<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-14199
LOGO
1,000,000 SHARES OF COMMON STOCK
500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
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Of the 1,000,000 shares of common stock, no par value ("Common Stock")
offered, 750,000 shares are
being sold by Digital Power Corporation ("Digital Power" or the "Company") and
250,000 shares are being sold by certain selling stockholders of the Company
(the "Selling Stockholders"). In addition, the Company is selling 500,000
redeemable common stock purchase warrants ("Warrants") entitling the holders
thereof to purchase during a three-year period from the date of this Prospectus
("Exercise Period") one share of Common Stock at an exercise price of $5.00 per
share, subject to adjustment. See "Principal and Selling Stockholders and
Warrantholders." The Company will not receive any proceeds from the sale of
shares by the Selling Stockholders. Under certain conditions, the Company shall
have the right upon 30 days notice to call each Warrant for redemption at $.125
per Warrant. See "Description of Securities." Further, the Company is
registering 500,000 shares of Common Stock that will be issued upon the exercise
of the Warrants. See "Management," "Certain Transactions," and "Description Of
Securities." Prior to this offering, there has been no public market for the
Common Stock or Warrants of the Company. See "Underwriting" for the factors to
be considered in determining the initial public offering price. The Common Stock
and Warrants have been approved for quotation on The Nasdaq SmallCap Market
under the symbols DPWR and DPWRW, respectively.
SEE "RISK FACTORS" COMMENCING ON PAGE 8 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE COMMON STOCK AND WARRANTS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C> <C>
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UNDERWRITING
DISCOUNTS PROCEEDS TO PROCEEDS TO SELLING
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
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Per Share.......... $4.00 $0.40 $3.60 $3.60
- ------------------------------------------------------------------------------------------------
Per Warrant........ $0.125 $0.0125 $0.1125 $-0-
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Total(3)........... $4,062,500 $406,250 $2,756,250 $900,000
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting estimated expenses of $230,000 payable by the Company, and
additional compensation to be received by the Underwriters in the form of a
non-accountable expense allowance equal to three percent (3%) of the
proceeds from the offering of the Common Stock and Warrants, or a total of
$121,875 ($140,156 if the Underwriters' over-allotment is exercised in
full).
(3) The Company has granted the Underwriters an option for 45 days to purchase
up to an additional 150,000 shares at the initial public offering price per
share, and up to additional 75,000 Warrants at $.125 per Warrant solely to
cover over-allotments, if any. If such option is exercised in full, the
total initial public offering price, underwriting discount, and proceeds to
Company will be $4,671,875, $467,188, and $3,304,687, respectively.
The shares and Warrants offered hereby are offered by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares of Common Stock and Warrants will be ready for delivery in Boca
Raton, Florida on or about December 20, 1996, against payment therefor in
immediately available funds.
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WERBEL-ROTH SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS DECEMBER 16, 1996.
<PAGE> 2
[Pictures of Power Supplies]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OR
WARRANTS OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP STOCK
MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
The Company intends to furnish its stockholders annual reports containing
consolidated financial statements audited by its independent auditors and
quarterly reports containing unaudited consolidated financial information for
the first three quarters of each fiscal year.
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise indicated, all
information in this Prospectus assumes that the Underwriters' over-allotment
option, Representative's Warrants, and outstanding options and Warrants will not
be exercised. See "Description of Securities" and "Underwriting."
THE COMPANY
Digital Power Corporation designs, develops, manufactures, and markets
switching power supplies for sale to manufacturers of computers and other
electronic equipment. Switching power supplies are critical components of all
computers and other electronic equipment. The electronic circuitry in computers
and other electronic equipment requires a steady and isolated supply of direct
current (DC) electrical power. In addition, the various components and
subassemblies within computers and other electronic equipment often require
different voltage levels of electrical power. The power supply products of the
Company satisfy these two requirements by converting the alternating current
(AC) electricity from a primary source, such as a wall outlet, into the direct
current required for the proper functioning of electronic circuits, and by
dividing the single electrical current into as many as four discrete output
voltages. The Company's power supply products also monitor and regulate the DC
output voltages being delivered to protect the electronic equipment from harmful
surges and drops in voltage levels. Because the Company's products have a high
"power-density" (measured in watts per cubic inch), the power supply products of
the Company are generally smaller than those of competitors. Furthermore, the
Company's power supply products are extremely "flexible" in design. This
"flexibility" approach allows the Company to modify quickly and inexpensively
its base-design products to satisfy an original equipment manufacturer's (OEM's)
specific power supply needs, thereby enabling the Company to keep to a minimum
its expenses for non-recurring engineering ("NRE") of its base-design products.
As a result of the Company's "flexibility" approach, it has provided samples of
modified power supplies to OEM customers in as quickly as a few days, an
important capability given the increasing emphasis placed by OEMs on
"time-to-market". Digital Power's strategic objective is to exploit this
combination of power density, flexibility, and short time-to-market to win an
increasing share of the growing power supply market. Unless the context
otherwise indicates, the reference to "Digital Power" or the "Company" herein
shall mean Digital Power Corporation and its wholly owned subsidiary Poder
Digital, S.A. de C.V.
Micro-Tech Consultants of Santa Rosa, California reports that the worldwide
market for power supplies was about $15 billion in 1995, with average projected
sales growth of approximately 8.5% over the next five years. This market is
highly fragmented among power supply manufacturers. The Company believes that
there are over 400 different manufacturers competing in the various market
segments. The major segments of the switching power supply market are typically
characterized as either the "captive market" or the "merchant market". The
captive market represents those OEMs who design and manufacture their own power
supplies for use as a component in their own electronic products, whereas the
merchant market represents those OEMs who purchase their power supplies from
third-party manufacturers who specialize in the development and production of
power supplies. The Company believes the merchant market is growing faster than
any other segment of the entire power supply market as OEMs increasingly buy
their power supplies from companies such as Digital Power rather than
manufacturing their own power supplies "in-house".
For the years ended December 31, 1994 and 1995, the Company had revenues
and income before income taxes of $6,249,333 and $144,976, and $10,037,502 and
$826,484, respectively. For the nine months ended September 30, 1996, the
Company had revenues and income before income taxes of $10,071,347 and
$1,089,607.
RISK FACTORS
For a discussion of considerations relevant to an investment in the Common
Stock and Warrants, see "Risk Factors."
3
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THE OFFERING
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Common Stock Offered:
Offering(1)........................................ 750,000 shares
Selling Stockholders............................... 250,000 shares
Total.............................................. 1,000,000 shares
Common Stock to be outstanding after the
Offering......................................... 2,363,275 shares
Warrants(1)........................................ Exercisable until December 16, 1999,
with each Warrant exercisable for one
share of Common Stock at a price of
$5.00, subject to adjustment. See
"Description of Securities."
Use of Proceeds.................................... Repayment of approximately $1.438
million of indebtedness and general
corporate purposes, which may include
product development, advertising,
payment of taxes, contribution to ESOP,
and working capital. See "Use of
Proceeds."
Nasdaq SmallCap Market Symbol
-- Common Stock.................................. DPWR
Nasdaq SmallCap Market Symbol
-- Warrants...................................... DPWRW
</TABLE>
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(1) Assumes that the Underwriters have not exercised an over-allotment option to
purchase up to an additional 150,000 shares and up to 75,000 Warrants.
4
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SUMMARY CONSOLIDATED FINANCIAL DATA
The unaudited summary consolidated financial data presented below should be
read in conjunction with the more detailed financial statements of the Company
and notes thereto along with the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
-------------------------- --------------------------
1994 1995 1995 1996
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<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues.............................. $6,249,333 $10,037,502 $7,199,067 $10,071,347
Income from operations................ 257,935 1,027,772 656,965 1,195,896
Income before income taxes............ 144,976 826,484 532,161 1,089,607
Provision (Benefit) for income
taxes.............................. 23,253 (277,400) 51,355 414,000
Net income............................ 121,723 1,103,884 480,806 675,607
Net income applicable to common
shareholders....................... 30,357 1,012,518 412,281 637,538
Net income per share
Primary............................ 0.02 0.80 0.33 0.41
Fully Diluted...................... $ 0.02 $ 0.66 $ 0.29 $ 0.38
Shares used in per share
calculation........................ 1,226,208 1,258,858 1,254,466 1,573,954
</TABLE>
<TABLE>
<CAPTION>
AS AT
SEPTEMBER 30, 1996
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ACTUAL AS ADJUSTED(1)
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<S> <C> <C>
Balance Sheet Data:
Working capital............................................... $2,921,818 $3,952,084
Total assets.................................................. 5,819,137 6,785,177
Long-term debt................................................ 1,772,834 398,725
Stockholders' equity.......................................... $1,885,267 $4,289,642
</TABLE>
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(1) Adjusted to give effect to the estimated net proceeds of this offering to be
received by the Company.
5
<PAGE> 6
THE COMPANY
Digital Power provides switching power supplies to original equipment
manufacturers (OEMs). The Company designs, develops, manufactures, and markets
50 watt to 750 watt power supplies. Power supplies are complex subassemblies or
modules integral to virtually every electronic product. They can have numerous
different features, but the most important functions of a power supply are to
receive alternating current (AC) electricity from a primary source, such as a
wall electrical outlet, convert that AC current into direct current (DC), reduce
the voltage of an output to the desired level, and regulate and filter the DC
output voltages required for the operation of the various electronic circuits.
The Company believes that its power supply products are superior to those of its
competitors because the Company's products combine high power-density (measured
in watts per cubic inch) with a high degree of design flexibility, allowing the
Company to modify its power supplies in order to satisfy the specific and unique
needs of its OEM customers. The Company has increased its revenues and income
before income taxes from $6,249,333 and $144,976 in fiscal year 1994, to
$10,037,502 and $826,484 in fiscal year 1995. For the nine months ended
September 30, 1996, revenues and income before income taxes were $10,071,347 and
$1,089,607.
According to independent market surveys conducted by Micro-Tech, the total
world market for electronic power supplies is in excess of $15 billion, with
approximately 50% of this market being the "captive market" and the balance
being the "merchant market". Growing at an average annual rate of 13%, the
merchant market is the fastest growing segment of the power supply market, as
OEMs continue to outsource their power supply requirements. This merchant market
is highly fragmented according to the power level, technology, packaging, and
application of a particular power supply. One segment of the merchant market
involves industrial and office automation, industrial and portable computing,
and networking applications. This is the market targeted and served by Digital
Power. The Company believes that its focus on high-efficiency, high-density,
design-flexible power supplies is ideally suited to the rapid growth
opportunities existing in this market segment.
Digital Power's products are sold domestically and in Canada through a
network of 13 manufacturers' representatives. Digital Power also has 28 stocking
distributors in the United States and Europe. In addition, the Company has
formed strategic relationships with three of its customers to private label its
products. Digital Power's customers can generally be grouped into three broad
industries, consisting of the computer, telecommunication, and instrument
industries. The Company has a current base of over 150 active customers,
including companies such as Ascend Communications, AT&T, Westinghouse, Telex,
Storage Dimensions, Motorola, Retix, Stanford Telecommunications, 3Com, and
Centillion Business Unit, a wholly-owned subsidiary of Bay Networks. See
"Business-Breakdown of Product Market".
The Company's strategy is to continue the trend of its sales and profit
growth by making increased sales to existing customers, while simultaneously
targeting sales to new customers. The Company believes that its "flexibility"
concept allows customers a unique choice between its products and products
offered by other power supply competitors. OEMs have typically had to settle for
a standard power supply product with output voltages and other features
predetermined by the manufacturer. Alternatively, if the OEM's product required
a different set of power supply parameters, the OEM was forced to design this
modification in-house, or pay a power supply manufacturer for a custom product.
Since custom-designed power supplies are development-intensive and require a
great deal of time to design, develop, and manufacture, only OEMs with
significant volume requirements can economically justify the expense and delay
associated with their production. Furthermore, since virtually every power
conversion product intended for use in commercial applications requires certain
independent safety agency testing, (e.g. by Underwriters Laboratories) at
considerable expense, an additional barrier is presented to the smaller OEM. By
offering the OEM customer a new choice with the Digital Power "flexibility"
series, the Company believes it has gained a competitive advantage. The
Company's "flexibility" series is designed around a standardized power platform,
but allows the customer to specify output voltages tailored to its exact
requirements within specific parameters. Furthermore, OEMs are seeking power
supplies with greater power density (measured in watts per cubic inch). Digital
Power's strategy in responding to this demand has been to offer increasingly
smaller power supply units or packages. For example, the Company believes that
its US100 series of products, mounted on a 3" x 5" printed circuit board, is the
industry's smallest 100 watt off-line (A/C input) power supply.
6
<PAGE> 7
In addition to the line of proprietary products offered, and in response to
requests from OEMs, the Company has recently begun providing "value-added
services" along with its products. The term "value-added services" refers to the
Company's incorporation of an OEM's selected electronic components, enclosures,
and cable assemblies with the Company's power supply products to produce a power
subassembly that is compatible with the OEM's own equipment and is specifically
tailored to meet the OEM's needs. The Company purchases the parts and components
that the OEM itself would otherwise attach to or integrate with the Company's
power supply, and the Company provides the OEM with that integration and
installation service thus saving the OEM time and money. The Company believes
that this value-added service is well-suited to those OEMs who wish to reduce
their vendor base and minimize their investment in fixed costs since the OEMs
are not required to manufacture their own power subassemblies and thus are not
required to purchase individual parts from many vendors or build assembly
facilities.
Currently, almost all of the Company's manufacturing, including its
value-added services, is done at a 16,000 square foot facility operated by the
Company's wholly-owned subsidiary, Poder Digital, S.A. de C.V., located in
Guadalajara, Mexico. However, the Company has recently entered into an agreement
with a manufacturer in China to manufacture the Company's products. In its
initial phase, the Company believes that the facility in China will complement
its manufacturing facility in Guadalajara, Mexico since the facility in China
will allow the Company to produce power supplies with sufficient lead time at
lower costs, while the Guadalajara facility will continue to manufacture power
supplies that need a quick turnaround or modification.
Through its predecessor, Digital Power was originally formed in 1969 in the
State of California. The Company's executive offices are located at 41920
Christy Street, Fremont, California 94538-3158, and the Company's telephone
number is 510-657-2635.
7
<PAGE> 8
RISK FACTORS
In addition to the other information presented in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the Common Stock and Warrants offered hereby.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" and elsewhere in this Prospectus.
CUSTOMER CONCENTRATION
For the nine months ended September 30, 1996, one OEM accounted for 20.8%
of the Company's total revenues, and for the fiscal year ended December 31,
1995, three OEMs accounted for 18% in the aggregate of total revenues. The one
OEM account which accounted for 20.8% of the Company's total revenues for the
nine months ended September 30, 1996 substantially contributed to the Company's
increase in revenues for such period. Recently, this OEM has decreased the
number of power supplies it has purchased from the Company. Further, this OEM
has indicated that it will require a higher wattage power supply for its new
products and that the OEM intends to use a power supply manufacturer other than
Digital to manufacture such new higher wattage power supply. Although this OEM
has not indicated when it intends to switch over to the higher wattage power
supply, management does not believe that this switch will occur until the second
or third quarter of 1997. The Company is seeking to design a new higher wattage
power supply to satisfy the needs of this OEM. However, even if the Company is
able to design a new higher wattage power supply that satisfies the needs of
this OEM, no assurance can be given that the OEM will change its mind and decide
to use the Company's new higher wattage power supply in its new products.
During 1995, two distributors accounted for 37% of revenues, and during
1994, one distributor accounted for 16% of revenues. Recently, a long term
customer of one of the distributors has substantially increased its purchase of
power supplies. For the nine months ended September 30, 1996 and 1995, the
customer of the distributor represented 8.20% and 3.81% of the Company's total
revenues. Although no assurance can be given, the Company believes that if the
customer of the distributor continues to increase its purchases of power
supplies, this increase will offset the potential decrease in sales to the OEM
discussed in the preceding paragraph. See "Risk Factors -- Dependence on
Computer and Other Electronic Equipment Industries; Customers' Product
Obsolescence." The loss of any one of these OEM customers would have an adverse
effect on the Company's revenues. See "Business" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON COMPUTER AND OTHER ELECTRONIC EQUIPMENT INDUSTRIES;
CUSTOMERS' PRODUCT OBSOLESCENCE
Substantially all of the Company's existing customers are in the computer
and other electronic equipment industries and produce products which are subject
to rapid technological change, obsolescence, and large fluctuations in product
demand. These industries are characterized by intense competition and a demand
on OEMs serving these markets for increased product performance and lower
product prices. Given this industry environment in which they operate, OEMs make
similar demands on their suppliers, such as the Company, for increased product
performance and lower product prices. Thus, in order to be successful, the
Company must properly assess developments in the computer and other electronic
equipment industries and identify product groups and customers with the
potential for continued and future growth. Factors affecting the computer and
other electronic equipment industries, in general, or any of the Company's major
customers or their products, in particular, could have a material adverse effect
on the Company's results of operations. In addition, the computer industry is
inherently volatile. Recently, certain segments of the computer and other
electronic industries have experienced a softening in demand for their products.
Although this has not materially affected the Company's customers, in the event
that it affects all segments of the computer and other electronic industries,
the growth of the Company could be adversely affected.
8
<PAGE> 9
COMPETITION
The design, manufacture, and sale of power supplies is a highly competitive
industry. The Company's competition includes approximately 400 companies located
throughout the world, some of whom have advantages over the Company in terms of
labor and component costs, and some of whom may offer products comparable in
quality to those of the Company. Certain of the Company's competitors, including
Computer Products, Inc., ASTEC America, Zytec Corporation and Lambda
Electronics, have substantially greater fiscal and marketing resources and
geographic presence than does the Company. In addition, in light of the
Company's limited revenues in comparison to the total power supply market, many
competitors may be unaware or indifferent to the Company and its products. If
the Company continues to be successful in increasing its revenues, other
competitors may notice and increase competition for the Company's customers. The
Company also faces competition from current and prospective customers who may
decide to design and manufacture internally the power supplies needed for their
products. To remain competitive, management believes that the Company must
continue to compete favorably on the basis of value by providing advanced
manufacturing technology, offering superior customer service and design
engineering services, continuously improving quality and reliability levels, and
offering flexible and reliable delivery schedules. There can be no assurance
that the Company will continue to compete successfully in this market.
DILUTION
The initial public offering price is greater than the book value per
outstanding share of Common Stock. Accordingly, purchasers in the offering will
suffer an immediate and substantial dilution of $2.18 in the net tangible book
value per share of the Common Stock from the initial public offering price.
Additional dilution will occur upon exercise of outstanding options granted by
the Company. See "Dilution."
DEPENDENCE ON GUADALAJARA, MEXICO FACILITY; FOREIGN CURRENCY FLUCTUATIONS
The Company produces substantially all of its products at its facility
located in Guadalajara, Mexico. The products are then delivered to Fremont,
California for testing and distribution. The Company believes that it has a good
working relationship with its employees in Guadalajara, Mexico and has recently
signed a five-year contract with the union representing the employees. Recently,
the Company has entered into a "turnkey" manufacturing contract with a
manufacturer located in China to produce its products in an attempt to reduce
its dependence on its Mexican facility. At this time the purchase of products
from the manufacturer located in China is minimal and requires advance
scheduling which affects the Company's ability to produce products quickly.
