Legal Sparks Fly, but Powertec Chief Is Upbeat
Powertec’s expansion plans have been given a jolt, but that doesn’t seem to faze Emmett H. Bradley.
Three months ago, the Chatsworth company’s president and chief executive appeared to have a friendly agreement to buy the assets of Semiconductor Circuits of Windham, N. H., a deal intended to play a key role in Powertec’s plan to increase its sales of power supply equipment. But the deal turned ugly in January when both sides sued each other in a dispute mainly over how much Powertec is supposed to pay.
Powertec also has been troubled by the slowdown in the electronics industry, a slump that last year stalled its steady rise in sales and profits.
Lofty Goals
Nevertheless, Bradley predicts that increased demand from manufacturers of computers, telecommunications equipment and medical equipment will raise sales from $22 million in Powertec’s fiscal year ended Oct. 31 to about $80 million in four years.
“We’re in a rapidly expanding market, and we plan to grow as fast as, or faster than, that market,” Bradley said.
Powertec’s products take the alternating current that flows out of wall outlets and turns it into direct current tailored to the wattage and voltage levels needed to power mini-computers and other sophisticated electronic equipment. The company’s power supplies are packed into metal cases about the size of a shoe box.
Most of Powertec’s efforts are going into building so-called switching power supplies, which became commercially feasible in the mid-1970s and which are quickly replacing the linear power supplies that have been widely used.
Unlike the linear devices, the switching power supplies convert electricity to a very high frequency, which makes it possible to use much smaller magnetic components in the product. As a result, the switching devices are more efficient, smaller, cheaper and cooler than linear power supplies.
Recognized by Fortune
Until last year, Powertec expanded rapidly in tandem with the success of the computer industry. In the 1984 fiscal year, sales increased 48% to $22 million and net income rose 59% to $2.5 million. In 1985, the company was picked as one of Forbes magazine’s “200 Best Small Companies in America,” based on its return on equity, steady earnings growth and strong balance sheet.
But flat sales and earnings made 1985 a frustrating year for Powertec. Based on early orders this year, however, Powertec and its counterparts are confident that business is improving.
“Most power supply companies are seeing an upturn. I would say you’ll have to give us another two to three months before we know. I’m very bullish,” said Lawrence Lee, president of LH Research, a Tustin-based competitor of Powertec.
Bradley said he is “getting signs that the market is strengthening. The question is whether it’s a flash in the pan.”
Bradley, 58, a soft-spoken Virginian with a master’s degree in electrical engineering from the Massachusetts Institute of Technology, said he once contemplated saving souls as a minister instead of selling power supplies to computer makers.
Business Trip as Vacation
During a typical week, Bradley spends five days in his office and a sixth working at home using his personal computer. He says his ideal vacation is going away on a business trip.
Analysts say Bradley runs a lean operation. The executive staff, for example, consists only of Bradley and four vice presidents, one each for marketing, manufacturing, finance and engineering.
Powertec, which employs 300 people, sells to such companies as Apollo Computer, Prime Computer and Gould’s Computer Systems Division. It has set its sights this year on getting Digital Equipment, one of the leading makers of mini-computers, as a customer.
John Salzer, a Santa Monica-based consultant to electronics companies, estimates the domestic market for the power switching devices was $2.8 billion last year.
But only about one-third of the market was grabbed by independent power supply firms such as Powertec. The rest was taken by electronics equipment manufacturers that installed their own power supplies in their products.
$6.1-Billion Market Possible
Salzer estimates that the market will grow to $6.1 billion in five years, and that independents will increase their share to about 45% because more computer makers want to contract out the work.
Makers of power supply devices, unlike many other electronics companies, do not appear to be seriously threatened by foreign competition. Consultants say foreign firms haven’t been interested in the business for several reasons, including the relatively small market for independent firms and the difficulty in mass-producing the products because they sometimes need to be tailored to individual customers.
“I would say they aren’t insulated from foreign competition, but they’re not in the first line of the battle,” Salzer said.
Bradley’s most immediate problem is dealing with the Semiconductor Circuits legal dispute and turning around the New Hampshire company, which makes products similar to Powertec’s. Bradley said Semiconductor Circuits lost more than $200,000 last year but predicts it will be in the black by this summer.
The complicated acquisition agreement became the subject of a lawsuit when former Semiconductor Circuits Chairman Paul J. LaBrie sued Powertec for $15.9 million, claiming that Powertec is hedging on its agreement.
LaBrie, acting through a company he runs called Scivest, alleges that Powertec committed itself to making the acquisition for at least $4.5 million in a deal calling for the Chatsworth company to pay $550,000 in cash and to assume long-term bank debt of more than $2.3 million and bills from suppliers of about $1.6 million.
Stock Contingent on Profits
In addition, LaBrie is supposed to receive three payments of Powertec stock in amounts that hinge on future Semiconductor Circuits profits.
LaBrie charges that Powertec is unjustifiably refusing to pay off Semiconductor Circuits’ debts. The suit also alleges that Powertec has mismanaged Semiconductor Circuits since November, hurting profits and possibly reducing the amount of stock LaBrie will receive.
LaBrie’s suit also charges that Powertec executives discussed the deal with people in the industry before it was completed, breaching a confidentiality agreement and hurting Semiconductor Circuits’ business before the deal closed.
Powertec has countersued for $1.4 million in compensatory damages and $5 million in punitive damages. The company alleges it discovered that the value of the assets it agreed to buy was overstated by Semiconductor Circuits officials by $1.4 million. As a result, Powertec contends, it should not have to pay more than $3.6 million and the undetermined amount of stock.
Bradley said he hopes the suit will be settled soon. Mark Jordan, who follows Powertec for Drexel Burnham Lambert in New York, the company’s investment banker, said he believes Powertec will settle quickly so it can devote its efforts to making the acquisition worthwhile.
“I think from Emmett’s standpoint, he’s a little frustrated that he’s wasting time on the acquisition. He would be much more interested in taking this acquisition, getting it up to speed and turning it around to become a real contributor to the company,” Jordan said.
