Arnold
/s/ Kris M. Budinger Director, President, 01/10/00
- ------------------------------- Secretary
Kris M. Budinger
- --------------------------------
Thomas Glaza Director
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EXHIBIT 5.1
Stephen E. Rounds, Attorney at Law
4635 East Eighteenth Ave.
Denver, Colorado 80220
January 10, 2000
OnLine Power Supply, Inc.
6909 S. Holly Circle
Suite 200
Englewood, Colorado 80112
Re: Registration Statement on Form SB-2
SEC File No. 333-93341
Gentlemen:
OnLine Power Supply, Inc. ("Company") has filed a registration
statement for a rescission offer by the Company to refund money (plus interest)
paid to the Company by certain investors who bought shares of common stock, and
shares of series A and series B preferred stock (since converted to shares of
common stock, as set forth in the registration statement). Hereafter, the
securities which are the subject of the registration statement are referred to
as the "rescission shares." I have acted as counsel to the Company in connection
with the preparation and filing of the registration statement.
Pursuant to the registration statement, when declared effective, the
holders of the rescission shares will have the right to either accept the
Company's refund offer, or to decline the offer and thereby reaffirm their
investment decision to keep all the rescission shares.
My opinion and consent is required in connection with such registration
statement. Such opinion and consent are to be filed as separate exhibits to the
pre-effective amendment no. 1 to the registration statement.
DOCUMENTS REVIEWED
I have examined originals, certified copies or other copies identified
to my satisfaction, of the following:
1. Articles of Incorporation of the Company.
2. Bylaws of the Company.
3. All exhibits listed in Part II of the registration statement on Form
SB-2.
4. Part I of the registration statement.
5. Minutes of proceedings of the Company board of directors from August
1996 to the date hereof.
6. Other documents as appropriate under the circumstances.
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OnLine Power Supply, Inc.
January 10, 2000
Page -2-
I have also consulted with officers and representatives of the Company,
and received such representations and assurances concerning the exhibits
described in paragraph 3 and the registration statement described in paragraph
4, as I have deemed advisable or necessary under the circumstances. Although I
have not undertaken independent verification of the matters covered by this
paragraph, I have no reason to believe that the representations and assurances
received are materially inaccurate or false.
OPINION
The following opinion is subject to compliance by the Company with
applicable state securities laws, to declaration of effectiveness of the
Company's registration statement, and to the last sentence of this paragraph.
Based on my review of the documents listed above, it is my opinion that the
shares of common stock to be in effect offered and sold by the Company to the
holders of the rescission shares who do not elect to accept the Company's refund
offer, will be upon such effective offer and sale to such persons, duly and
validly issued, fully paid and non-assessable shares of the common stock of the
Company. This opinion assumes that the refund offer is conducted in accordance
with the final prospectus contained in the effective registration statement.
No opinion is expressed, and none shall be inferred to be expressed,
with respect to federal and state income tax laws and their impact on the
holders of the rescission shares.
No opinion is expressed, and none shall be inferred to be expressed,
with respect to the financial statements contained in the registration
statement.
This opinion has been delivered to you for the purpose of being
included as an exhibit to the registration statement and is intended solely for
your benefit.
Yours Sincerely,
/s/ Stephen E. Rounds
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EXHIBIT 10.1
December 8, 1999
Mr. Wallace Tsuha
Saturn Electronics & Engineering, Inc.
255 Rex Boulevard
Auburn Hills, MI 48326
RE: Manufacturing and Business Relationship
Dear Wally:
The following represents the terms under which Saturn will manufacture OnLine
Power Supply Products. These terms more specifically address the relationship
under which OnLine will utilize Saturn manufacturing abilities and financial
strengths.
1. Saturn will become the exclusive global manufacturer of the power
supply products developed and sold by OnLine for the duration of the
specific product families (front ends, 48V PWR Supply).
2. OnLine will require financing of material by Saturn to initiate the
start up and production of the products. Saturn agrees to finance these
costs by utilizing OnLine customer purchase orders and accounts
receivable as the underlying security to fund the necessary amounts as
needed. Terms are net 30 days for normal purchases. However, subject to
receipt of payment from OEM customers not to exceed 45 days. An escrow
account will be set up to disburse the funds as received by escrow
agent. For any down payment the disbursement will be split 75% Saturn
and 25% OnLine.
3. When necessary or to its advantage, OnLine agrees to execute first tier
sales agreements with Saturn to facilitate minority owned business
credit customers. Under these circumstances, Saturn will receive a 5%
markup on these sales and will pay OnLine an amount equal to the
difference between the price paid by the customer and the price paid to
OnLine less 5%.
4. If for any reason, OnLine becomes insolvent or unable to pay its debts
to Saturn, OnLine grants Saturn a royalty free license to build out its
inventory position and sell the product directly to OnLine customers
completing existing customer purchase order requirements The license
would exist for the period it takes to liquidate Saturn based
inventory, or in non-cancelable orders for parts. In addition, Saturn
has the first right of refusal on acquiring OnLine's technology,
patents and designs if OnLine becomes insolvent or unable to pay its
debts.
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5. Saturn agrees to be price competitive within a 10% range of other bids
from other comparable manufacturers, offering comparable financing,
design, engineering and quality support.
6. Saturn and OnLine will split any design for manufacturing cost savings.
/s/ Kris Budinger 12/8/99 /s/ Wallace K. Tsuha, Jr. 12/8/99
- ---------------------------------- -----------------------------------------
Kris Budinger Date Wallace K. Tsuha, Jr. Date
President Chairman, CEO & President
Saturn Electronics & Engineering, Inc.
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EXHIBIT 23.2
Stephen E. Rounds, Attorney at Law
4635 East Eighteenth Ave.
Denver, Colorado 80220
January 10, 2000
OnLine Power Supply, Inc.
6909 S. Holly Circle
Suite 200
Englewood, Colorado 80112
Re: Registration Statement on Form SB-2
SEC File No. 333-93341
Gentlemen:
I hereby consent to the filing of my opinion to the registration
statement on Form SB-2. However, I do not admit that I am in the category of
those persons whose consent is required to be so filed by Section 7(a) of the
Securities Act of 1933.
Yours Sincerely,
/s/ Stephen E. Rounds
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
Securities and Exchange Commission
Washington, DC
We consent to the use in this registration statement of Online Power Supply,
Inc. on Form SB-2, as amended by Amendment No. 1, of our report dated March 2,
1999, appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Cordovano and Harvey, P.C.
Denver, Colorado
January 11, 2000
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