However, if the Company's revenues grow as anticipated, the Company intends to
manufacture more of its products utilizing the Chinese manufacturer. In the
event that there is an unforeseen disruption at the Guadalajara production plant
or with the Chinese manufacturer, such disruption may have an adverse effect on
the Company's ability to deliver its products and may adversely affect the
Company's financial operations.
Further, the Guadalajara, Mexico, facility conducts its financial
operations using the Mexican peso. Therefore, due to financial conditions beyond
the control of the Company, the Company is subject to monetary fluctuations
between the U.S. dollar and Mexican peso. During fiscal 1995, the Mexican peso
was devalued against the U.S. dollar resulting in an approximate $85,000 loss to
the Company. See "Management's Discussion and Analysis and Results of
Operations."
SECURITY INTEREST IN THE COMPANY'S ASSETS
The Company has entered into a $1.5 million revolving credit facility. As
of September 30, 1996, the amount outstanding under the credit facility and
other loans was $1,919,226. Although the Company intends to use part of the
proceeds raised hereby to reduce the credit facility, the credit facility is
secured by substantially all of the Company's assets. Therefore, in the event
the Company is unable to repay the credit facility, the bank will hold a
first-priority security interest in the Company's assets upon default. See "Use
of Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
9
<PAGE> 10
NECESSITY TO MAINTAIN CURRENT PROSPECTUS; STATE BLUE SKY REGISTRATION REQUIRED
TO EXERCISE WARRANTS
The shares of Common Stock issuable on exercise of the Warrants (except the
Warrants issuable upon exercise of the Representative's Warrants) have been
registered with the Commission. The Company will be required, from time to time,
to file post-effective amendments to its registration statement in order to
maintain a current prospectus covering the issuance of such shares upon exercise
of the Warrants. The Company has undertaken to make such filings and use its
best efforts to cause such post-effective amendments to become effective. If for
any reason a required post-effective amendment is not filed, it does not become
effective or is not maintained, the holders of the Warrants may be prevented
from exercising their Warrants. Holders of the Warrants have the right to
exercise the Warrants only if the underlying Shares of Common Stock are
qualified, registered or exempt from registration under applicable securities
laws of the state in which the various holders of the Warrants reside. The
Company cannot issue shares of Common Stock to holders of the Warrants in states
where such shares are not qualified, registered or exempt. See "Description of
Securities."
DEPENDENCE UPON KEY PERSONNEL; NEED TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL
The Company's performance is substantially dependent on the performance of
its executive officers and key personnel, and on its ability to retain and
motivate such personnel. The loss of any of the Company's key personnel,
particularly Robert O. Smith or Claude Adkins, could have a material adverse
effect on the Company's business, financial condition, and operating results.
The Company has "key person" life insurance policies on Mr. Smith in the
aggregate amount of $2 million. The Company also has an employment agreement
with Mr. Smith.
The Company's future success also depends on its continuing ability to
identify, hire, train, and retain other highly-qualified creative, technical,
and managerial personnel. Competition for highly qualified personnel is intense.
There can be no assurance that the Company will be successful in attracting,
assimilating, and retaining such personnel, and the failure to do so could have
a material adverse effect on the Company's business, financial condition, and
operating results. Moreover, in the event of the loss of any such personnel,
there can be no assurance that the Company would be able to prevent the
unauthorized disclosure or use of its proprietary technology, practices,
procedures, or customer lists.
CONCENTRATION OF STOCK OWNERSHIP
Upon the completion of the offering, the present directors, executive
officers, and stockholders owning more than 5% of the outstanding Common Stock
and their respective affiliates will beneficially own approximately 27.0% of the
outstanding Common Stock of the Company (24.9% of the outstanding Common Stock
if the Underwriters' over-allotment option is exercised in full). As a result of
their ownership, the directors, executive officers, and more than 5%
stockholders and their respective affiliates collectively will have substantial
control of all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. Under California
law, however, shareholders are entitled to cumulative voting. Such concentration
of ownership may also have the effect of delaying or preventing a change in
control of the Company. See "Principal and Selling Stockholders and
Warrantholders" and "Description of Securities."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF SECURITIES PRICES
Prior to the offering, there has been no public market for the Company's
Common Stock or Warrants, and there can be no assurance that an active public
market for the Company's Common Stock or Warrants will develop or be sustained
after the offering. The initial offering price will be determined by
negotiations between the Company and the Representative of the Underwriters
based upon several factors. The trading price of the Company's Common Stock or
Warrants could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new products by the Company or its competitors, changes in financial estimates
by securities analysts, the operating and stock price performance of other
companies that investors may deem comparable to the Company, and other events or
factors. Moreover, in some future quarter the Company's operating results may
fall below the expectations of
10
<PAGE> 11
securities analysts and investors. In such event, the market price of the
Company's Common Stock or Warrants would likely be materially and adversely
affected. In addition, the stock market in general, and the market prices for
high-tech related companies in particular, have experienced extreme volatility
that often has been unrelated to the operating performance of such companies.
These broad market and industry fluctuations may adversely affect the trading
price of the Company's Common Stock or Warrants, regardless of the Company's
operating performance. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALES; NO PRIOR TRADING MARKET; REGISTRATION RIGHTS
Sales of a substantial number of shares of the Company's Common Stock in
the public market could have the effect of depressing the prevailing market
price of its Common Stock. Upon the completion of the offering, the Company will
have outstanding 2,363,275 shares of Common Stock (assuming no exercise of
outstanding options and Warrants of 1,449,900). Of these shares, 1,109,750
shares to be sold or distributed in the offering will be freely transferable
without restriction or further registration under the Securities Act of 1933
(the "Securities Act") unless purchased by "affiliates" of the Company as that
term is defined in Rule 144 of the Securities Act ("Affiliates"), which shares
will be subject to the resale limitations of Rule 144 adopted under the
Securities Act. The remaining 1,253,525 shares will be either subject to lock-up
agreements or "restricted securities" as that term is defined under Rule 144
("Restricted Shares"). Restricted Shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rule
144 promulgated under the Securities Act, which rule is summarized below. As a
result of the contractual restrictions described below and the provisions of
Rule 144, additional shares will be available for sale in the public market as
follows: (i) 1,156,740 currently outstanding shares will be eligible for sale
upon expiration of lock-up agreements 12 months from the date of this
Prospectus; (ii) 1,449,900 additional shares will be issuable upon the exercise
of stock options and Warrants, to the extent exercisable as of such date; and
(iii) 96,785 currently outstanding shares will be eligible for sale from time to
time thereafter pursuant to Rule 144. See "Shares Eligible for Future Sale."
Certain stockholders of the Company have entered into lock-up agreements
with Werbel-Roth Securities, Inc. (the "Representative") providing that, with
certain limited exceptions, such stockholders will not offer, sell, contract to
sell, grant an option to purchase, make a short sale, or otherwise dispose of or
engage in any hedging or other transaction that is designed or reasonably
expected to lead to a disposition of any shares of Common Stock for a period of
12 months from the date of this Prospectus without the prior written consent of
the Representative. Other than the (i) 1,109,750 shares being offered or
distributed hereby, (ii) 1,449,900 shares subject to options and Warrants, and
(iii) 96,785 shares subject to Rule 144, as of the date of this Prospectus, no
shares of Common Stock of the Company will be eligible for immediate sale in the
public market until the expiration of the 12 month lock-up agreements with the
Representative of the Underwriters. The Representative may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to lock-up agreements.
Prior to the offerings, there has been no public market for the Common
Stock of the Company, and no predictions can be made as to the effect, if any,
that the sale or availability for sale of shares of additional Common Stock will
have on the trading price of the Common Stock. Nevertheless, sales of
substantial amounts of such shares in the public market, or the perception that
such sales could occur, could adversely affect the trading price of the Common
Stock and could impair the Company's future ability to raise capital through an
offering of its equity securities. See "Description of Securities."
DEPENDENCE ON SUPPLIERS
In order to reduce dependence on any one supplier, the Company attempts to
obtain two suppliers for each component of its products. However, for two line
transformers in three of its products, the Company is dependent on single
suppliers. Currently, these products account for approximately 10% of the
Company's total sales. Although the Company will seek to find other
manufacturers of transformers for these three products, unanticipated shortages
or delays in these parts may have an adverse effect on the Company's results of
operations.
11
<PAGE> 12
NO PATENTS
The Company's products are not subject to any U.S. or foreign patents. The
Company believes that because its products are being continually updated and
revised, obtaining patents would not be beneficial. Therefore, there can be no
assurance that other competitors or former employees will not obtain the
Company's proprietary information and develop it.
POSSIBLE DILUTION FROM WARRANTS AND OPTIONS
On completion of this Offering, options and Warrants to purchase an
aggregate of 1,449,900 shares of common stock will be outstanding, including
700,000 shares underlying the Warrants, 150,000 shares underlying the
Representative's Warrants and 599,900 shares underlying the options issued to
employees and directors of the Company. Holders of some of such options and
Warrants will be able to purchase 599,900 shares of Common Stock at a price less
than the offering price of the Common Stock with a resulting dilution of the
interests to the other stockholders. Because of this potential dilutive effect,
the options and Warrants may have a detrimental impact on the terms under which
the Company may obtain financing through a sale of its Common Stock in the
future. For these reasons, any evaluation of the favorability of market
conditions for a subsequent stock offering by the Company must take into account
any outstanding options or Warrants. See "Dilution," "Management-Stock Plans"
and "Description of Securities."
REDEEMABLE WARRANTS AND IMPACT ON INVESTORS
Provided that the closing bid price of the Common Stock has been at least
$6.00 per share for thirty (30) consecutive trading days, the Warrants are
subject to redemption by the Company. The Company's exercise of this right would
force the holder of the Warrants to exercise the Warrants and pay the exercise
price at a time when it may be disadvantageous for the holder to do so, to sell
the Warrants at the then current market price when the holder might otherwise
wish to hold the Warrants for possible additional appreciation, or to accept the
redemption price. Holders who do not exercise their Warrants prior to redemption
by the Company will forfeit their right to purchase the Shares of Common Stock
underlying the Warrants. See "Description of Securities."
NO DIVIDENDS
The Company has not paid cash dividends on its Common Stock since its
inception and does not anticipate any cash dividends on the Common Stock in the
foreseeable future. For the foreseeable future, the Company intends to reinvest
earnings of the Company, if any, on the development and expansion of its
business. See "Dividend Policy."
AUTHORIZATION OF PREFERRED STOCK; POSSIBLE ANTI-TAKEOVER EFFECTS
The Board of Directors is authorized to issue shares of preferred stock and
to determine the dividend, liquidation, conversion, redemption and other rights,
preferences, and limitation of such shares without further vote or action of the
stockholders. Accordingly, the Board of Directors is empowered, without
stockholder approval, to issue preferred stock with dividend, liquidation,
conversion, or other rights which could adversely effect the voting power or the
rights of the holders of the Common Stock. In the event of such issuance, the
preferred stock could be utilized, under certain circumstances, as a method of
discouraging and delaying or preventing a change in control of the Company. The
Company has no present intention to issue any shares of its preferred stock,
although there can be no assurance that the Company will not do so in the
future. See "Description of Securities."
PENNY STOCK REGULATION
The Commission has adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
system, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer also must
12
<PAGE> 13
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction,
and monthly account statements showing the market value of each penny stock held
in the customer's account. The bid and offer quotations, and the broker-dealer
and salesperson compensation information, must be given to the customer orally
or in writing prior to effecting the transaction and must be given to the
customer in writing before or with the customer's confirmation. In addition, the
penny stock rules require that prior to a transaction in a penny stock not
otherwise exempt from such rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules. While the shares of Common Stock offered hereunder will not
initially be subject to penny stock regulation rules by virtue of the fact that
such registered securities will be quoted on The Nasdaq SmallCap Market, there
can be no assurance that the Company will be able to continuously meet The
Nasdaq SmallCap Market maintenance criteria. See "Risk Factors -- Maintenance
Criteria for Nasdaq Securities."
MAINTENANCE CRITERIA FOR NASDAQ SECURITIES
The Nasdaq Stock Market, Inc., which administers The Nasdaq SmallCap
Market, maintains criteria for continued eligibility on The Nasdaq SmallCap
Market. In order to be included in The Nasdaq SmallCap Market, a company must
maintain $2,000,000 in total assets, a $200,000 market value of the public float
and $1,000,000 in total capital and surplus. In addition, continued inclusion
requires two market-makers and a minimum bid price of $1.00 per share, provided
however, that if a company falls below such minimum bid price, it will remain
eligible for continued inclusion on The Nasdaq SmallCap Market if the market
value of the public float is at least $1,000,000 and the company has $2,000,000
in capital and surplus. The failure to meet these maintenance criteria in the
future may result in the discontinuance of the inclusion of the Company's
securities on The Nasdaq SmallCap Market. In such event, the Company's
securities will be subject to being delisted, and trading, if any, in the Common
Stock of the Company would thereafter be conducted in the over-the-counter
market in the so-called "pink sheets," or the OTC Bulletin Board. Consequently,
an investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, the Company's securities.
The Nasdaq Stock Market, Inc. has recently proposed certain changes to the
entry and maintenance criteria for listing eligibility on The Nasdaq SmallCap
Market. The proposed entry standards would require at least $4 million in net
tangible assets or $750,000 in net income in two of the last three years. The
proposed entry standards would also require a public float of at least one
million shares, a $5 million market value of public float, a minimum bid price
of $4.00 per share, at least three market makers, and at least 300 shareholders.
The proposed maintenance standards (as opposed to entry standards) would require
at least $2 million in net tangible assets or $500,000 in net income in two of
the last three years, a public float of at least 500,000 shares, a $1 million
market value of public float, a minimum bid price of $1.00 per share, at least
two market makers, and at least 300 shareholders. The Nasdaq Stock Market, Inc.
is currently in the process of soliciting comments from investors, issuers,
market participants, and others with respect to the foregoing proposed changes.
No changes have yet been adopted by The Nasdaq Stock Market, Inc.
The Company's securities will be listed on The Nasdaq SmallCap Market prior
to the adoption of the proposed entry standards. The Company further believes
that even if the proposed entry and maintenance standards are adopted, the
Company will be able to satisfy the new entry and maintenance standards.
However, no assurance can be given that the Company will be able to continue to
satisfy the new proposed maintenance standards.
If the Company's securities were subject to the regulations on penny
stocks, the market liquidity for the Company's securities could be severely and
adversely affected by limiting the ability of broker-dealers to sell the
Company's securities and the ability of purchasers in this offering to sell
their securities in the secondary market at a time and price acceptable to them.
13
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 750,000 shares of
Common Stock and 500,000 Warrants offered by the Company hereby are estimated to
be approximately $2,404,375 ($2,975,546 if the Underwriters' over-allotment
option is exercised in full) after deducting the estimated underwriting discount
and offering expenses.
The Company intends to use approximately $1,438,335 of such net proceeds
for the repayment of $1,288,996 outstanding under the Company's revolving credit
facility and loans with San Jose National Bank. The Company's revolving credit
facility bears interest at prime plus 1% and is due in October, 1997. The loans
consist of two loans in the aggregate of $139,339 bearing interest at 10% and
10.5% per annum due in December 1998, and May 1999. In addition, the Company
intends to pay off a $10,000 loan. Proceeds from the revolving credit facility
were used for working capital and proceeds from the two loans were used for the
purchase of equipment. The remaining balance will be used for general corporate
purposes, which may include product development, advertising, payment of taxes,
contributions to the Company's ESOP, and working capital. Any additional
proceeds received upon the exercise of the Warrants, the Underwriters'
over-allotment option or the Representative's Warrants, as well as income from
investments, if any, will be added to working capital. Pending use of the net
proceeds of the offering for the above purposes, the Company intends to invest
such funds in short-term, interest bearing, investment grade obligations.
As a forward looking statement based on its current operations, the Company
believes that the proceeds raised hereby will be sufficient to meet the
Company's financial needs for at least twelve months following the date of the
offering, and that no additional financing will be required in the near future.
The Company will not receive any proceeds from the sale of shares by the
Selling Shareholders or the Warrants by certain Warrantholders.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends since its
inception. The Company currently intends to retain future earnings for use in
the operation and expansion of the business. The Company does not intend to pay
any cash dividends in the foreseeable future. The declaration of dividends in
the future will be at the discretion of the Board of Directors and will depend
upon the earnings, capital requirements, and financial position of the Company.
On May 31, 1996, the Company issued a preferred stock dividend in the form
of Common Stock valued at $1.80 per share on the cumulative accrued but unpaid
dividends on the Series A Preferred Stock. Since such stock dividend, all of the
Series A Preferred Stock has been converted into Common Stock.
14
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1996, as adjusted to give effect to the sale of 750,000 shares of
Common Stock and 500,000 Warrants offered by the Company hereby assuming net
proceeds of approximately $2,404,375, and the application of the net proceeds
therefrom.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Current portion of long-term debt................................... $ 146,392 $ 82,166
----------- -----------
Long-term debt, less current portion................................ 1,772,834 398,725
Stockholders' Equity
Series A Preferred stock, no par value; 2,000,000 shares
authorized; no shares issued and outstanding................... -- --
Common stock, no par value 10,000,000 shares authorized; 1,603,275
shares issued and outstanding; 2,353,275 shares issued and
outstanding as adjusted(1)..................................... $ 5,539,115 $ 7,943,490
Accumulated deficit............................................... (3,172,957) (3,172,957)
Unearned ESOP plan shares......................................... (480,891) (480,891)
----------- -----------
Total stockholders' equity.......................................... 1,885,267 4,289,642
----------- -----------
Total capitalization................................................ $ 3,804,493 $ 4,770,533
=========== ===========
</TABLE>
- ---------------
(1) The above calculations do not include 609,900 shares of Common Stock
issuable upon the exercise of stock options. Of such 609,900 options, (i)
96,900 are immediately exercisable at an exercise price of $0.50, (ii)
178,125 are immediately exercisable at an exercise price of $1.80, (iii)
59,375 are exercisable in May 1997 at an exercise price of $1.80, and (iv)
275,500 are exercisable in May 1998 at an exercise price of $1.80.
15
<PAGE> 16
DILUTION
At September 30, 1996, the net tangible book value of the Company was
$1,764,232, or $1.10 per share. Net tangible book value per share is determined
by dividing the net tangible book value (tangible assets less liabilities) of
the Company at September 30, 1996, by the number of shares of Common Stock
outstanding. Without taking into account any changes in net tangible book value
after September 30, 1996, other than to give effect to the sale of the Company
of 750,000 shares of Common Stock offered hereby, and after deducting
underwriting discounts and commissions and estimated offering expenses payable
to the Company, the pro forma net tangible book value at September 30, 1996
would have been approximately $4,289,642, or $1.82 per share. This amount
represents an immediate dilution to new investors of $2.18 per share and an
immediate increase in net tangible book value per share to existing stockholders
of $0.72 per share. The following table illustrates this dilution per share:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.............................. $4.00
Net tangible book value per share at September 30, 1996............ $1.10
Increase per share attributable to new investors................... .72
-----
Pro forma net tangible book value per share after the offering....... 1.82
-----
Net tangible book value dilution per share to new investors.......... $2.18
=====
</TABLE>
The foregoing information assumes no exercise of outstanding stock options.
At September 30, 1996, there were outstanding options to purchase 96,900 shares
of Common Stock at an exercise price of $.50 per share, and outstanding options
to purchase 513,000 shares of Common Stock at an exercise price of $1.80 per
share (of which options 178,125 are immediately exercisable and 334,875 are
subject to vesting). To the extent outstanding options are exercised, there will
be further dilution to new investors.
The following table sets forth, as of September 30, 1996, the number of
shares of Common Stock purchased, the percentage of shares of Common Stock
purchased, the total gross consideration paid, the percentage of total
consideration paid, and the average price per share paid by the existing
shareholders and by the investors purchasing shares of Common Stock in this
offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT NUMBER PERCENT PER SHARE
--------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............ 1,603,275 68.13% $5,539,115 64.87% $3.45
New investors.................... 750,000 31.87% $3,000,000 35.13% $4.00
--------- ------- ---------- ------- -----
Total.................. 2,353,275 100.00% $8,539,115 100.00% $3.63
========= ======= ========== ======= =====
</TABLE>
16
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data presented below for
the years ended December 31, 1994 and 1995, are derived from and should be read
in conjunction with the more detailed financial statements of the Company and
the notes thereto, which have been audited by Hein + Associates LLP, independent
auditors, whose report is included elsewhere in this Prospectus. The selected
consolidated statements of operations data for the nine months ended September
30, 1995 and 1996 and consolidated balance sheet data as of September 30, 1996
are derived from the unaudited consolidated financial statements of the Company.
In the opinion of the Company, such unaudited consolidated financial statements
include all necessary adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of results for such periods. The
selected consolidated financial data presented below should be read along with
the notes to the audited consolidated financial statements appearing elsewhere
herein, and the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which follows this section.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------ ------------------------
1994 1995 1995 1996
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:..................................... $6,249,333 $10,037,502 $7,199,067 $10,071,347
Cost and expenses:
Cost of sales............................... 4,663,124 7,494,427 5,482,592 7,496,955
Engineering and product development......... 408,966 481,475 348,487 506,331
Sales and marketing......................... 500,338 452,654 345,377 371,507
General and administrative.................. 418,970 581,174 365,646 500,658
Total operating expenses...................... 1,328,274 1,515,303 1,059,510 1,378,496
Income from operations........................ 257,935 1,027,772 656,965 1,195,896
Interest expense, net......................... 102,509 116,030 81,319 100,409
Translation loss.............................. (10,450) (85,258) 43,485 5,880
Income before income taxes.................... 144,976 826,484 532,161 1,089,607
Provision (Benefit) for income taxes.......... 23,253 (277,400) 51,355 414,000
Net income.................................... 121,723 1,103,884 480,806 675,607
Net income applicable to common
shareholders................................ 30,357 1,012,518 412,281 637,538
Net income per share:
Primary..................................... 0.02 0.80 0.33 0.41
Fully diluted............................... $0.02 $0.66 $0.29 $0.38
Supplementary net income per share:(1)
Primary..................................... 0.11 0.90 0.40 0.47
Fully diluted............................... 0.11 0.73 0.34 0.44
Shares used in per share calculations......... 1,226,208 1,258,858 1,254,466 1,573,954
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1996
-------------------
<S> <C>
BALANCE SHEET DATA:
Working capital........................................................... $ 2,921,818
Total assets.............................................................. 5,819,137
Long-term debt............................................................ 1,772,834
Stockholders' equity...................................................... $ 1,885,267
</TABLE>
- ---------------
(1) Supplementary net income per share has been computed based on elimination of
interest expense associated with long-term debt due to the intended use of
proceeds to pay down $1,438,335 in indebtedness.
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATION
The following discussion and analysis should be read in connection with the
Company's consolidated financial statements and the notes thereto and other
financial information included elsewhere in the Prospectus.
OVERVIEW
The Company designs, develops, manufactures, and markets electronic power
supplies for use in converting electric power into a form suitable for the
operation of electronic circuitry. Revenues are generated from the sale of the
Company's power supplies to OEMs in the computer and other electronic equipment
industries.
RESULTS OF OPERATIONS
The table below sets forth certain statements of operations data as a
percentage of revenues for the nine months ended September 30, 1995 and 1996 and
the years ended December 31, 1994 and 1995.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------- ---------------
1994 1995 1995 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues............................................ 100% 100% 100% 100%
Cost of goods sold.................................. 74.62 74.66 76.16 74.44
----- ----- ----- -----
Gross margin........................................ 25.38 25.34 23.84 25.56
Selling, general and administrative................. 14.71 10.30 9.88 8.66
Engineering and product development................. 6.54 4.80 4.84 5.03
----- ----- ----- -----
Total operating expense............................. 21.25 15.10 14.72 13.69
Operating income.................................... 4.13 10.24 9.12 11.87
Net interest expense................................ 1.64 1.16 1.13 1.00
Translation loss.................................... .17 .85 0.60 0.06
Income before income taxes.......................... 2.32 8.23 7.39 10.81
Provision (Benefit) for income taxes................ .37 (2.76) 0.71 4.11
----- ----- ----- -----
Net Income.......................................... 1.95% 10.99% 6.68% 6.70%
===== ===== ===== =====
Net Income applicable to common shareholders........ .49% 10.09% 5.73% 6.33%
===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995.
REVENUES
Revenues for the nine months ended September 30, 1996 increased by
$2,872,280, or 39.90% over the nine months ended September 30, 1995. This
increase in revenues was due primarily to substantially increased sales to a
single OEM and, to a lesser extent, to increased sales to the Company's 28
stocking distributors.
Due to market conditions, sales of the OEM's products have slowed which in
turn has affected the sales of the Company's power supplies to the OEM. In light
of such decrease in purchases, it will be unlikely that the OEM will purchase
the same number of power supplies it purchased during the first nine months of
the year. In addition, this OEM has initially indicated that it will be
switching to a new power supply to be manufactured by another company. Although
this OEM has not indicated when it intends to switch to a new power supply, the
Company does not believe that the switch will occur until either the second or
third quarter of next year. The Company is seeking to design a new power supply
to satisfy the needs of this OEM. However, even if the Company is able to design
a new power supply that satisfies the needs of this OEM, no assurance can be
given that the OEM will use the Company's new power supply for the OEM's new
product. See "Risk Factors -- Customer Concentration."
18
<PAGE> 19
GROSS MARGINS
Gross margins were 25.56% for the nine months ended September 30, 1996
compared to 23.84% for the nine months ended September 30, 1995. The improvement
in gross margins can primarily be attributed to greater capacity utilization as
fixed overhead costs declined on a per unit basis.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased by $161,142, from
$711,023 for the nine months ended September 30, 1995, to $872,165 for the nine
months ended September 30, 1996. The increase primarily related to one-time
bonuses to certain employees which increased employee compensation expense. As a
percentage of revenues, however, selling, general and administrative expenses
decreased from 9.88% for the nine months ended September 30, 1995 to 8.66% for
the nine months ended September 30, 1996 since the increase in revenues during
this period was greater than the increase in selling, general and administrative
expenses.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were 5.03% of revenues for the
nine months ended September 30, 1996, and 4.84% of revenues for the nine months
ended September 30, 1995. This slight increase as a percentage of revenues was
due to increased staffing and to one-time bonuses to certain employees which
increased employee compensation expense.
INTEREST EXPENSE
Interest expense was 1.0% of revenues for the nine months ended September
30, 1996 and 1.13% of revenues for the nine months ended September 30, 1995.
This decrease was primarily due to a one percentage point reduction in interest
rate of the line of credit loan which took place in September 1995.
TRANSLATION LOSS
The primary currency of the Company's subsidiary, Poder Digital, is the
Mexican peso. During 1995, the Mexican peso was devalued against the United
States dollar. As a result of such devaluation, the Company experienced a
translation loss of $43,485 for the nine months ended September 30, 1995 related
to Poder Digital's operations using Mexican pesos as compared to a similar loss
of $5,880 for the nine months ended September 30, 1996.
INCOME BEFORE INCOME TAXES
Income before income taxes for the nine months ended September 30, 1996 was
$1,089,607 compared to $532,161 for the same period during 1995. This increase
of $557,446 was primarily due to the substantial increase in revenues over
expenses during the nine months ended September 30, 1996.
INCOME TAX
The Company's income tax expense was 4.11% of revenues for the nine months
ended September 30, 1996 and 0.71% of revenues for the nine months ended
September 30, 1995. Through December 31, 1995, the Company had net operating
loss tax carry-forwards (NOLs) which resulted in minimal federal tax liability
for the Company in 1995. During the second quarter of fiscal 1996, the Company
began providing for year-end tax liability at an estimated average annual rate
of approximately 40%.
NET INCOME
Net income was $675,607 for the nine months ended September 30, 1996 and
$480,806 for the nine months ended September 30, 1995. The increase in net
income was due to increased revenues and a decreased cost of goods sold as a
percentage of sales. As previously discussed, during the fourth quarter of 1995,
the Company recognized a one-time tax benefit of $277,400 due to its prior net
operating losses. Because of the
19
<PAGE> 20
tax benefit recognized during the fourth quarter of 1995, it is unlikely that
the Company's net income for 1996 will exceed the Company's 1995 net income. Net
income applicable to common shareholders for the nine months ended September 30,
1996, and 1995, was $637,538 and $412,281, respectively. The difference between
net income and net income applicable to common shareholders is due to cumulative
dividends on the Company's Series A Preferred Stock. On May 31, 1996, the
Company issued 216,229 shares of Common Stock valued at $1.80 per share on the
cumulative accrued, but unpaid dividends, on the Series A Preferred Stock. Also,
on May 31, 1996, each share of the Series A Preferred Stock converted into one
share of Common Stock.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES
Revenues in 1995 increased by $3,788,169, or 60.62%. The majority of this
increase, $1,936,921 (51.13%) was due to increased sales through the Company's
stocking distributors who resell the Company's products to OEMs. Direct sales by
the Company to OEMs accounted for $1,249,415 (32.98%) of the increase in sales
and the balance of $601,833 (15.89%) was generated by the Company's three
private label customers.
GROSS MARGINS
Gross margins were 25.34% of revenues during 1995 and 25.38% of revenues
during 1994. This slight decrease in gross margins was due to increased costs to
the Company. These increased costs primarily resulted from increased sheet metal
costs and increased costs associated with certain Japanese-sourced materials,
such as capacitors. Japanese-sourced materials became more expensive because of
the weakening of the Japanese yen against the dollar. In addition, the Company's
administrative costs of its Mexican facility increased due to the appointment of
a new plant manager and several other key management personnel to strengthen the
operations of that facility. These increases in costs were offset by an
approximate 5% increase in selling prices instituted during 1995.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were 10.30% of revenues in
1995 and 14.71% of revenues in 1994. Selling, general and administrative
expenses declined as a percentage of sales during 1995 primarily due to the
Company's decision to terminate its relationship with its manufacturer's
representative in the Northern California territory and to manage sales
directly, resulting in a decrease in commissions to 1.42% of revenues in 1995
from 3.87% of revenues in 1994.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were 4.80% of revenues in
1995, and 6.54% of revenues in 1994. During 1994, the Company had entered into
several custom product development contracts which were engineering-intensive
but did not result in the expected revenues. In 1995, the Company directed its
engineering resources to a greater degree on the development of modifiable
standard products with a resulting decline in engineering expenses as a
percentage of revenues.
INTEREST EXPENSE
Interest expense was 1.16% of revenues during 1995 and 1.64% of revenues
during 1994. Interest expense relates primarily to a line of credit and two
equipment term loans with San Jose National Bank. The two term loans in the
aggregate principal amount of $170,000, and the line of credit, are secured by
the Company's accounts receivables and the Company's assets. Proceeds from the
two term loans were used to acquire equipment, and proceeds from the line of
credit were used for working capital. Because the Company's borrowings did not
increase in 1995, interest expense, as a percentage of revenues, decreased in
1995. In addition, the interest rate on the line of credit loan decreased by one
percentage point in September 1995.
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TRANSLATION LOSS
The primary currency of the Company's subsidiary, Poder Digital, is the
Mexican peso. During the fiscal year ended 1995, the Mexican peso was devalued
against the United States dollar. As a result of the devaluation, the Company
incurred a $85,258 translation loss related to Poder Digital's operations.
During 1994, the Company experienced a translation loss of $10,450.
INCOME BEFORE INCOME TAXES
Income before income taxes increased by $681,508 from $144,976 during 1994
to $826,484 in 1995. This substantial increase was primarily due to the increase
in revenues from the sale of the Company's power supplies.
INCOME TAX
During the fourth quarter of 1995, the Company recognized an income tax
benefit of $277,400 as compared to a tax provision of $23,253 during 1994. The
recognition of the tax benefit during 1995 is due to the Company's utilization
of its prior net operating loss carryforward.
NET INCOME
Net income was $1,103,884 in 1995 and $121,723 in 1994, an increase of
$982,161, or 807%. The increase in net income was due to a substantial increase
in sales without a corresponding increase in expenses related to such sales, and
due to a $277,400 tax benefit. Net income applicable to common shareholders for
the years ended December 31, 1995, and 1994, was $1,012,518 and $30,357,
respectively. The difference between net income and net income applicable to
common shareholders is due to cumulative dividends on the Company's Series A
Preferred Stock amounting to $91,366 per year.
The Company does not believe that its business is seasonal.
LIQUIDITY AND CAPITAL RESOURCES
Through September 30, 1996, the Company funded its operations primarily
through revenues generated from operations, and its $1.5 million line of credit
with San Jose National Bank. On September 30, 1996, the Company had cash and
cash equivalents of $188,084 and working capital of $2,921,818. This compares
with cash and cash equivalents of $202,917 and a working capital of $2,211,358
at December 31, 1995. The increase in working capital is primarily due to an
increase in receivables and inventory, offset by an increase in accrued
liabilities and a decrease in deferred income taxes.
Cash provided by operating activities for the Company totalled $79,430 and
$151,515 for the nine months ended September 30, 1996 and 1995, respectively.
Cash used in investing activities consisted of expenditures for the purchase of
production and testing equipment. Such expenditures increased to $322,584 during
the nine months ended September 30, 1996 from $83,783 during the prior year
period. During the nine months ended September 30, 1996 and 1995, cash from
financing activities included borrowings (including advances under the Company's
line of credit and bank loans) of $414,852 and $99,437, respectively, net of
note and line of credit payments of $8,879,919 and $6,773,350 for the same
respective periods.
Cash provided by operating activities for the Company totalled $319,035
during fiscal 1995 as compared to cash used in operating activities of $384,667
during fiscal 1994. The increase in cash provided by operating activities is due
primarily to the increase in net income. Cash used in investing activities in
each of fiscal 1995 and fiscal 1994 consisted of expenditures for production and
testing equipment of $254,530 and $71,682, respectively. During fiscal 1994,
cash used in investing activities included the purchase of a temporary
investment of $100,000. Expenditures for equipment were the direct result of
increasing business operations. Cash provided by financing activities consisted
of borrowings (including advances under the Company's revolving line of credit)
of $9,542,788 and $5,801,768 during fiscal 1995 and fiscal 1994, respectively,
net of $9,346,200 and $5,422,500 in note and line of credit payments during
fiscal 1995 and fiscal 1994, respectively.
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The Company's bank borrowings consist of a $120,000 promissory note bearing
interest at 10% per annum and due December 8, 1998, a $50,000 promissory note
bearing interest at 10.5% per annum and due May, 1999, and a $1.5 million line
of credit bearing interest at prime plus 1% and due October 15, 1997. Proceeds
from the promissory notes were used to acquire equipment, and the line of credit
is used to supplement the Company's working capital. The promissory notes and
line of credit are secured by substantially all of the Company's assets. The
Company intends to use a portion of the net proceeds of this offering for the
repayment of the credit facility and the notes. The Company does not anticipate
any material capital expenditures during 1997. As of September 30, 1996 and
December 31, 1995, the Company's bank borrowings totalled $1,919,226 and
$1,054,145, respectively. See Note 6 of Notes to Consolidated Financial
Statements. Part of the proceeds raised hereby will be used to reduce the
Company's borrowings by approximately $1.438 million.
In addition, the Company is a guarantor of a $500,000 term loan granted to
the Company's employee stock ownership plan ("ESOP"). The $500,000 term loan is
included in the total amount of the Company's bank borrowings as of September
30, 1996 stated in the preceding paragraph. The $500,000 is due in July 2001 and
bears interest at 10.5% per annum. Proceeds from the loan were used to acquire
the Company's Common Stock by the ESOP. Principal and interest on the loan will
be paid by the ESOP through contributions made by the Company to the ESOP in the
amount of approximately $10,750 per month. This amount will be a monthly
deduction against revenues through July 2001.
NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS
The requirements of the Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets," issued in March 1995
("FAS 121") and the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," issued in October 1995 ("FAS 123"),
are effective for financial statements for years that begin after December 15,
1995. The Company adopted FAS 121 effective January 1, 1996. The adoption had no
effect on the Company's financial position.
FAS 123 encourages, but does not require, companies to recognize
compensation expense based on fair value for grants of stock, stock options, and
other equity instruments granted to employees. Companies that do not adopt the
fair value accounting rules must disclose the impact of adopting the new method
in the notes to the financial statements. The Company currently does not intend
to adopt the fair value accounting prescribed by FAS 123 and will be subject
only to the disclosure requirements prescribed by FAS 123.
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BUSINESS
OVERVIEW
Digital Power Corporation designs, develops, manufactures, and markets
switching power supplies for sale to manufacturers of computers and other
electronic equipment. Switching power supplies are critical components of all
computers and other electronic equipment. The electronic circuitry in computers
and other electronic equipment requires a steady and isolated supply of direct
current (DC) electrical power. In addition, the various components and
subassemblies within computers and other electronic equipment often require
different voltage levels of electrical power. The power supply products of the
Company satisfy these two requirements by converting the alternating current
(AC) electricity from a primary source, such as a wall outlet, into the direct
current required for the proper functioning of electronic circuits, and by
dividing the single electrical current into as many as four discrete output
voltages. The Company's power supply products also monitor and regulate the DC
output voltages being delivered to protect the electronic equipment from harmful
surges and drops in voltage levels. Because the Company's products have a high
"power-density" (measured in watts per cubic inch), the power supply products of
the Company are generally smaller than those of competitors. For example, the
Company believes that its US100 series of power supplies, on a 3" x 5" printed
circuit board, is the smallest 100 watt off-line (AC input) power supply
available in the industry. Furthermore, the Company's power supply products are
extremely "flexible" in design. This "flexibility" approach allows the Company
to modify quickly and inexpensively its base-design products to satisfy an OEM's
specific power supply needs, thereby enabling the Company to keep to a minimum
its expenses for non-recurring engineering ("NRE") of its base-design products.
Because of this reduced NRE expense related to the "flexibility" line of
switching power supplies, the Company does not charge its customers for its NRE
expenses incurred in tailoring a power supply to a customer's specific
requirements. However, many competitors of the Company do charge their customers
for NRE expenses. As a result of the Company's "flexibility" approach, it has
provided samples of modified power supplies to OEM customers in as quickly as a
few days, an important capability given the increasing emphasis placed by OEMs
on "time-to-market". Digital Power's strategic objective is to exploit this
combination of power density, flexibility, and short time-to-market to win an
increasing share of the growing power supply market.
THE INDUSTRY
The market for power supplies is large, as all electronic systems require a
steady supply of low voltage electrical power. Almost all of these systems
require direct current (DC) voltages, not the alternating current (AC) voltages
provided by utility companies. Furthermore, the voltage levels produced by
standard power sources must be significantly lowered in order to allow proper
functioning of an electronic component. For example, internal computer
microprocessors, as well as memory and logic circuitry in telecommunications
systems, generally operate on a voltage level of 5 volts DC or less. However,
most electrical outlets produce at least 115 volts AC. Therefore, the incoming
voltage of 115 volts AC must be both converted to DC and reduced to 5 volts.
This is the function performed by a typical power supply. Those products which
accept and convert alternating current from a primary power source into the
direct current required by electronic systems are generally referred to as
"power supplies". Those products which convert one level of DC voltage into a
higher or lower level of DC voltage as required by a particular electronic
device are generally referred to as "DC/DC converters".
Electronic systems are sensitive to variations in voltage, and therefore
require protection from the surges and drops in the AC voltage which commonly
occur over electrical lines. Power supplies perform this essential function by
regulating or maintaining the output voltages within a narrow range of values.
Finally, power supplies divide a charge of electricity into multiple lower
voltage outputs. Most electronic systems have a number of subsystems, each of
which may require a different incoming operating voltage. Power supplies can
provide multiple outputs of different voltage levels. Certain voltage levels are
common in the electronics field. Increasingly, Digital Power has received
requests from OEMs for "non-standard" voltage outputs. Digital Power believes
that its "flexibility" series of power supplies are ideally suited for these
non-standard voltage applications.
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THE MARKET
According to Micro-Tech, the worldwide market for electronic power supplies
was estimated to be $15 billion in 1995. The power supply manufacturing industry
is highly fragmented and Digital Power believes there are approximately 400
power supply competitors in the world. The electronic power supply market is
typically split into captive and merchant segments. The captive segment of the
market, that portion represented by OEMs who design and manufacture power
supplies for use in their own products, is estimated to account for 50% of the
total market according to Micro-Tech. The balance of the power supply market is
served by merchant power supply manufacturers such as Digital Power that design
and manufacture power supplies for sale to OEMs. Micro-Tech forecasts that the
merchant segment of the market will experience the greatest rate of growth,
increasing from 52.5% of the total market in 1996 to 62.8% of the total market
in 2000. The Company believes that the increase is due, in part, to the fact
that power supplies are becoming an increasingly complex component to the OEMs,
with constantly changing requirements such as power factor correction (PFC) and
filtering specifications to minimize electromagnetic interference (EMI).
POWER FACTOR CORRECTION. The alternating current electricity delivered by
utility companies over power lines is delivered in smooth waves, known as
harmonic waves, or sine waves. This smooth harmonic wave form of AC electricity
that reaches a power supply is known as "apparent power", and it is measured in
watts (watts equal volts multiplied by amperes). Although the electricity
reaches a switching power supply in a smooth harmonic wave form, the switching
power supply does not draw on the electricity in a smooth harmonic fashion.
Rather, in the process of "rectifying" the alternating current into direct
current form, a switching power supply will draw current off the AC harmonic
wave form in short bursts, each of which is shorter in duration than the wave
frequency. The amount of power drawn off the line by the switching power supply
in these short bursts is known as the "real input power". The real input power
cannot be greater than the apparent power, and in fact is almost always less
than the apparent power. Therefore, a percentage, or factor, can be
arithmetically determined by dividing the real input power by the apparent
power, giving a coefficient known as the "power factor" of the power supply.
Ideally, a switching power supply would have a power factor of one, where all
the apparent power is drawn off by the power supply, resulting in the real input
power equaling the apparent power. In practice, however, this is not possible.
In fact, most switching power supplies without the special feature known as
"power factor correction" have an approximate power factor of only .60.
The reason why power factor of less than one can be a significant problem
relates to the power that is not drawn off the power line, or the differential
amount between one and the power factor (1 - .60 = .40 in the example given
above). This differential of missing power is reflected back onto the power line
in a harmonically distorted fashion, since the originally smooth harmonic wave
form has now been disrupted by the power that has been drawn off by the power
supply and exhibits a kind of "ripple" in the wave form. The harmonically
distorted wave form circulates as wasted heat energy in the power line, as well
as in wall sockets, electrical wiring in the building, and in distribution
transformers along the power line. This problem of harmonic distortion and
wasted heat energy grows as additional switching power supplies are connected to
and draw power from a power line. A large enough number of switching power
supplies drawing power from a line without power factor correction will result
in: (i) a significant uncompensated loss of electrical power (in the form of
heat) to the electrical utility company; (ii) potential damage to power lines
and transformers caused by excessive heat; and (iii) "dirty" electrical power
for "downstream" consumers of electricity. A low power factor is generally not a
problem for the piece of electronic equipment itself served by the switching
power supply.
In response to these problems, manufacturers of power supplies have
developed certain circuitry within power supplies known as "power factor
correction", or PFC. With PFC, most power supplies can be improved to perform at
a power factor of approximately .99. Historically, PFC has only been installed
in high wattage switching power supplies because of the comparatively greater
amount of harmonic distortion reflected back onto the line by these power
supplies. However, PFC is rapidly becoming critical at all power levels, not
only because it allows equipment designers to power more circuits from a
standard outlet, but also because of regulatory requirements established in the
European Union, such as European Normatives EN61000-3-2 and EN61000-3-3. These
two normative standards, known more fully as "Limits For Harmonic Current
Emissions," and "Limitation Of Voltage Fluctuations And Flicker On Low Voltage
Supply Systems For
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Equipment With Rated Current <16A (less than 16 amperes)," respectively, upgrade
the former generic standard IEC555.2 and place pressure on manufacturers of
power supplies to develop products with PFC at lower and lower power levels.
ELECTROMAGNETIC INTERFERENCE (EMI). EMI is universally undesirable because
it potentially interferes with the operation of other electronic equipment. In
the United States, the Federal Communications Commission ("FCC") has mandated
certain EMI limits which cannot be exceeded by OEM equipment. The European Union
(EU) has issued an electromagnetic compatibility (EMC) directive that applies
certain requirements to products sold in Europe beginning January 1, 1996. The
EU created these directives to insure conformity with safety and quality
standards and to assess product compliance throughout its jurisdiction. One of
these requirements involves Conformity European ("CE") marking. OEMs may add the
"CE" mark to their equipment if it meets the requirements for radiated and
conducted noise emissions and for noise susceptibility. The power supply, if
part of an OEM system, does not itself need CE certification. However, since it
is one of the major noise generators within an OEM system, there is a growing
demand for the power supply to have the CE mark. A pre-approved power supply
provides added assurance that the OEM will meet the applicable standards with
little trouble.
Digital Power plans to address the market demands discussed above for PFC
and EMI features by developing and introducing a line of power supply products
which incorporate PFC and provide filtering from EMI which meets or exceeds the
requirements for "CE" marking.
The power supply market can be segmented between custom and standard power
supplies. Power supplies designed and manufactured by an OEM for use in its own
equipment are an example of a custom design, as the product is not intended for
resale. However, custom power supplies are also common in the merchant market,
as certain OEMs contract with power supply manufacturers to design a product
that meets the form, fit, and function requirements of their specific
application. Standard, "off-the-shelf" power supplies are intended for sale to
many customers whose electronic equipment can operate from "standard" output
voltages, such as 5 volts, 12 volts or 24 volts DC. A subset of the standard
segment of the market has evolved, commonly known as "modified", comprising
power supply products which have the performance characteristics of a standard
power supply, but need certain, usually minor, modifications. These
modifications may include slight mechanical changes to the sheet metal chassis,
but more typically involve an adjustment to the output voltages from one of the
"standard" output voltages (e.g. 5 volts to 7 volts, or 15 volts to 18.5 volts).
Digital Power primarily serves the North American power electronics market
with AC/DC power supplies and DC/DC converters ranging from 50 watts to 750
watts of total output power. AC/DC power supplies represent the largest part of
the merchant power electronics market, with sales in North America alone
expected to grow from about $4.9 billion in 1996 to $6.7 billion in 2000. During
the same period, DC/DC converter sales in North America are forecasted to grow
from $1.5 billion in 1996 to $2.1 billion in 2000.
STRATEGY
Digital Power's strategy is to be the supplier of choice to OEMs requiring
a high quality power solution where size, rapid modification, and time-to-market
are critical to their business success. Target market segments would include
telecommunications, networking, switching, mass storage, and industrial and
office automation products. While many of these segments would be characterized
as computer-related, the Company does not participate in the personal computer
(PC) power supply market. The power supply market for PCs is very competitive
with standard power supplies producing low margins.
PRODUCT STRATEGY
Digital Power has eight series of base designs from which thousands of
individual models can be produced. Each series has its own printed circuit board
(PCB) layout that is common to all models within the series regardless of the
number of output voltages (typically one to four) or the rating of the
individual output voltages. A broad range of output ratings, from 3.3 volts to
48 volts, can be produced by simply changing the power transformer construction
and a small number of output components. Designers of electronic systems
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can determine their total power requirements only after they have designed the
system's electronic circuitry and selected the components to be used in the
system. Since the designer has a finite amount of space for the system and may
be under competitive pressure to further reduce its size, a burden is placed on
the power supply manufacturer to maximize the power density of the power supply.
A typical power supply consists of a PCB, electronic components, a power
transformer and other electromagnetic components, and a sheet metal chassis. The
larger components are typically installed on the PCB by means of
pin-through-hole assembly where the components are inserted into pre-drilled
holes and soldered to electrical circuits on the PCB. Other components can be
attached to the PCB by surface mount interconnection technology (SMT) which
allows for a reduction in board size since the holes are eliminated and
components can be placed on both sides of the board. The Company's US100 series
is an example of a product using this manufacturing technology.
PRODUCTS
Digital Power's "flexibility" concept applies to all of the Company's US,
UP/SP, and DP product series. A common printed circuit board is shared by each
model in a particular family, resulting in a reduction in parts inventory while
allowing for rapid modifiability into thousands of output combinations. The
following is a description of the Company's products.
US50/DP50 SERIES
The US50 series of power supplies are compact, economical, high efficiency,
open frame switchers that deliver up to 50 watts of continuous or 60 watts of
peak power from one to four outputs. The 90-264 VAC universal input allows them
to be used worldwide without jumper selection. Flexibility options include
chassis and cover, power good signal, an isolated V4 output, and UL544 (medical)
safety approval. All US50 series units are also available in 12VDC, 24VDC, or
48VDC inputs. This optional DC input unit (DP50 series) maintains the same
pin-out, size, and mounting as the US50 series.
US70/DP70 SERIES
The US70 series of power supplies is similar to the US50 series, a compact,
economical, highly efficient, open frame switcher that delivers up to 65 watts
with a 70 watt peak. This unit is offered with one to four outputs, a universal
input rated from 90 to 264 VAC, and is only slightly larger than the US50
series. The US70 series is differentiated from competitive offerings by virtue
of its smaller size, providing up to four outputs while competitors typically
are limited to three outputs. Flexibility options include cover, power good
signal, an isolated V4 output, and UL544 (medical) safety approval. The DP70 is
the same as the US70 except the input is 48 volts DC. The Company also offers 12
& 24 VDC DC input on this series where the model series changes to DN&DM. This
type of product is ideal for low profile systems with the power supply measuring
3.2" x 5" x 1.5".
US100/DP100 SERIES
The US100/DP100 is the industry's smallest 100 watt switcher. Measuring
only 5" x 3.3" x 1.5", this series delivers up to 100 watts of continuous or 120
watt peak power from one to four outputs. The 90-264VAC universal input allows
them to be used worldwide. This product is ideal in applications where OEMs have
upgraded their systems, requiring an additional 30-40 watts of output power but
being unable to accommodate a larger unit. The US100 fits in the same form
factor and does not require any tooling or mechanical changes by the OEM.
Flexibility options include a cover and adjustable post regulators on V3 and/or
V4 outputs. Fully custom models are also available. All US100 series units are
also available with 12VDC, 24VDC, or 48 VDC inputs. This optional DC input unit
(DP100) maintains the same pin-out, size, and mounting as the US100 series.
UP300 SERIES
The UP300 series are economical, high efficiency, open frame switchers that
deliver up to 300 watts of continuous, 325 watt, peak power from one to two
outputs. The 115/230VAC auto-selectable input allows
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them to be used worldwide. On-board EMI filtering is a standard feature.
Flexibility options include a cover, power fail/power good signal, and an
isolated 2nd output. The UP300 is also available as the SP300 series, which is
jumper selectable between 115 and 230VAC and provides the OEM an even more
economical solution. This product can be used in network switching systems or
other electronic systems where a lot of single output current, such as 5, 12,
24, 48 volt current might be required.
US250/DP250 SERIES
The US250 series are economical, high efficiency, open frame switchers that
deliver up to 250 watts of continuous or 300 watts of peak power from one to
four outputs. The 115/230VAC auto-selectable input allows them to be used
worldwide. Flexibility options include cover, power fail/power good signal,
enable/inhibit, and an isolated V3 output. All US250 series units are also
available with 12VDC, 24VDC, or 48VDC inputs. This optional DC input unit
(DP250) maintains the same pin-out, size, and mounting as the US250 series.
US350 SERIES
The US350 series is a fully-featured unit that has active power factor
correction and was designed to be field-configurable by the Company's
international and domestic sales channels. This feature allows the stocking
distributor to lower its inventory costs but still maintain the required stock
to rapidly provide power supplies with the unique combination of output voltages
required by an OEM. This unit delivers 350 watts from one to four outputs
modules and meets the total harmonic distortion spec IEC 555.2. The US350 has an
on-board EMI filter and operates from 90-264 VAC input. This unit measures 9" x
5" x 2.5" and can operate without any minimum loads and has an optional internal
fan and power fail/power good signal.
US750 SERIES
The newest product under development by the Company is the US750 series.
The US750 is a fully modular power supply measuring 3" x 10.25" x 5" and
delivers 750 watts from one to four power outputs. This product can be
configured to meet many different applications. It comes with optional N+1
parallelability, hot swapability, frequency synching, power good/power fail, and
remote on/off. The Company anticipates that this product will be available for
sale during the first quarter of 1997.
The Company also produces two products designated as the KD series in a 150
watt and 200 watt product. These designs were acquired in 1987 under a licensing
agreement with KDK Electronics. They are still offered for sale but are expected
to continue to decline as a percentage of Digital's revenues. The licensing
agreement with KDK Electronics, as amended, provides that in the event total
historical sales of KD products reaches $20 million, then KDK Electronics will
be granted a stock option to purchase 100,000 shares of Digital's Common Stock
for $3.50 per share with Digital paying the exercise price. Due to changing
market conditions, the KD series is expected to be phased out prior to reaching
the $20 million sales level. Therefore, no common stock is anticipated to be
granted to KDK Electronics under the licensing agreement. In addition, KDK
Electronics will be paid a royalty equal to 5% on the first $20 million total
sales of the KD series products with the royalty decreasing on sales over that
amount. KD products accounted for 23%, 14%, and 9% of revenues in 1994, 1995,
and for the nine months ended September 30, 1996, respectively. Total cumulative
sales of KD products were $14,398,829 as of September 30, 1996.
VALUE-ADDED SERVICE
Digital Power offers its customers various types of value-added services,
which may include the following additions to its standard product offerings.
Electrical (power): Paralleled power supplies for (N+1) redundancy, hot
swapability, output OR'ing diodes, AC input receptacle with fuse, external EMI
filter, on/off switch, cabling and connectors, and battery backup with charger.
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Electrical (control and monitoring): AC power fail detect signal, DC
output(s) OK signal, inhibit, output voltage margining, and digital control
interface.
Mechanical: Custom hot-plug chassis for (N+1) redundant operation, locking
handle, cover, and fan.
These services incorporate one of the Company's base products along with
additional enclosures, cable assemblies, and other electronic components to
arrive at a power subassembly. This strategy matches perfectly with those OEMS
wishing to reduce their vendor base, as the turnkey sub-assembly allows
customers to eliminate other vendors.
QUALITY MANAGEMENT METHODS
Digital Power's emphasis on quality begins with the initial design stage
and continues through the production processes to the end product. To execute
this strategy, the Company utilizes sophisticated design techniques including
computer modeling and computer aided design combined with advanced management
methods such as just-in-time (JIT) manufacturing, statistical process control
(SPC), and total quality commitment (TQC). The Company believes that these
techniques lower production costs while simultaneously improving production
efficiencies and the quality of the end-product.
SAFETY AND REGULATORY AGENCIES
All of the Company's power supplies meet or exceed established
international safety standards including Underwriters Laboratory Incorporated
(UL) in the United States; Canadian Standards Associations (CSA) in Canada, or
the UL equivalent (cUL); and Technischer Uberwachungs-Verein (TUV) or Verband
Deutscher Electrotechniker (VDE) in Germany. In addition the Company has been
site-approved by the British Approval Board for Telecommunications (BABT) in the
United Kingdom. The Company plans to achieve ISO 9001 certification, a European
model for quality assurance, by the second quarter of 1997.
SUPPLIERS
Other than certain fabricated parts such as printed circuit boards and
sheet metal chassis which are readily available from many suppliers, the Company
uses no custom components. Typically, two suppliers are qualified for every
component, with the exception being two line transformers, one manufactured by
Tamura and the second one manufactured by Spitznagel. These transformers are
designed into three of the Company's products, which products accounted for
approximately 10% of the Company's sales in 1995.
MANUFACTURING STRATEGY
Consistent with its product flexibility strategy, the Company aims to
maintain a high degree of flexibility in its manufacturing processes in order to
respond to rapidly changing market conditions. With few exceptions, the
competitive nature of the power supply industry has placed continual downward
pressure on selling prices. In order to achieve low cost manufacturing with a
labor-intensive product, manufacturers have the option of automating much of the
labor out of their product, or producing their product in a low labor cost
environment. Given the high fixed costs of automation and the resistance this
places on making major product changes, Digital Power believes that its flexible
manufacturing strategy is best achieved through a highly variable cost of
operation. In 1986, the Company established a wholly-owned subsidiary in
Guadalajara, Mexico to assemble its products. This manufacturing facility
performs materials management, sub-assembly, final assembly, and test functions
for the majority of the Company's power supply products. In addition, Digital
has entered into an agreement with Fortron/Source Corp. to manufacture Digital's
products at a facility located in China on a turnkey basis. Purchases from
Fortron/Source will be made pursuant to purchase orders and the agreement may be
terminated upon 120 days notice. Although the Company has just recently begun to
manufacture its products through Fortron/Source, the Company believes that it
will be able to produce high volume power supplies through Fortron/Source at a
cost lower than at its Guadalajara, Mexico, facility.
28
<PAGE> 29
SALES, MARKETING AND CUSTOMERS
Digital Power markets its products domestically through a network of 13
independent manufacturers representatives. Each representative organization is
responsible for managing sales in a particular geographic territory. Generally,
the representative has exclusive access to all potential customers in the
assigned territory and is compensated by commissions at 5% of net sales after
the product is shipped, received, and paid for by the customer. Typically,
either the Company or the representative organization may terminate the
agreement with 30 days written notice.
In certain territories, the Company has entered into agreements with 28
stocking distributors who buy and resell the Company's products. For the nine
months ended September 30, 1996, and for the years ended December 31, 1995 and
1994, distributor sales accounted for 40.4%, 33.4%, and 26.0%, respectively, of
the Company's total sales. Over this same period, one distributor accounted for
20.6%, 27%, and 16%, respectively, of total sales. In addition, international
sales through stocking distributors accounted for less than 5% of the Company's
sales. In general, the agreements with stocking distributors are subject to
annual renewal and may be terminated upon 90 day's written notice. Although
these agreements may be terminated by either party in the event a stocking
distributor decides to terminate its agreement with the Company, the Company
believes that it would be able to continue the sale of its products through
direct sales to the customers of the stocking distributor. Further, and in
general, stocking distributors are eligible to return 25% of their previous six-
month's sales for stock rotation. For the past three years, stock rotations have
not exceeded one percent of total sales.
The Company has also entered into agreements with three private label
customers who buy and resell the Company's products. Under these agreements, the
Company sells its products to the private label company who then resells the
products with its label to its customers. The Company believes that these
private label agreements expand its market by offering the customer a second
source for the Company's products. The private label agreements may be
terminated by either party. Further, the private label agreement requires that
any product subject to a private label be available for 5 years. For the nine
months ended September 30, 1996, and for the years ended December 31, 1995 and
1994, private label sales accounted for 8.6%, 11.35%, and 11.29%, respectively,
of total sales.
The Company's promotional efforts to date have included product data
sheets, feature articles in trade periodicals, and trade shows. Part of the
proceeds raised hereby will be used for future promotional activities, including
space advertising in industry-specific publications, a full line product
catalog, application notes, and direct mail to an industry-specific mail list.
The Company's products are warranted to be free of defects for a period
ranging from one to two years from date of shipment. No significant warranty
returns have been experienced. As of September 30, 1996, the Company's warranty
reserve was $149,125.
29
<PAGE> 30
BREAKDOWN OF PRODUCT MARKET
The table below sets forth as of September 30, 1996 the percentage of
Digital Power's revenues generated by particular market segments served by
Digital Power's customers, and indicates representative customers within those
market segments.
<TABLE>
<CAPTION>
PERCENTAGE OF
PRODUCT OR MARKET SERVED BY CUSTOMER REVENUES REPRESENTATIVE CUSTOMERS
- ------------------------------------- ------------- ------------------------------
<S> <C> <C>
Communications....................... 28% Westinghouse
STM Wireless
Stanford Telecommunications
Multipoint Networks
ADC
AT&T
Network Switches, Routers, Hubs...... 24% Centillion Business Unit,
a division of Bay Networks
Ascend Communications
Digital Link
Whitetree
3COM
Computer Peripheral/Mass Storage..... 12% Storage Dimensions
Motorola
Photography/Visual Equipment......... 9% N View
Photometrics
Optivision
Semiconductor Mfg. Equipment......... 7% Applied Materials
Asyst Technologies
Enclosures........................... 6% Elma
Sigma/Trimm
Broadcast Equipment.................. 5% Leitch Video
Office Automation.................... 4% Quartet Ovonics
Patapsco
Medical Equipment.................... 3% OEC Diasonics
Test Equipment....................... 2% Analogic
Orion Instruments
</TABLE>
BACKLOG
Digital Power typically does not build finished goods for stock. Upon
receipt of a purchase order from a customer, a work order is issued to the
Company's production department to build a specified quantity of a model to be
delivered on a specified shipment date. Backlog consists of purchase orders
on-hand generally having a scheduled delivery date within the next six months.
The Company's backlog was $5,217,578 at September 30, 1996, and $3,276,498 at
December 31, 1995. Variations in the magnitude and duration of purchase orders
received by the Company and customer delivery requirements may result in
substantial fluctuations in backlog from period to period. Although the Company
may have a binding purchase order, customers may cancel or reschedule deliveries
and backlog may not be a meaningful indicator of future financial results.
30
<PAGE> 31
COMPETITION
The merchant power supply manufacturing industry is highly fragmented and
serviced by approximately 400 competitors worldwide. Many of the Company's
competitors are located in low cost environments where they may have advantages
in terms of labor and component costs. In addition, they may offer products
comparable in quality to those of Digital Power and have significantly greater
financial and marketing resources. Representative examples of the Company's
competitors are Computer Products, Inc., ASTEC America, Zytec Corporation, and
Lambda Electronics. The Company believes it has a competitive position with its
targeted customers who need a high-quality, compact product which can be readily
modified to meet the customer's unique requirements. To remain competitive, the
Company must continue to offer innovative products at competitive prices while
demonstrating flexibility in meeting the customer's requirements for rapid
time-to-market.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are primarily directed
toward the development of new standard power supply platforms which may be
readily modified to provide a broad array of individual models. Improvements are
constantly sought in power density, modifiability, and efficiency, while the
Company attempts to anticipate changing market demands for increased
functionality, such as PFC and improved EMI filtering. Internal research is
supplemented through the utilization of consultants who specialize in various
areas, including component and materials engineering, and electromagnetic design
enhancements to improve efficiency, while reducing the cost and size of the
Company's products. Product development is performed at Digital Power's
headquarters in California by three engineers who are supported and assisted by
five technicians. The Company's total expenditures for research and development
were $408,966, $481,475, and $506,331 for the years ended December 31, 1994, and
1995, and the nine month period ended September 30, 1996, respectively, and
represented 6.54%, 4.8%, and 5.03% of the Company's total revenues for the
corresponding periods.
EMPLOYEES
As of September 30, 1996, the Company had approximately 345 full-time
employees with 300 of these employed at its wholly-owned subsidiary Poder
Digital located in Guadalajara, Mexico. The employees of Digital Power's Mexican
operation are members of a national labor union, as are most employees of
Mexican companies. The Company has not experienced any work stoppages at either
of its facilities and believes its employee relations are good.
FACILITIES
The Company's headquarters are located in approximately 9,500 square feet
of leased office, research and development space in Fremont, California. The
Company pays $5,890 per month, subject to adjustment, and the lease expires on
January 31, 2001. The Company's manufacturing facility is located in 16,000
square feet of leased space in Guadalajara, Mexico. The Company pays
approximately $3,500 per month, subject to adjustment, and the lease expires in
February, 2001. The Company believes that its existing facilities are adequate
for the foreseeable future and has no plans to expand them.
LEGAL PROCEEDINGS
The Company knows of no material litigation or claims pending, threatened,
or contemplated to which the Company is or may become a party.
31
<PAGE> 32
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names and ages of the Executive Officers and Directors of the Company
as of November 30, 1996, and certain information about such persons, are set
forth below. The Company's Bylaws provide for a Board of Directors of not less
than five nor more than nine members, with the actual number to be set by
resolution of the Board. Each of the Company's Directors is elected at the
annual meeting of shareholders of the Company and serves until the next annual
meeting until such person's successor is elected and qualified, or until such
person's earlier death, resignation, or removal.
As part of the Underwriting Agreement, the Representative of the
Underwriters shall have the option to designate a member to the Board of
Directors, or, at the Underwriters' option, designate an individual to attend
the Board's meetings for a period of five years. At this time, the
Representative has not indicated whether it intends to exercise such right. See
"Underwriting."
Executive Officers are appointed by, and serve at the discretion of, the
Board of Directors. Except as discussed below, the Company has no employment
agreements with any of its Executive Officers or Directors. The Company has not
paid any fees or other remuneration to the Directors for their services as
Directors. The Directors do, however, receive stock options and Warrants from
the Company for their services. In August of 1996, each Director received
Warrants to purchase 20,000 shares of Common Stock at $5.00 per share for
services as a Director. See "Principal and Selling Stockholders and
Warrantholders." The Company has agreed to register the Common Stock underlying
such options and Warrants. No family relationship exists between any of the
Officers or Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ ---- ------------------------------------------------
<S> <C> <C>
Edward L. Lammerding................ 67 Chairman of the Board
Philip M. Lee....................... 72 Director
Thomas W. O'Neil, Jr................ 67 Director
Robert O. Smith..................... 52 Director, Chief Executive Officer, and President
Claude Adkins....................... 54 Director, Executive Vice President, and Vice
President-Engineering
Philip G. Swany..................... 46 Chief Financial Officer and Vice
President-Finance
</TABLE>
BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS.
EDWARD L. LAMMERDING. Mr. Lammerding is Chairman of the Board of the
Company and has been a Director since 1989. Since November, 1995, Mr. Lammerding
has also served as Chairman of the Board of Alternative Technology Resources,
Inc., and since 1983 he has served as Chairman of the Board of Sierra Resources
Corporation, a venture capital investment firm. Currently, Mr. Lammerding is
serving as a director or trustee of three other organizations, including Public
Affairs Information, Inc., a legislative bill reporting service, Unicube U.S.A.,
Inc., a hospital curtain manufacturer, and Fulton Water Co., a domestic water
supply company. Mr. Lammerding also serves on the board of the California State
Lottery Commission, St. Mary's College, and the Marine Corps Historical
Foundation. Mr. Lammerding received an A.B. in Economics from St. Mary's
College.
PHILIP M. LEE. Mr. Lee has served as a Director of the Company since 1991.
He has over 40 years experience in supermarket management and is a general
partner of J & P Properties, a real estate management and investment company.
Mr. Lee is also a director of Sierra Resources Corporation. He received a
certificate in management from American River College.
THOMAS W. O'NEIL, JR. Mr. O'Neil has served as a Director of the Company
since 1991. He is a certified public accountant and has been a partner of
Schultze, Wallace and O'Neil, CPAs, since 1991. Mr. O'Neil is a retired partner
of KPMG Peat Marwick. Mr. O'Neil is also a director of the California Exposition
and State Fair, Chairman of the Board of the Regional Credit Association, and a
director of Alternative Technology Resources, Inc.
32
<PAGE> 33
ROBERT O. SMITH. Mr. Smith joined the Company in November 1989 as its
Chief Executive Officer and as a Director, and in May 1996 he was also made
President of the Company. From 1980 through 1989, Mr. Smith held various
executive positions with Computer Products, Inc., a manufacturer of power
conversion products and industrial automation systems (including positions as
Vice President/Group Controller of the Power Conversion Group, General Manager
of the Compower Division, and President of the Boschert subsidiary). From 1978
to 1980, Mr. Smith was Cost Accounting Manager at Harris Computer Systems. Mr.
Smith received a B.S. in Business Administration from the Ohio University and
completed numerous courses in the M.B.A. program at Kent State University.
CLAUDE ADKINS. Mr. Adkins was the Company's President from September 1987
to May 1996, and Executive Vice President and Vice President of Engineering from
May 1996 to the present. Mr. Adkins has been responsible for marketing power
supplies and for new product development for the Company since the inception of
the power supply line of products. From August 1975 to January 1978, Mr. Adkins
was a technical sales representative for Richards Associates, a manufacturer's
representative organization in San Jose, California. He received an A.A. degree
from El Camino Junior College, and a B.S. degree in Industrial Technology and
Electronics from California State University at Long Beach.
PHILIP G. SWANY. Mr. Swany joined the Company as its Controller in 1981.
In February 1992, he left the Company to serve as the Controller for Crystal
Graphics, Inc., a 3-D graphics software development company. In September 1995,
Mr. Swany returned to the Company where he was made Vice President-Finance. In
May 1996, he was named Chief Financial Officer and Secretary of the Company. Mr.
Swany received a B.S. degree in Business Administration -- Accounting from Menlo
College, and attended graduate courses in business administration at the
University of Colorado.
COMMITTEES OF THE BOARD.
The Board has an Audit Committee and a Compensation Committee. The Audit
Committee consists of Messrs. Lammerding and O'Neil, and the Compensation
Committee consists of Messrs. O'Neil and Lee.
The primary functions of the Audit Committee are to review the scope and
results of audits by the Company's independent auditors, the Company's internal
accounting controls, the non-audit services performed by the independent
accountants, and the cost of accounting services.
The Compensation Committee administers the Company's 1996 Stock Option Plan
and approves compensation, remuneration, and incentive arrangements for officers
and employees of the Company.
EXECUTIVE COMPENSATION.
The following table sets forth the Compensation of the Company's president
and chief executive officer during the past three years. No other officer
received annual compensation in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------- ------------------------ -------
OTHER ANNUAL RESTRICTED SECURITIES LTIP ALL OTHER
NAME AND COMPENSA- STOCK UNDERLYING PAYOUTS COMPENSA-
PRINCIPAL POSITION YEAR SALARY($) TION($) AWARD(S)($) OPTIONS(#) ($) TION
- ------------------------ ----- -------- ------------ ----------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert O. Smith 1995 $105,000 $0 $ 0 0 $ 0 $ 0
President and CEO 1994 $100,000 $0 $ 0 0 $ 0 $ 0
1993 $100,000 $0 $ 0 104,922(1) $ 0 $ 0
</TABLE>
- ---------------
(1) During fiscal year 1993, Mr. Smith received a ten year option to acquire
104,922 shares of Common Stock at $.50 per share. During fiscal year 1996,
Mr. Smith exercised his option to acquire 18,022 shares of Common Stock.
33
<PAGE> 34
Effective October 1, 1996, the Company and Mr. Smith entered into an
employment contract which terminates on December 31, 1999. Under the terms of
Mr. Smith's employment contract, Mr. Smith shall serve as president and chief
executive officer of the Company and his salary shall be $150,000 per annum
effective January 1, 1997, increasing to $175,000 per annum on January 1, 1998
and to $200,000 per annum on January 1, 1999. Mr. Smith's current salary for
1996 is $110,000. In addition, pursuant to Mr. Smith's contract, he shall have
the right to receive on the first business day of each January during the term
of his contract options to acquire 100,000 shares of Common Stock at the lower
of the closing market price as of such date or the average closing price for the
first six months of each year of his contract. Finally, pursuant to Mr. Smith's
employment contract, in the event there is a change in control, Mr. Smith shall
be granted a five year consulting contract at $200,000 per year.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Sections 204 and 317 of the California General Corporation Law permit
indemnification of directors, officers, and employees of corporations under
certain conditions subject to certain limitations. Article V of the Company's
Amended and Restated Articles of Incorporation states that the Company may
provide indemnification of its agents, including its officers and directors, for
breach of duty to the Company in excess of the indemnification otherwise
permitted by Section 317 of the Corporations Code, subject to the limits set
forth in Section 204 of the Corporations Code. Article VI of the Bylaws provides
that the Company shall, to the maximum extent and in the manner permitted in the
Corporations Code, indemnify each of its agents, including its officers and
directors, against expenses, judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding arising by
reason of the fact that any such person is or was an agent of the Company.
Pursuant to Section 317 of the California Corporations Code, the Company is
empowered to indemnify any person who was or is a party or is threatened to be
made a party to any proceeding (other than an action by or in the right of the
Company to procure a judgment in its favor) by reason of the fact that such
person is or was an officer, director, employee, or other agent of the Company
or its subsidiaries, against expenses, judgments, fines, settlements, and other
amounts actually and reasonably incurred in connection with such proceeding, if
such person acted in good faith and in a manner such person reasonably believed
to be in the best interests of the Company and, in the case of a criminal
proceeding, the Company has no reasonable cause to believe the conduct of such
person was unlawful. In addition, the Company may indemnify, subject to certain
exceptions, any person who was or is a party or is threatened to be made a party
to any threatened, pending, or completed action by or in the right of the
Company to procure a judgment in its favor by reason of the fact that such
person is or was an officer, director, employee, or other agent of the Company
or its subsidiaries, against expenses actually and reasonably incurred by such
person in connection with the defense or settlement of such action if such
person acted in good faith and in a manner such person believed to be in the
best interest of the Company and its shareholders. The Company may advance
expenses incurred in defending any proceeding prior to final disposition upon
receipt of an undertaking by the agent, officer, director, or employee to repay
that amount if it shall be determined that the agent is not entitled to
indemnification as authorized by Section 317. In addition, the Company is
permitted to indemnify its agents in excess of Section 317.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
STOCK PLANS
EMPLOYEE STOCK PURCHASE PLAN. The Company adopted an Employee Stock
Ownership Plan ("ESOP") in conformity with ERISA requirements. As of September
30, 1996, the ESOP owns, in the aggregate, 173,333 shares of the Company's
Common Stock. In June 1996, the ESOP entered into a $500,000 loan with San Jose
National bank to finance the purchase of shares. The Company has guaranteed the
repayment of the loan, and it is intended that Company contributions to the ESOP
will be used to pay off the
34
<PAGE> 35
loan. See "Management's Discussion and Analysis." The Company intends to make a
monthly contribution of approximately $10,750 per month to the ESOP. All
employees of the Company participate in the ESOP on the basis of level of
compensation and length of service. Participation in the ESOP is subject to
vesting over a six-year period. The shares of the Company's Common Stock owned
by the ESOP are voted by the ESOP trustees. Mr. Smith, President and Chief
Executive Officer of the Company, is one of two trustees of the ESOP.
1996 STOCK OPTION PLAN. The Company has established a 1996 Stock Option
Plan (the "1996 Plan"). The purpose of the 1996 Plan is to encourage stock
ownership by employees, officers, and directors of the Company to give them a
greater personal interest in the success of the business and to provide an added
incentive to continue to advance in their employment by or service to the
Company. A total of 513,000 shares of Common Stock are authorized to be issued
under the Plan, of which 275,500 shares have been issued pursuant to the 1996
Plan at an exercise price of $1.80 per share. In connection with the issuance of
the stock options, the Company obtained a letter from its investment banker that
the value of the stock options do not exceed $1.80 per share. The stock options
to acquire 275,500 shares vest after two years. The 1996 Plan provides for the
grant of incentive or non-statutory stock options. The exercise price of any
incentive stock option granted under the 1996 Plan may not be less than 100% of
the fair market value of the Common Stock of the Company on the date of grant.
The fair market value for which an optionee may be granted incentive stock
options in any calendar year may not exceed $100,000. Shares subject to options
under the 1996 Plan may be purchased for cash. Unless otherwise provided by the
Board, an option granted under the 1996 Plan is exercisable for ten years. The
1996 Plan is administered by the Compensation Committee which has discretion to
determine optionees, the number of shares to be covered by each option, the
exercise schedule, and other terms of the options. The 1996 Plan may be amended,
suspended, or terminated by the Board, but no such action may impair rights
under a previously granted option. Each option is exercisable, during the
lifetime of the optionee, only so long as the optionee remains employed by the
Company. No option is transferrable by the optionee other than by will or the
laws of descent and distribution. Pursuant to the 1996 Plan, Messrs. Smith,
Adkins, and Swany received options to acquire 61,500, 29,500, and 24,250 shares
of Common Stock, respectively.
401(K) PLAN
The Company has adopted a tax-qualified employee savings and retirement
plan (the "401(k) Plan"), which generally covers all of the Company's full-time
employees. Pursuant to the 401(k) Plan, employees may make voluntary
contributions to the 401(k) Plan up to a maximum of six percent of eligible
compensation. These deferred amounts are contributed to the 401(k) Plan. The
401(k) Plan permits, but does not require, additional matching and Company
contributions on behalf of Plan participants. The Company matches contributions
at the rate of $.25 for each $1.00 contributed. The Company can also make
discretionary contributions. The 401(k) Plan is intended to qualify under
Sections 401(k) and 401(a) of the Internal Revenue Code of 1986, as amended.
Contributions to such a qualified plan are deductible to the Company when made
and neither the contributions nor the income earned on those contributions is
taxable to Plan participants until withdrawn. All 401(k) Plan contributions are
credited to separate accounts maintained in trust.
CERTAIN TRANSACTIONS
Sierra Resources Corporation is a venture capital company registered as a
business development company under the Securities Act of 1933. Edward L.
Lammerding, Chairman of the Company, is the founder of Sierra Resources
Corporation and, since 1983, has served as its chairman of the board. Sierra
Resources Corporation is a principal shareholder of the Company. Previously, but
not within the past two fiscal years, Sierra Resources has assisted the Company
in financing through loans. In August 1996, Sierra Resources received Warrants
to purchase 100,000 shares of common stock at $5.00 per share for providing
certain administrative and financial advice to the Company. Sierra Resources
intends to distribute all of its Digital Common Stock and Warrants to its
shareholders. See "Principal and Selling Stockholders and Warrantholders."
The Company believes that its transactions with Sierra Resources were made
on terms no less favorable to the Company than those terms available from
unaffiliated parties. Further, all future transactions with affiliates of the
Company will be made on terms no less favorable to the Company than those terms
available from unaffiliated parties.
35
<PAGE> 36
PRINCIPAL AND SELLING STOCKHOLDERS AND WARRANTHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of November 30, 1996, and
as adjusted to reflect the sale of the Common Stock offered by the Company and
the Selling Stockholders, for (i) each director, (ii) all directors and officers
of the Company as a group, (iii) each person known to the Company to own
beneficially five percent (5%) or more of the outstanding shares of the
Company's Common Stock, and (iv) all other Selling Stockholders.
The Company is also registering 180,412 shares of Common Stock and 100,000
Warrants owned by Sierra Resources Corporation. Sierra Resources intends to
distribute 178,612 shares and 100,000 Warrants to its shareholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(1) AFTER OFFERING(2)
----------------------- SHARES TO ---------------------
NAME OF SELLING STOCKHOLDER NUMBER PERCENT BE SOLD NUMBER PERCENT
- -------------------------------------- --------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Edward L. Lammerding.................. 422,131(3) 24.2 40,136 116,960(3) 4.9
629 J Street
Sacramento, CA 95814
Philip M. Lee......................... 410,178(4) 23.6 6,000 99,250(4) 4.1
41920 Christy Street
Fremont, CA 94538
Thomas W. O'Neil, Jr. ................ 67,100(5) 4.1 14,600 52,500(5) 2.2
455 Capitol Mall
Sacramento, CA 95814
Robert O. Smith....................... 327,733(6) 18.6 10,000 317,733(6) 12.7
41920 Christy Street
Fremont, CA 94538
Claude Adkins......................... 136,500(7) 5.6 15,000 121,500(7) 5.0
41920 Christy Street
Fremont, CA 94538
Alaric Corporation.................... 10,500 * 5,500 5,000 *
Callopy, Christine N. ................ 2,000 * 600 1,400 *
Castillo, Joaquin..................... 4,000 * 2,000 2,000 *
Davis, Devere J. & Lois M. ........... 9,700 * 1,000 8,700 *
Flores, Louis......................... 48,700 3.0 20,000 28,700 1.2
Gong, Sherman......................... 3,000 * 1,000 2,000 *
Greenslate, Norman C. & Dolores....... 6,300 * 2,000 4,300 *
Harris, Patricia A. .................. 2,000 * 500 1,500 *
Haug, Bruce........................... 1,500 * 1,500 0 0
Kai, Jimmy T. ........................ 6,500 * 1,900 4,600 *
Lammerding Assoceights (A & S Part)... 27,766(8) 1.7 9,366 18,400 *
Lammerding, Claire M. ................ 2,000(8) * 600 1,400 *
Lammerding, Jerome C. ................ 2,000(8) * 600 1,400 *
Lammerding, Joseph E. ................ 2,000(8) * 600 1,400 *
Lammerding, Mary C. .................. 2,000(8) * 600 1,400 *
Lee Family Trust...................... 86,266 5.4 30,266 61,750 2.6
41920 Christy Street
Fremont, CA 94538
Lucas, David.......................... 8,000 * 3,000 5,000 *
Marquez, Jose......................... 72,200 4.5 10,000 62,200 2.5
Moore, Elizabeth...................... 63,366 4.0 20,366 43,000 1.8
Muir, Sharon.......................... 2,700 * 2,700 0 0
Mulhern, Iva Trust.................... 17,933 1.1 6,933 11,000 *
Mulhern, James M. Trust............... 17,933 1.1 6,933 11,000 *
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(1) SHARES TO AFTER OFFERING(2)
NAME OF SELLING STOCKHOLDER NUMBER PERCENT BE SOLD NUMBER PERCENT
- -------------------------------------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C>
Old Timers, Ltd. ..................... 18,700 1.2 6,000 12,700 *
Retzer, William K. & Mary J. ......... 62,500 3.9 16,500 46,000 1.9
Rushford Hintz, Florence Catherine.... 750 * 750 0 0
Rushford, Daniel Lee.................. 750 * 750 0 0
Rushford, James William............... 750 * 750 0 0
Rushford, Michael Dennis.............. 750 * 750 0 0
Sierra Resources Corp. ............... 180,412 11.3 1,800 0(9) 0
629 J Street
Sacramento, CA 95814
Skinner, Marjory V. .................. 7,200 * 2,200 5,000 *
Takehara, Kenji....................... 6,300 * 3,000 3,300 *
Takehara, Rusby F. ................... 6,300 * 3,000 3,300 *
Taricco, Richard P. & Peggy L. T. .... 5,700 * 800 4,900 *
Rhodora Finance Corporation Limited... 183,464 11.4 -- 183,464 7.8
80 Broad Street
Monrovia, Liberia
Digital Power-ESOP.................... 173,333 10.8 -- 173,333 7.4
41920 Christy Street
Fremont, CA 94538
Tipton, William, Jr. M.D.............. 83,800 5.2 -- 83,800 3.6
777 Sunset Ridge
Northfield, IL 60093
Officers and Directors as a group
(6 persons)......................... 1,098,230(10) 54.6 116,002 722,943(10) 27.0
</TABLE>
- ---------------
Footnotes to table:
* Less than 1%.
(1) The persons named in the table have sole voting and investment power with
respect to all of the Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and the information
contained in the footnotes to the table.
(2) Assuming no exercise of the Underwriters' over-allotment option.
(3) Prior to the offering, includes 27,500 shares subject to options and
Warrants exercisable within 60 days. Also includes 180,412 shares and
100,000 shares subject to Warrants exercisable within 60 days owned by
Sierra Resources Corporation of which Mr. Lammerding is president and
chairman of the board and has dispositive and voting power. Subsequent to
the offering, includes 35,940 shares subject to options and Warrants
exercisable within 60 days.
(4) Prior to the offering, includes 27,500 shares subject to options and
Warrants exercisable within 60 days. Also includes 86,266 shares held by a
family trust for which Mr. Lee serves as a trustee and 180,412 shares and
100,000 shares subject to Warrants exercisable within 60 days held by Sierra
Resources Corporation for which Mr. Lee serves as a director and has
dispositive and voting power. Subsequent to the offering, includes 59,750
shares held by the trust and 29,500 shares subject to options and Warrants
exercisable within 60 days.
(5) Includes 27,500 shares subject to options and Warrants exercisable within 60
days.
(6) Includes 144,400 shares subject to options and Warrants exercisable within
60 days. Also includes 173,333 shares owned by the Digital Power ESOP of
which Mr. Smith is a trustee and therefore deemed to be a beneficial owner.
(7) Includes 57,500 shares subject to options and Warrants exercisable within 60
days.
37
<PAGE> 38
(8) Represents shares of Mr. Lammerding's adult children and shares of a family
corporation to which Mr. Lammerding disclaims beneficial ownership.
(9) After the sale of 1,800 shares, Sierra Resources will own 178,612 shares
which it intends to distribute to its shareholders.
(10) Includes a total of 399,400 shares subject to options and Warrants owned
prior to the offering and exercisable within 60 days, and 309,840 shares
subject to options and Warrants owned after the offering and exercisable
within 60 days. Also includes 173,333 shares owned by the Digital Power
ESOP of which Mr. Smith is a trustee and therefore deemed to be a
beneficial owner.
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Warrants as of November 30, 1996, and as
adjusted to reflect the sale of the Warrants offered by the Company and the
Selling Stockholders, for each director and all other selling Warrantholders.
The Company is also registering the 200,000 Warrants and the 200,000 shares of
Common Stock underlying the Warrants owned by the selling Warrantholders. The
selling Warrantholders may sell all or none of their Warrants.
<TABLE>
<CAPTION>
WARRANTS BENEFICIALLY WARRANTS BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(1) WARRANTS AFTER OFFERING(2)
--------------------- TO BE ---------------------
NAME OF WARRANTHOLDER NUMBER PERCENT OFFERED NUMBER PERCENT
- --------------------------------------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Edward L. Lammerding................... 120,000(3) 60.0 20,000 0 0
629 J Street
Sacramento, CA 95814
Philip M. Lee.......................... 120,000(3) 60.0 20,000 0 0
41920 Christy Street
Fremont, CA 94538
Thomas W. O'Neil....................... 20,000 10.0 20,000 0 0
455 Capitol Mall
Sacramento, CA 95814
Robert O. Smith........................ 20,000 10.0 20,000 0 0
41920 Christy Street
Fremont, CA 94538
Claude Adkins.......................... 20,000 10.0 20,000 0 0
41920 Christy Street
Fremont, CA 94538
Sierra Resources Corp. ................ 100,000 50.0 100,000(4) 0 0
</TABLE>
- ---------------
Footnotes to table:
(1) The persons named in the table have sole voting and investment power with
respect to all of the Warrants shown as beneficially owned by them, subject
to community property laws where applicable and the information contained in
the footnotes to the table.
(2) Assuming no exercise of the Underwriters' over-allotment option.
(3) Includes Warrants to acquire 100,000 shares of Common Stock owned by Sierra
Resources Corporation for which Messrs. Lammerding and Lee are directors and
may have dispositive and voting power.
(4) Sierra Resources intends to distribute 100,000 Warrants to its shareholders.
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, no par value, and 2,000,000 shares of Preferred Stock, no par
value. As of November 30, 1996, there were outstanding 1,613,275 shares of
Common Stock held of record by stockholders and no shares of Preferred Stock
outstanding.
COMMON STOCK
Each stockholder is entitled to one vote for each share of Common Stock
held on all matters submitted to a vote of stockholders. Each holder of Common
Stock has the right to cumulate his votes, which means each share shall have the
number of votes equal to the number of directors to be elected and all of which
votes may
38
<PAGE> 39
be cast for any one nominee. Subject to such preferences as may apply to any
Preferred Stock outstanding at the time, the holders of outstanding shares of
Common Stock are entitled to receive dividends out of assets legally available
therefor at such times and in such amounts as the Board of Directors may from
time to time determine. The Common Stock is not entitled to preemptive rights
and is not subject to conversion or redemption. Upon the liquidation,
dissolution, or winding up of the Company, the holders of Common Stock and any
participating Preferred Stock outstanding at that time would be entitled to
share ratably in all assets remaining after the payment of liabilities and the
payment of any liquidation preferences with respect to any outstanding Preferred
Stock. Each outstanding share of Common Stock now is, and all shares of Common
Stock that will be outstanding after completion of the offering will be, fully
paid and non-assessable.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by California law, to provide for the issuance of shares of Preferred Stock in
one or more series, to establish from time to time the number of shares to be
included in each such series, to fix the powers, designations, preferences, and
rights of the shares of each wholly-unissued series and any qualifications,
limitations, or restrictions thereon, and to increase or decrease the number of
shares of any such series (but not below the number of shares of such series
then outstanding) without any further vote or action by the stockholders. The
Board of Directors may authorize the issuance of Preferred Stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of Common Stock. Thus, the issuance of Preferred Stock may have
the effect of delaying, deterring, or preventing a change in control of the
Company. The Company has no current plans to issue any shares of Preferred
Stock.
WARRANTS
The Company is offering 500,000 Warrants at a price of $.125 per Warrant
entitling the holder of each Warrant to purchase, commencing during a three-year
period from the effective date of this Prospectus, a share of Common Stock at an
exercise price of $5.00 per share. The Company shall have the right to call each
Warrant for redemption upon not less than thirty (30) days written notice for a
redemption price of $.125 per Warrant provided that the closing bid price of the
Common Stock has been at least $6.00 per share for thirty (30) consecutive
trading days ending within three (3) trading days of the date on which notice of
redemption is given.
Further, the Company has issued Warrants to purchase 200,000 shares, in the
aggregate, to its Directors and an affiliate of the Company. The Warrants have
the same term, exercise price, and are subject to redemption, as the Warrants
offered through this offering.
In addition, the Representative shall receive Warrants ("Representative's
Warrants") which shall entitle the holder to purchase an aggregate of 100,000
shares of Common Stock and 50,000 Warrants, similar but not identical to, the
Warrants. The Representative's Warrants are not exercisable for a one year
period. See "Underwriting."
STOCK OPTIONS
In addition to the stock options to purchase 275,500 shares of Common Stock
issued pursuant to the 1996 Plan, the Company issued options in 1993 to purchase
237,500 shares of Common Stock at $1.80 per share. The options expire in 2003
and were issued to employees and directors of the Company. Of the options to
purchase 237,500 shares, options to purchase 178,125 shares are immediately
exercisable and the remaining options to purchase 59,375 vest in May 1997.
In addition, Mr. Smith was issued an option in 1993 that expires in 2003 to
acquire 104,922 shares of Common Stock at $0.50 per share of which 86,900
options are currently outstanding.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock and
Warrants is American Securities Transfer and Trust, Inc., located at 1825
Lawrence Street, Suite 444, Denver, Colorado, 80202-1817, phone number (303)
298-5370.
39
<PAGE> 40
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of the Company's Common Stock in
the public market could have the effect of depressing the prevailing market
price of its Common Stock. Upon the completion of the offerings, the Company
will have outstanding 2,363,275 shares of Common Stock. Of these shares, the
1,109,750 shares sold or distributed in the offering will be freely transferable
without restriction or further registration under the Securities Act of 1933
(the "Securities Act") unless purchased by "affiliates" of the Company as that
term is defined in Rule 144 of the Securities Act ("Affiliates"), which shares
will be subject to the resale limitations of Rule 144 adopted under the
Securities Act. Of the other shares outstanding upon the completion of the
offering, 1,253,525 shares will be either subject to lock-up agreements or
"restricted securities" as that term is defined under Rule 144 ("Restricted
Shares"). Restricted Shares may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rule 144 promulgated
under the Securities Act, which rule is summarized below. As a result of the
contractual restrictions described below, and the provisions of Rule 144,
additional shares will be available and eligible for sale in the public market
as follows: (i) 1,156,740 currently outstanding shares upon expiration of
lock-up agreements 12 months from the date of this Prospectus, (ii) 1,449,900
additional shares issuable upon the exercise of stock options and Warrants, to
the extent exercisable as of such date, and (iii) 96,785 currently outstanding
shares from time to time thereafter pursuant to Rule 144.
Certain stockholders of the Company have entered into lock-up agreements
with the Representative of the Underwriters providing that, with certain limited
exceptions, such stockholders will not offer, sell, contract to sell, grant an
option to purchase, make a short sale, or otherwise dispose of or engage in any
hedging or other transaction that is designed or reasonably expected to lead to
a disposition of any shares of Common Stock for a period of 12 months from the
date of this Prospectus without the prior written consent of the Representative.
Other than (i) the 1,109,750 shares being offered or distributed hereby, (ii)
1,449,900 shares subject to stock options and Warrants, and (iii) 96,785 shares
owned by holders owning 5,000 or less shares of Common Stock as of the date of
this Prospectus, no shares of Common Stock of the Company will be eligible for
immediate sale in the public market until the expiration of the 12 month lock-up
agreement with the Representative of the Underwriters. The Representative may,
in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lock-up agreements.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least two years will be entitled to sell in any three-month period a number of
shares that does not exceed the greater of (i) 1% of the then outstanding shares
of the Company's Common Stock (approximately 23,632 shares immediately after the
offering), or (ii) the average weekly trading volume of the Company's Common
Stock in The Nasdaq SmallCap Market during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the Commission.
Such sales pursuant to Rule 144 are subject to certain requirements relating to
manner of sale, notice, and availability of current public information about the
Company. The Commission has recently proposed to reduce the two year holding
periods under Rule 144 to one year. If enacted, such modification will have a
material effect on the timing of when certain shares of Common Stock become
eligible for resale.
Prior to the offerings, there has been no public market for the Common
Stock of the Company, and no predictions can be made of the effect, if any, that
the sale or availability for sale of shares of additional Common Stock will have
on the trading price of the Common Stock. Nevertheless, sales of substantial
amounts of such shares in the public market, or the perception that such sales
could occur, could adversely affect the trading price of the Common Stock, and
could impair the Company's future ability to raise capital through an offering
of its equity securities. See "Description of Securities."
40
<PAGE> 41
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representative,
Werbel-Roth Securities, Inc., have severally agreed to purchase from the Company
and the Selling Stockholders the following respective numbers of shares of
Common Stock and Warrants at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES NUMBER OF WARRANTS
------------------------------------- ---------------- ------------------
<S> <C> <C>
Werbel-Roth Securities, Inc. ........ 750,000 450,000
Noble Investment Co. of Palm Beach... 100,000 25,000
Prime Charter Ltd. .................. 100,000 12,500
Grady Hatch & Company, Inc. ......... 50,000 12,500
--------- -------
Total...................... 1,000,000 500,000
========= =======
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of Common Stock and Warrants offered
hereby if any of such shares or Warrants are purchased.
The Company and the Selling Stockholders have been advised by the
Representative of the Underwriters that the Underwriters propose to offer the
shares of Common Stock and Warrants to the public at the initial public offering
prices set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $.20 per share and $.00625 per
Warrant. The Underwriters may allow, and such dealers may re-allow, a concession
not in excess of $.05 per share to certain other dealers. After the initial
public offering, the public offering price and other selling terms may be
changed by the Representative of the Underwriters. Further, the Company has
agreed to reimburse the Underwriters on a non-accountable basis for their
expenses in the amount of 3% of the gross proceeds from the offering.
At the closing of the sale of Shares being offered hereby, the Company will
sell to the Representative the Representative's Warrants, for nominal
consideration, entitling the Representative to purchase an aggregate of 100,000
shares of Common Stock and 50,000 Warrants, similar but not identical to, the
Warrants. The Representative's Warrants shall be non-exercisable and
non-transferable (other than a transfer to affiliates of the Representative or
members of the selling group) for a period of twelve months following the date
of this Prospectus. The Representative's Warrants and the underlying securities
shall contain the usual anti-dilution provisions and shall not be redeemable.
The Representative's Warrants will be exercisable after twelve months from the
effective date of this Prospectus and for a period of four years thereafter; and
if the Representative's Warrants are not exercised during this term, they shall,
by their own terms, automatically expire. The exercise price of each of the
Representative's Warrants shall be 120% of the public offering price per Share
and price per Warrant. In addition, the Company has granted to the
Representative a single demand registration right and unlimited piggy back
registration rights, related to the Common Stock and Warrants underlying the
Representative's Warrants.
The Representative may designate that the Representative's Warrants be
issued in varying amounts directly to its officers, directors, shareholders,
employees, and other proper persons and not to the Representative; however, such
designation will only be made by the Representative if it determines and
represents to the Company that such issuance would not violate the
interpretation of the Board of Governors of the NASD relating to the review of
corporate financing arrangements and would not require registration of the
Representative's Warrants or underlying securities.
Upon written request of the then holder(s) owning a majority of the total
Representative's Warrants and the underlying securities issued upon the exercise
of the Representative's Warrants, at any time within the period commencing on
the date of this Prospectus and ending five years thereafter, the Company will
file, not more than once, a registration statement under the Act, registering or
qualifying, as the case may be, the Representative's Warrants and/or the
underlying securities. The filing shall be made within sixty (60) days of such
notice, and the Company agrees to use its best efforts to cause the above filing
to become effective. All expenses of such registration or qualification,
including, but not limited to, legal, accounting, printing, and mailing fees,
will be borne by the Company.
41
<PAGE> 42
During the one year period commencing on the date of this Prospectus, the
Representative's Warrants will not be sold, transferred, assigned, pledged, or
hypothecated, except to officers of the Underwriters and members of the Selling
Group and officers and partners thereof.
In addition to the above, the Company understands and agrees that if, at
any time during the term of the Representative's Warrants and for a period of
two years thereafter, it should file a registration statement with the SEC
pursuant to the Securities Act for a public offering of securities, either for
the account of the Company or for the account of any other person, the Company,
at its own expense, will offer to said holder(s) the opportunity to register or
qualify the Representative's Warrants and the underlying securities for public
offering. The Company shall give such holder(s) notice by registered mail at
least thirty (30) days prior to filing any such registration statement with the
Commission.
In addition, the Company has granted to the Underwriters an over-allotment
option, exercisable not later than 45 days from the date of this Prospectus, to
purchase up to 150,000 additional shares of Common Stock and 75,000 Warrants at
the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus. To the extent that
the Underwriters exercise such option, each of the Underwriters shall have a
firm commitment to purchase approximately the same percentage thereof that the
number of shares of Common Stock and Warrants to be purchased by it shown in the
above table bears to 1,000,000, and the Company will be obligated, pursuant to
the option, to sell such shares and Warrants to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock and Warrants hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 1,000,000 shares and 500,000 Warrants are being offered.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
Stockholder's of the Company owning more than 5,000 shares of Common Stock
not being sold in the initial public offering have agreed not to offer, sell, or
otherwise dispose of any of such Common Stock for a period of 12 months from the
date of this Prospectus without the prior written consent of the Representative
of the Underwriters. See "Shares Eligible for Future Sale."
The Representative of the Underwriters has advised the Company and the
Selling Stockholders that the Underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
As part of the Underwriting Agreement, the Representative of the
Underwriters shall have the right to designate a member of the Board of
Directors, or at the Representative's option, to designate one individual to
attend the meetings of the Company's Board of Directors for a period of five
years. Further, for a period of three years, the Representative shall have a
right of first refusal to sell the Company's securities in a public or private
offering.
The preceding is a brief summary of the Underwriting Agreement and is
qualified in its entirety by the Underwriting Agreement itself which has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part.
Prior to this offering, there has been no public market for the Common
Stock or Warrants of the Company. Consequently, the initial public offering
price for the Common Stock has been determined by negotiations between the
Company, the Selling Stockholders, and the Representative of the Underwriters.
Among the factors considered in such negotiations were the prevailing market
conditions, the results of operations of the Company in recent periods, the
market capitalization, the stage of development of other companies which the
Company and the Representative of the Underwriters believes to be comparable to
the Company, estimates of the business potential of the Company, the present
state of the Company's development, and other factors deemed relevant.
LEGAL MATTERS
The validity of the shares of Common Stock and Warrants offered by the
Company and Common Stock offered by the Selling Stockholders will be passed upon
by Bartel Eng Linn & Schroder, Sacramento, California. Certain legal matters in
connection with this offering will be passed upon for the Underwriters by Atlas,
Pearlman, Trop, and Borkson, P.A., Fort Lauderdale, Florida.
42
<PAGE> 43
EXPERTS
The audited consolidated financial statements of the Company as of December
31, 1995, and for each of the two years in the period ended December 31, 1995,
have been included in this Prospectus and Registration Statement in reliance
upon the report of Hein + Associates LLP, independent certified public
accountants, appearing elsewhere herein and in the Registration Statement, and
upon the authority of such firm as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
In June 1996, the Company decided to retain Hein + Associates LLP as the
Company's independent accountants and dismissed Villanueva, Purcell & Co., the
Company's former accountants. The decision to change independent accountants was
ratified and approved by the Company's Board of Directors in June 1996. During
the relationship between the Company and Villanueva, Purcell & Co., there were
no disagreements regarding any matters with respect to accounting principles or
practices, financial statement disclosure, or audit scope or procedure, which
disagreements, if not resolved to the satisfaction of the former accountants,
would have caused Villanueva, Purcell & Co. to make reference to the subject
matter of the disagreement in connection with its report. The former
accountants' reports for the years ended December 31, 1994 and 1993 are not a
part of the financial statements of the Company included in this Prospectus.
Such reports did not contain an adverse opinion or disclaimer of opinion or
qualification of modifications as to uncertainty, audit scope or accounting
principles. Prior to retaining Hein + Associates LLP, the Company had not
consulted with Hein + Associates LLP regarding accounting principles.
ADDITIONAL INFORMATION
A Registration Statement on Form SB-2, including amendments thereto,
relating to the shares of Common Stock and Warrants offered hereby, has been
filed by the Company with the Commission under the Securities Act. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. Statements contained in this Prospectus as
to the contents of any contract or other document referred to are not
necessarily complete and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information with respect to the Company and the Common
Stock and Warrants offered hereby, reference is made to such Registration
Statement and exhibits. A copy of the Registration Statement may be inspected by
anyone without charge at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549, and at the regional offices of the Commission located at Room 1228,
75 Park Place, New York 10007, and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part of the
Registration Statement and the exhibits thereto may be obtained from those
offices upon the payment of certain fees prescribed by the Commission. In
addition, the Commission maintains a Web site (http://www.sec.gov) that contains
reports proxy and information statements and other information regarding issuers
that file electronically with the Commission.
43
<PAGE> 44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report.......................................................... F-2
Consolidated Balance Sheets -- December 31, 1995 and September 30, 1996 (unaudited)... F-3
Consolidated Statements of Income -- For the Years Ended December 31, 1994 and 1995
and for the nine months ended September 30, 1995 and 1996 (unaudited)............... F-4
Consolidated Statement of Stockholders' Equity -- For the Years Ended December 31,
1994 and December 31, 1995 and for the nine months ended
September 30, 1996 (unaudited)...................................................... F-5
Consolidated Statements of Cash Flows -- For the Years Ended December 31, 1994 and
1995
and for the nine months ended September 30, 1995 and 1996 (unaudited)............... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 45
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
Digital Power Corporation and Subsidiary
Fremont, California
We have audited the accompanying consolidated balance sheet of Digital
Power Corporation and Subsidiary as of December 31, 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended December 31, 1994 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Digital Power Corporation
and Subsidiary as of December 31, 1995, and the results of their operations and
their cash flows for the years ended December 31, 1994 and 1995 in conformity
with generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
August 31, 1996
F-2
<PAGE> 46
DIGITAL POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------ SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash............................................................... $ 202,917 $ 188,084
Temporary investment............................................... 100,000 108,139
Accounts receivable -- trade, net of allowance for doubtful
accounts of $120,000 and $120,000 (unaudited)................... 1,616,497 2,419,095
Other receivables.................................................. 57,858 151,377
Inventory, net..................................................... 1,557,226 2,108,939
Prepaid expenses and deposits...................................... 27,792 34,977
Deferred income taxes.............................................. 240,856 50,519
------------ ------------
Total current assets............................................ 3,803,146 5,061,130
Property and Equipment, net.......................................... 357,680 608,870
Deposits............................................................. 18,364 28,102
Deferred Offering Costs.............................................. -- 121,035
Deferred Income Taxes................................................ 139,000 --
------------ ------------
Total Assets............................................... $4,318,190 $ 5,819,137
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt.................................. $ 46,014 $ 146,392
Current portion of capital lease obligations....................... 11,925 13,076
Debenture payable.................................................. 5,000 --
Accounts payable................................................... 1,131,586 1,092,794
Accrued liabilities................................................ 397,263 887,050
------------ ------------
Total current liabilities....................................... 1,591,788 2,139,312
Long-Term Debt, less current portion................................. 1,008,131 1,772,834
Obligations Under Capital Lease, less current portion................ 31,690 21,724
------------ ------------
Total liabilities............................................... 2,631,609 3,933,870
------------ ------------
Commitments and Contingencies (Notes 6, 7 and 9)
Stockholders' Equity:
Series A cumulative redeemable convertible preferred stock, no par
value, 1,000,000 and 2,000,000 (unaudited) shares authorized,
415,302 and 0 (unaudited) shares issued and outstanding
(Aggregate liquidation preference of $1,100,000)................ 747,569 --
Common stock, no par value, 5,000,000 and 10,000,000 (unaudited)
shares authorized, 963,722 and 1,603,275 (unaudited) shares
issued and outstanding.......................................... 4,398,322 5,539,115
Accumulated deficit................................................ (3,459,310) (3,172,957)
Unearned employee stock ownership plan shares...................... -- (480,891)
------------ ------------
Total stockholders' equity...................................... 1,686,581 1,885,267
------------ ------------
Total Liabilities and Stockholders' Equity................. $4,318,190 $ 5,819,137
============ ============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-3
<PAGE> 47
DIGITAL POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31, FOR THE NINE MONTHS ENDED
-------------------------- SEPTEMBER 30,
1994 1995 --------------------------
---------- ----------- 1995 1996
---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................ $6,249,333 $10,037,502 $7,199,067 $10,071,347
Cost of Goods Sold...................... 4,663,124 7,494,427 5,482,592 7,496,955
---------- ----------- ---------- ----------
Gross Margin.......................... 1,586,209 2,543,075 1,716,475 2,574,392
---------- ----------- ---------- ----------
Operating Expenses:
Engineering and product development... 408,966 481,475 348,487 506,331
Marketing and selling................. 500,338 452,654 345,377 371,507
General and administrative............ 418,970 581,174 365,646 500,658
---------- ----------- ---------- ----------
Total operating expenses...... 1,328,274 1,515,303 1,059,510 1,378,496
---------- ----------- ---------- ----------
Income From Operations.................. 257,935 1,027,772 656,965 1,195,896
---------- ----------- ---------- ----------
Other Income (Expense):
Interest income....................... 523 3,116 2,997 8,305
Interest expense...................... (103,032) (119,146) (84,316) (108,714)
Translation loss...................... (10,450) (85,258) (43,485) (5,880)
---------- ----------- ---------- ----------
Other income (expense)............. (112,959) (201,288) (124,804) (106,289)
---------- ----------- ---------- ----------
Income Before Income Taxes.............. 144,976 826,484 532,161 1,089,607
---------- ----------- ---------- ----------
Provision (Benefit) For Income Taxes.... 23,253 (277,400) 51,355 414,000
---------- ----------- ---------- ----------
Net Income.............................. $ 121,723 $ 1,103,884 $ 480,806 675,607
========== =========== ========== ==========
Net Income Applicable To Common
Shareholders.......................... $ 30,357 $ 1,012,518 $ 412,281 637,538
========== =========== ========== ==========
Net Income Per Common Share:
Primary............................... $ 0.02 $ 0.80 $ 0.33 $ 0.41
========== =========== ========== ==========
Fully diluted......................... $ 0.02 $ 0.66 $ 0.29 $ 0.38
========== =========== ========== ==========
Weighted Average Number Of Shares
Outstanding........................... 1,226,208 1,258,858 1,254,466 1,573,954
========== =========== ========== ==========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-4
<PAGE> 48
DIGITAL POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNEARNED
EMPLOYEE
PREFERRED STOCK COMMON STOCK STOCK TOTAL
------------------- --------------------- ACCUMULATED OWNERSHIP STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT DEFICIT PLAN EQUITY
-------- --------- --------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994........... 415,302 $ 747,569 963,722 $4,398,322 $(4,684,917) $ -- $ 460,974
Net income........................ -- -- -- -- 121,723 -- 121,723
-------- --------- ---------- ---------- ----------- --------- ----------
Balances, December 31, 1994......... 415,302 747,569 963,722 4,398,322 (4,563,194) -- 582,697
Net income........................ -- -- -- -- 1,103,884 -- 1,103,884
-------- --------- ---------- ---------- ----------- --------- ----------
Balances, December 31, 1995......... 415,302 747,569 963,722 4,398,322 (3,459,310) -- 1,686,581
Net income (unaudited)............ -- -- -- -- 675,607 -- 675,607
Dividend on preferred stock
(unaudited)..................... -- -- 216,229 389,213 (389,254) -- (41)
Conversion of preferred stock
(unaudited)..................... (415,302) (747,569) 415,302 747,569 -- -- --
Exercise of stock options
(unaudited)..................... -- -- 8,022 4,011 -- -- 4,011
ESOP loan and share purchases
(unaudited)..................... -- -- -- -- -- (500,000) (500,000)
Contribution to the ESOP
(unaudited)..................... -- -- -- -- -- 19,109 19,109
-------- --------- ---------- ---------- ----------- --------- ----------
Balances, September 30, 1996
(unaudited)....................... -- $ -- 1,603,275 $5,539,115 $(3,172,957) $(480,891) $1,885,267
======== ========= ========== ========== =========== ========= ==========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-5
<PAGE> 49
DIGITAL POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31, FOR THE NINE MONTHS ENDED
-------------------------- SEPTEMBER 30,
1994 1995 --------------------------
----------- ----------- 1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income..................................... $ 121,723 $ 1,103,884 $ 480,806 675,607
----------- ----------- ---------- ----------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization............. 60,334 70,140 16,686 71,394
Deferred income taxes..................... -- (374,689) (34,508) 329,337
Warranty expense.......................... 15,000 30,000 -- 119,125
Inventory reserve......................... 140,000 195,000 260,000 --
Contribution to ESOP...................... -- -- -- 19,109
Bad debt expense.......................... 17,521 55,000 15,000 --
Unrealized gain on temporary investment... -- -- -- (8,139)
Foreign currency translation loss......... 10,450 85,258 43,485 5,880
Changes in operating assets and liabilities:
Accounts receivable....................... (622,302) (465,047) (259,274) (802,598)
Other receivables......................... (9,895) (39,855) (23,583) (93,519)
Inventory................................. (475,396) (594,983) (280,878) (551,713)
Prepaid expenses.......................... 6,620 (17,879) (8,731) (23,804)
Other assets.............................. -- -- 2,608 6,881
Accounts payable.......................... 344,826 266,721 (104,032) (38,792)
Accrued liabilities....................... 6,452 5,485 43,936 370,662
----------- ----------- ---------- ----------
Net adjustments.............................. (506,390) (784,849) (329,291) (596,177)
----------- ----------- ---------- ----------
Net cash provided by (used in) operating
activities................................ (384,667) 319,035 151,515 79,430
----------- ----------- ---------- ----------
Cash Flows From Investing Activities:
Purchases of property and equipment............ (71,682) (254,530) (83,783) (322,584)
Purchase of temporary investment............... (100,000) -- -- --
----------- ----------- ---------- ----------
Net cash used in investing activities........ (171,682) (254,530) (83,783) (322,584)
----------- ----------- ---------- ----------
Cash Flows From Financing Activities:
Deferred offering costs........................ -- -- -- (121,035)
Proceeds from exercise of stock options........ -- -- -- 4,011
Payments of preferred stock dividend........... -- -- -- (41)
Proceeds from notes payable.................... 1,762,768 120,000 -- 50,000
Principal payments on notes payable............ (1,620,750) (1,276) (1,276) (49,771)
Principal payments on capital lease
obligations.................................. (4,478) (9,054) (6,297) (8,815)
Payment of debenture........................... -- -- -- (5,000)
Proceeds from line of credit................... 4,039,000 9,422,788 6,872,787 9,195,000
Principal payments on line of credit........... (3,801,750) (9,344,924) (6,773,350) (8,830,148)
----------- ----------- ---------- ----------
Net cash provided by financing activities.... 374,790 187,534 91,864 234,201
----------- ----------- ---------- ----------
Effect of Exchange Rate Changes on Cash.......... (10,450) (85,258) (43,485) (5,880)
----------- ----------- ---------- ----------
Net Increase (decrease) In Cash.................. (192,009) 166,781 116,111 (14,833)
Cash and Cash Equivalents, beginning of period... 228,145 36,136 36,136 202,917
----------- ----------- ---------- ----------
Cash and Cash Equivalents, end of period......... $ 36,136 $ 202,917 $ 152,247 188,084
=========== =========== ========== ==========
Supplemental Cash Flow Information:
Cash payments for:
Interest..................................... $ 105,634 $ 121,931 $ 86,252 $ 105,521
=========== =========== ========== ==========
Income taxes................................. $ 31,498 $ 55,803 $ 10,000 69,500
=========== =========== ========== ==========
Non-cash investing and financing transactions:
Property and equipment acquired with capital
lease..................................... $ 46,368 $ 10,779 $ 9,790 --
=========== =========== ========== ==========
Conversion of preferred stock to common
stock..................................... $ -- $ -- $ -- 747,569
=========== =========== ========== ==========
Preferred stock dividend of common stock..... $ -- $ -- $ -- 389,213
=========== =========== ========== ==========
Notes payable for unearned employee stock
ownership plan shares..................... $ -- $ -- $ -- 500,000
=========== =========== ========== ==========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-6
<PAGE> 50
DIGITAL POWER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED)
1. NATURE OF OPERATIONS:
Digital Power Corporation ("DPC"), and its wholly owned subsidiary Poder
Digital, S.A. de C.V. ("PD") which is located in Guadalajara, Mexico,
(collectively referred to as the "Company") are engaged in the design,
manufacture and sale of switching power supplies.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its subsidiary. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Statement of Cash Flows -- For purposes of the statements of cash flows,
the Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Inventory -- Inventory is stated at the lower of cost (first-in, first-out)
or market.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation of equipment and furniture is calculated using the straight-line
method over the estimated useful lives (ranging from 5 to 10 years) of the
respective assets. Leasehold improvements are amortized over the shorter of the
estimated useful life or the term of the lease. The cost of normal maintenance
and repairs is charged to operating expense as incurred. Material expenditures
which increase the life of an asset are capitalized and depreciated over the
estimated remaining useful life of the asset. The cost of fixed assets sold, or
otherwise disposed of, and the related accumulated depreciation or amortization
are removed from the accounts, and any gains or losses are reflected in current
operations.
Deferred Offering Costs -- Direct costs incurred by the Company in
connection with its proposed initial public offering of common stock have been
deferred, and will be charged against the proceeds of the offering when
completed. Should the offering not be completed such costs will be expensed.
Income Taxes -- The Company accounts for income taxes under the liability
method, which requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statements and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Revenue Recognition -- Sales revenue is recognized when the products are
shipped to customers, including distributors. Customers receive a one or two
year product warranty and sales to distributors are subject to a right of
return. The Company provides a reserve for estimated warranty costs and a
reserve for estimated product returns.
Foreign Currency Translation -- Gains and losses from the effects of
exchange rate fluctuations on transactions denominated in foreign currencies are
included in results of operations. Assets and liabilities of the Company's
foreign subsidiary are translated into U.S. dollars at period-end exchange
rates, and their revenues and expenses are translated at average exchange rates
for the period. Translation adjustments are accumulated in a separate component
of stockholders' equity until such time as the foreign subsidiary is sold or
substantially liquidated. Deferred taxes have not been allocated to the
cumulative foreign currency translation adjustment included in stockholders'
equity because there is no intent to repatriate earnings of the foreign
subsidiary.
F-7
<PAGE> 51
DIGITAL POWER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED)
Net Income Per Common Share -- Net income per common share is calculated
upon net income applicable to common shareholders, which represents net income
adjusted for cumulative preferred dividends applicable to the period.
The weighted average common shares is based upon actual common stock and
common stock equivalents outstanding. Additionally, common stock equivalents
issued during the prior year at less than the $4.00 proposed initial public
offering price have been included for all periods presented in the computation
using the "treasury stock method" and the anticipated public offering price.
Fully diluted net income per common share is computed using the "if
converted" method for preferred stock.
Accounting Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. The actual results could differ from
those estimates.
The Company's financial statements are based upon a number of significant
estimates, including the allowance for doubtful accounts, technological
obsolescence of inventories, the estimated useful lives selected for property
and equipment, realizability of deferred tax assets, allowance for sales
returns, and warranty reserve. Due to the uncertainties inherent in the
estimation process, it is at least reasonably possible that these estimates will
be further revised in the near term and such revisions could be material.
Impairment of Long-Lived Assets -- Effective January 1, 1996, the Company
adopted Financial Accounting Standards Board Statement 121 (FAS 121) entitled
"Accounting for Impairment of Long-Lived Assets."
In the event that facts and circumstances indicate that the cost of assets
or other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow value is
required. Adoption of FAS 121 had no effect on the unaudited September 30, 1996
financial statements.
Stock-Based Compensation -- In October 1995, the Financial Accounting
Standards Board issued a new statement titled "Accounting for Stock-Based
Compensation" (FAS 123) which the Company adopted January 1, 1996. FAS 123
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options and other equity instruments to employees
based on fair value. Companies that do not adopt the fair value accounting rules
must disclose the impact of adopting the new method in the notes to the
financial statements. Transactions in equity instruments with non-employees for
goods or services must be accounted for on the fair value method. The Company
has elected not to adopt the fair value accounting prescribed by FAS 123 for
employees, but is subject to the disclosure requirements prescribed by FAS 123.
Accrued Warranty Costs -- Estimated warranty costs are provided for at the
time of sale of the warranted product. The Company generally extends warranty
coverage for one or two years from the time of sale.
Concentrations of Credit Risk -- Credit Risk represents the accounting loss
that would be recognized at the reporting date if counterparties failed
completely to perform as contracted. Concentrations of credit risk (whether on
or off balance sheet) that arise from financial instruments exist for groups of
customers or groups of counterparties when they have similar economic
characteristics that would cause their ability to meet contractual obligations
to be similarly effected by changes in economic or other conditions described
below. In accordance with FASB Statement No. 105, Disclosure of Information
about Financial Instruments with Off Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk, the credit risk amounts shown do
not take into account the value of any collateral or security.
F-8
<PAGE> 52
DIGITAL POWER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED)
Fair Value of Financial Instruments -- The estimated fair values for
financial instruments under SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, are determined at discrete points in time based on
relevant market information. These estimates involve uncertainties and cannot be
determined with precision. The estimated fair values of the Company's financial
instruments, which includes all cash, accounts receivables, accounts payable,
long-term debt, and other debt, approximates the carrying value in the
consolidated financial statements at December 31, 1995.
Interim Financial Information -- The September 30, 1995 and 1996 financial
statements have been prepared by the Company without audit. In the opinion of
management, the accompanying unaudited financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary for a fair
presentation of the Company's financial position as of September 30, 1996, and
the results of their operations and cash flows for the nine month periods ended
September 30, 1995 and 1996. The results of operations for the nine month
periods ended September 30, 1995 and 1996 are not necessarily indicative of
those that will be obtained for the entire fiscal year.
3. INVENTORY:
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
Raw Materials.............................. $ 110,318 $ 125,846
Work-in-process............................ 1,718,952 2,283,161
Finished goods............................. 127,956 99,932
Allowance for obsolescence................. (400,000) (400,000)
------------ ------------
$ 1,557,226 $2,108,939
============ ============
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
Machinery and equipment.................... $ 1,004,955 $1,262,679
Office equipment and furniture............. 272,614 324,284
Leasehold improvements..................... 23,409 11,177
----------------- ------------------
1,300,978 1,598,140
Accumulated Depreciation................... (943,298) (989,270)
----------------- ------------------
$ 357,680 $ 608,870
============= ==============
</TABLE>
5. ACCRUED LIABILITIES:
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
Accrued payroll and benefits............... $ 87,712 $ 445,357
Accrued commissions and royalties.......... 58,665 79,974
Accrued warranty expense................... 60,000 149,125
Accrued income taxes....................... 46,000 45,410
Other...................................... 144,886 167,184
----------------- ------------------
$ 397,263 $ 887,050
============= ==============
</TABLE>
F-9
<PAGE> 53
DIGITAL POWER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED)
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
$1,500,000 line of credit bearing interest
at the bank's prime rate plus one percent
(total of 9.5% at December 31, 1995),
maturing October 15, 1997, collateralized
by substantially all assets of DPC....... $ 924,145 $1,288,996
Unsecured note payable, due on demand,
interest at 12%.......................... 10,000 10,000
Notes payable, due in monthly installments
including interest at 10% and 10.5%, due
December 1998 and May 1999,
collateralized by substantially all
assets of DPC............................ 120,000 139,339
Employee stock ownership plan loan See Note
11....................................... -- 480,891
----------------- ------------------
1,054,145 1,919,226
Less current portion....................... (46,014) (146,392)
----------------- ------------------
$ 1,008,131 $1,772,834
============= ==============
</TABLE>
Aggregate maturities of long-term debt are due as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
--------------------------------------------------------- ----------
<S> <C>
1996................................................... $ 46,014
1997................................................... 964,020
1998................................................... 44,111
----------
$1,054,145
==========
</TABLE>
7. CAPITAL LEASE OBLIGATIONS:
The Company leases certain equipment under agreements classified as capital
leases. Equipment under these leases has a cost of $61,680 and accumulated
amortization of $15,420 at December 31, 1995.
Following is a schedule of future minimum lease payments under capital leases at
December 31, 1995:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
------------------------------------------------------------------ --------
<S> <C>
1996.............................................................. $ 16,787
1997.............................................................. 16,696
1998.............................................................. 14,689
1999.............................................................. 5,375
-------
Total future minimum lease payments............................... 53,547
Less, amount representing interest................................ (9,932)
-------
Present value of net minimum lease payments....................... 43,615
Less current portion.............................................. (11,925)
-------
$ 31,690
=======
</TABLE>
F-10
<PAGE> 54
DIGITAL POWER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED)
8. STOCKHOLDERS' EQUITY:
COMMON STOCK
On May 31, 1996, DPC signed a letter of intent for a proposed public
offering of 1,000,000 shares of DPC common stock at $4.00 per share. Of the
1,000,000 shares, 750,000 are being sold by the Company and 250,000 shares are
being sold by certain existing shareholders.
PREFERRED STOCK
The preferred stock has one series authorized, Series A cumulative
redeemable convertible preferred stock ("Series A"), and an additional 500,000
shares of preferred stock has been authorized, but the rights, preferences,
privileges and restrictions on these shares has not been determined. DPC's Board
of Directors is authorized to create new series of preferred stock and fix the
number of shares as well as the rights, preferences, privileges and restrictions
granted to or imposed upon any series of preferred stock.
The holders of Series A are entitled to one vote for each share of common
stock into which the Series A can be converted, and vote together with the
common shareholders as a single class. Dividends on Series A are at an annual
rate of $.22 per share and are cumulative from the date of issuance, and shall
be paid prior to dividends on common stock. The Company had never declared a
dividend through December 31, 1995, and the accumulated dividends on Series A
were approximately $483,000 at December 31, 1995.
Shares of Series A are convertible into common stock at any time at the
option of the holder at a rate of one share of common stock for each share of
Series A. The conversion rate is subject to adjustment under certain
circumstances. Additionally, conversion is automatic on the effective date of a
firm commitment for an underwritten public offering of $1,000,000 or more.
The Company may redeem the Series A in whole or in part, by paying $1.80
per share plus any dividends in arrears. Partial redemptions shall be pro-rata
among all Series A holders.
In the event of a liquidation, dissolution, or winding up of the Company,
Series A holders are entitled to receive a liquidation preference of $1.80 per
share of Series A plus all dividends in arrears. The liquidation preference on
the Series A was approximately $1,100,000 at December 31, 1995.
On May 31, 1996, all of the 415,302 issued and outstanding shares of Series
A were converted into 415,302 shares of common stock. Additionally, the Company
declared a dividend on the Series A for all unpaid dividends through the
conversion date and issued an aggregate of 216,229 shares of common stock to
holders of Series A effective immediately prior to such conversion.
STOCK OPTIONS
The Company has issued non-qualified options covering 104,922 shares
exercisable at $.50 per share. Upon issuance, the Company recorded compensation
expense for the difference between the exercise price and the fair market value
of the underlying common stock of $1.80 per share. Such options expire in 2003.
Subsequent to December 31, 1995, 8,022 of such option were exercised.
In May 1993 the Company issued options to purchase 237,500 shares of its
common stock at $1.80 per share. Such options are subject to a four year vesting
plan. The exercise price of $1.80 per share approximated the fair market value
at the date of grant.
In May 1996, the Company adopted the 1996 Stock Option Plan covering
513,000 shares. Under the plan, the Company can issue either incentive or
non-statutory stock options. Immediately thereafter, the
F-11
<PAGE> 55
DIGITAL POWER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED)
Company issued options to purchase 275,500 shares of its common stock at $1.80
per share. Such options become 100% vested two years after issuance. The
exercise price was based upon a letter from its investment banker as to the fair
market value of such options based upon their terms, conditions and
restrictions.
The following table sets forth activity for all options:
<TABLE>
<CAPTION>
EXERCISE PRICE
NUMBER PER SHARE
------- --------------
<S> <C> <C>
Balances
January 1, 1994, December 31, 1994 and
December 31, 1995............................... 342,422 $.50 - $1.80
Issued............................................. 275,500 $ 1.80
Exercised.......................................... (8,022) $ .50
------- ------------
Balance, September 30, 1996.......................... 609,900 $.50 - $1.80
======= ============
</TABLE>
At December 31, 1995 and September 30, 1996 options to purchase 223,672 and
275,025 shares respectively at prices ranging from $.50 to $1.80 per share were
exercisable.
WARRANTS
On August 19, 1996, the Company issued 200,000 common stock purchase
warrants to certain Company directors and affiliates. Each warrant entitles the
holder to purchase one share of common stock at $5.00 and expires three years
after the effective date of the Company's initial public offering of securities
as described in Note 8.
9. COMMITMENTS:
The Company leases office space in California, and a manufacturing facility
in Guadalajara, Mexico under the terms of operating leases. The total future
minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
---------------------------------------------------------- --------
<S> <C>
1996...................................................... $118,423
1997...................................................... 105,640
1998...................................................... 108,880
1999...................................................... 109,174
2000...................................................... 112,579
Thereafter................................................ 10,378
--------
$565,074
========
</TABLE>
Lease payments on the manufacturing facility in Mexico are to be made in
Mexican Pesos. The above schedule was prepared using the conversion rate in
effect at December 31, 1995. Changes in the conversion rate will have an impact
on the Company's required minimum payments and its operating results.
Additionally, lease payments on the facility in Mexico will increase on an
annual basis in proportion to the increase in the minimum wage in the
Guadalajara, Mexico area.
Rent expense was $116,337 and $116,699 for 1994 and 1995, respectively.
F-12
<PAGE> 56
DIGITAL POWER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED)
The Company has a royalty agreement with a third party on various products,
and any derivatives from the base design of these products. Commitments under
this agreement are as follows:
5% of first $ 20,000,000 in sales of these products
4% of next $ 25,000,000 in sales of these products
3% of next $ 33,333,333 in sales of these products
2% of next $ 50,000,000 in sales of these products
1% of next $100,000,000 in sales of these products
As of December 31, 1995, the Company had sold approximately $13,630,000 of
product subject to this agreement.
If the Company sells an additional $6,370,000 of these products after
December 31, 1995, the Company is required to grant 100,000 shares of common
stock to the third party in the royalty agreement. Due to changing market
demand, the Company's management currently expects to replace these products
with products it is in the process of designing, and Company's management
believes the Company will therefore not have to grant the 100,000 shares of
common stock.
The Company sold approximately $1,448,000 and $1,453,000 of these products
in 1994 and 1995, respectively, and had royalty expenses of approximately
$72,400 and $72,600 for 1994 and 1995, respectively.
The Company has an employment contract with its President/CEO which
terminates on December 31, 1999. Under the terms of the employment contract, he
shall serve as president and chief executive officer of the Company and his
salary shall be $150,000 per annum effective January 1, 1997, increasing to
$175,000 per annum on January 1, 1998 and to $200,000 per annum on January 1,
1999. His current salary for 1996 is $110,000. In addition, pursuant to the
contract, he shall have the right to receive on the first day of each January
during the term of his contract options to acquire 100,000 shares of Common
Stock at the lower of the closing market price as of such date or the average
closing price for the first six months of each year of his contract. Finally,
pursuant to the employment contract, in the event there is a change in control,
the employee shall be granted a five year consulting contract at $200,000 per
year.
10. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK, MAJOR CUSTOMERS AND OTHER RISKS
AND UNCERTAINTIES:
Sales to unaffiliated customers which represent more than 10% of the
Company's net sales for 1994 and 1995 were as follows (both customers are
distributors):
<TABLE>
<CAPTION>
CUSTOMER 1994 1995
- -------- ---- ----
<S> <C> <C>
A 16% 27%
B --% 10%
</TABLE>
The Company operates primarily in one industry segment: the manufacture and
sale of switching power supplies. Additionally, most of the Company's sales are
to customers located in California. Financial instruments that subject the
Company to credit risk consist primarily of accounts receivable. The Company
frequently sells large quantities of inventory to its customers. At December 31,
1995, approximately $1,053,000 or 65% of the Company's net accounts receivable
were due from five customers.
As of December 31, 1995, the Company maintained cash in a bank that was
approximately $352,000 in excess of the federally insured limit.
11. EMPLOYEE BENEFIT PLANS:
The Company has a 401(k) profit sharing plan (the "Plan") covering
substantially all employees of DPC. Eligible employees may make voluntary
contributions to the Plan, which are matched by the Company
F-13
<PAGE> 57
DIGITAL POWER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED)
at a rate of $.25 for each $1.00 contributed, up to a maximum of six percent of
eligible compensation. The Company can also make discretionary contributions.
The Company made matching contributions to the Plan of $5,593 and $9,594 for
1994 and 1995, respectively. The Board of Directors of DPC elected not to make a
discretionary contribution to the Plan for 1994 or 1995.
The Company also has an employee stock ownership plan (the "ESOP") covering
substantially all employees of DPC. The Company can make discretionary
contributions of cash or company stock (as defined in the ESOP plan document) up
to deductible limits prescribed by the Internal Revenue Code. The Board of
Directors of DPC elected to make no contributions to the ESOP for 1994 or 1995.
Effective June 13, 1996, the ESOP obtained a $500,000 loan guaranteed by
the Company for the purpose of acquiring common stock of the Company from
existing stockholders. The loan bears interest at 10.5% per annum and requires
monthly payments of principal and interest of $10,784 through July 2001. The
Company has paid $19,109 in principal and $13,245 in interest through September
30, 1996 on this loan. The Company has also recognized $19,109 in compensation
expense through September 30, 1996 for its contributions to the ESOP.
Immediately upon the funding of the loan, the ESOP purchased approximately
154,000 shares of the Company's common stock from existing shareholders.
In accordance with the AICPA Statement of Position 93-6 entitled "Employers
Accounting for Employee Stock Ownership Plans", the Company has recorded the
$500,000 loan as a debt on its books with a corresponding charge to
stockholder's equity.
12. INCOME TAXES:
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
FOR YEARS ENDED
DECEMBER 31,
---------------------
1994 1995
------- ---------
<S> <C> <C>
Federal................................................ $ -- $(351,150)
State.................................................. 23,253 73,750
Foreign................................................ -- --
------- ---------
$23,253 $(277,400)
======= =========
</TABLE>
The components of the net deferred tax asset at December 31, 1995 are as
follows:
<TABLE>
<S> <C>
Net book value of fixed assets.................................... $ (3,695)
Net operating loss carryforward................................... 383,551
--------
Total deferred tax asset................................ $379,856
========
</TABLE>
Management believes that, based on earnings through and subsequent to
December 31, 1995, deferred tax assets are more likely than not to be realized
and, therefore, the valuation allowance against deferred tax assets was reversed
as of December 31, 1995.
As of December 31, 1995, DPC has net operating loss carryforwards for
federal income tax purposes of approximately $1,044,000 which begin to expire in
2002. As of December 31, 1995, PD has a net operating loss carryforward of
approximately $58,000 which expires in 1999.
F-14
<PAGE> 58
DIGITAL POWER CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1995 IS UNAUDITED)
Total income tax expense differed from the amounts computed by applying the
U.S. federal statutory tax rates to pre-tax income as follows:
<TABLE>
<CAPTION>
FOR YEARS ENDED
DECEMBER 31,
----------------------
1994 1995
-------- ---------
<S> <C> <C>
Total expense computed by applying the U.S. statutory
rate................................................ $ 49,292 $ 281,005
State income taxes.................................... 23,253 73,750
Effect of income taxable in Mexico.................... 27,197 (14,857)
Utilization of temporary difference................... (76,489) (261,135)
Effect of valuation allowance......................... -- (356,163)
-------- ---------
$ 23,253 $(277,400)
======== =========
</TABLE>
F-15
<PAGE> 59
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NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Prospectus Summary..................... 3
The Company............................ 6
Risk Factors........................... 8
Use of Proceeds........................ 14
Dividend Policy........................ 14
Capitalization......................... 15
Dilution............................... 16
Selected Consolidated Financial Data... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 18
Business............................... 23
Management............................. 32
Certain Transactions................... 35
Principal and Selling Stockholders and
Warrantholders....................... 36
Description of Securities.............. 38
Shares Eligible For Future Sale........ 40
Underwriting........................... 41
Legal Matters.......................... 42
Experts................................ 43
Change in Accountants.................. 43
Additional Information................. 43
Index To Consolidated Financial
Statements........................... F-1
</TABLE>
UNTIL JANUARY 10, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------------------------------------
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------------------------------------------------------
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LOGO
1,000,000 SHARES OF
COMMON STOCK
500,000 REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
------------------
WERBEL-ROTH SECURITIES, INC.
DECEMBER 16, 1996
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