UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the quarterly period ended June 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from _______ to _______
COMMISSION FILE NUMBER 1-12711
California 94-1721931
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|
Number of shares of common stock outstanding as of August 7, 2003: 5,410,680.
DIGITAL POWER CORPORATION
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2003
IN U.S. DOLLARS
UNAUDITED
INDEX
Page
--------
Review Report of Unaudited Interim Consolidated 2
Financial Statements
Consolidated Balance Sheets 3 - 4
Consolidated Statements of Operations 5
Statements of Changes in Shareholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8 - 13
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We have reviewed the accompanying consolidated balance sheet of Digital Power Corporation ("the Company") and its subsidiary as of June 30, 2003, and the related interim consolidated statements of operations for the six months and three months ended June 30, 2003 and the statements of changes in shareholders' equity for the six months ended June 30, 2003 and consolidated statements of cash flows for the six months and three months ended June 30, 2003, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the Company's management. The interim consolidated financial statements of the Company and its subsidiaries for the six months and three months ended June 30, 2002 were reviewed by other accountants, whose report dated August 13, 2002, stated that they were not aware of any material modification that should be made to those statements for them to be in conformity with accounting principles generally accepted in the United States.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States.
s/ KOST FORER & GABBAY
Tel-Aviv, Israel KOST FORER & GABBAY
August 5, 2003 A Member of Ernst & Young Global
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June 30, December 31,
---------------------------------
2003 2002 2002
-------------- --------------- ------------------
Unaudited
---------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,357 $ 1,022 $ 616
Restricted short-term bank deposit - - 600
Trade receivables, net of doubtful accounts of $29, $284
and $39 at June 30, 2003 and 2002 and December 31, 2002,
respectively 1,368 1,987 1,982
Deferred income taxes 307 - 649
Other current assets 126 207 134
Inventories 1,621 1,584 1,451
-------------- --------------- --------------
Total current assets 4,779 4,800 5,432
-----
-------------- --------------- --------------
OTHER LONG-TERM ASSETS 30 30 43
-------------- --------------- --------------
PROPERTY AND EQUIPMENT, NET 341 715 364
-------------- --------------- --------------
Total assets $ 5,150 $ 5,545 $ 5,839
-----
============== =============== ==============
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The accompanying notes are an integral part of the consolidated financial statements.
June 30, December 31,
---------------------------------
2003 2002 2002
-------------- --------------- ------------------
Unaudited
---------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit $ - $ - $ 250
Current maturities of capital lease obligations and
long-term loan from a bank 8 37 27
Accounts payable 1,014 1,473 1,349
Other current liabilities 629 1,442 974
-------------- --------------- ------------------
Total current liabilities 1,651 2,952 2,600
-----
-------------- --------------- ------------------
LONG-TERM LIABILITIES:
Capital lease obligations and long-term loan from a bank
net of current maturities 4 8 -
Other long-term liabilities - 12 -
-------------- --------------- ------------------
Total long-term liabilities 4 20 -
-----
-------------- --------------- ------------------
SHAREHOLDERS' EQUITY:
Series A Redeemable, Convertible Preferred shares no
par value: 500,000 shares authorized, 0 shares issued
and outstanding at June 30, 2003 and June 30, 2002 and
December 31, 2002 - - -
Preferred shares, no par value: 1,500,000 shares
authorized, 0 shares issued and outstanding at June 30,
2003, June 30, 2002 and December 31, 2002 - - -
Common shares, no par value: 10,000,000 shares authorized;
5,410,680, 4,510,680 and 4,510,680 shares issued and
outstanding at June 30, 2003 and June 30, 2002 and
December 31, 2002, respectively 11,636 11,036 11,036
Additional paid-in capital 837 733 837
Accumulated deficit (8,862) (8,962) (8,482)
Accumulated other comprehensive loss (116) (234) (152)
-------------- --------------- ------------------
Total shareholders' equity 3,495 2,573 3,239
-----
-------------- --------------- ------------------
Total liabilities and shareholders' equity $ 5,150 $ 5,545 $ 5,839
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============== =============== ==================
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The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
Six months ended Three months ended Year ended
June 30, June 30, December 31,
----------------------------- -----------------------------
2003 2002 2003 2002 2002
------------ ------------- ------------- ------------- ---------------
Unaudited
--------------------------------------------------------------
Revenues $ 3,729 $ 4,541 $ 1,596 $ 2,358 $ 8,775
Cost of revenues 2,704 3,285 1,166 1,637 6,310
------------ ------------- ------------- ------------- ---------------
Gross profit 1,025 1,256 430 721 2,465
------------ ------------- ------------- ------------- ---------------
Operating expenses:
Engineering and product development 273 373 128 183 749
Selling and marketing 518 522 259 269 1,014
General and administrative 647 528 337 279 1,228
------------ ------------- ------------- ------------- ---------------
Total operating expenses 1,438 1,423 724 731 2,991
-----
------------ ------------- ------------- ------------- ---------------
Operating loss (413) (167) (294) (10) (526)
Capital gain from disposal of a
subsidiary - - - - 280
Financial income, net 7 12 11 20 6
Other income - 5 - 10 -
------------ ------------- ------------- ------------- ---------------
Loss before taxes on income (tax
benefit) (406) (150) (283) 20 (240)
Taxes on income (tax benefit) (26) 40 (18) 14 (530)
------------ ------------- ------------- ------------- ---------------
Net income (loss) $ (380) $ (190) $ (265) $ 6 $ 290
============ ============= ============= ============= ===============
Basic and diluted earnings (loss)
per share $ (0.08) $ (0.04) $ (0.05) $ 0.01 $ 0.06
============ ============= ============= ============= ===============
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The accompanying notes are an integral part of the consolidated financial statements.
DIGITAL POWER CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
Accumulated
Common shares Additional other Total Total
------------------- paid-in Accumulated comprehensive comprehensive shareholders'
Number Amount capital deficit loss income (loss) equity
--------- ------- ---------- ----------- ------------- --------------- -------------
Balance as of January 1, 2002 4,510,680 $11,036 $ 733 $ (8,772) $ (312) $ 2,685
Stock compensation related
to warrants issued to bank
for financing transaction - - 20 - - 20
Stock compensation related to
options granted to
consultants and service
providers - - 84 - - 84
Comprehensive income:
Net income - - - 290 - $ 290 290
Foreign currency translation
adjustments - - - - 160 160 160
--------- ------- ---------- ----------- ------------- --------------- -------------
Total comprehensive income $ 450
===============
Balance as of December 31, 2002 4,510,680 11,036 837 (8,482) (152) 3,239
Issuance of Common shares 900,000 600 - - - 600
Comprehensive loss:
Net loss - - - (380) - $ (380) (380)
Foreign currency translation
adjustments - - - - 36 36 36
--------- ------- ---------- ----------- ------------- --------------- -------------
Total comprehensive loss $ (344)
===============
Balance as of June 30, 2003
(unaudited) 5,410,680 $11,636 $ 837 $ (8,862) $ (116) $ 3,495
========= ======= ========== =========== ============= =============
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The accompanying notes are an integral part of the consolidated financial statements.
DIGITAL POWER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------------------------------------------
U.S. dollars in thousands
Six months ended Three months ended Year ended
June 30 June 30 December 31
-------------------------------------------------------------
2003 2002 2003 2002 2002
-------------------------------------------------------------
Unaudited Audited
-------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (380) $ (190) $ (265) $ 6 $ 290
Adjustments required to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 71 159 34 74 298
Capital gain from disposal of a subsidiary - - - - (280)
Compensation related to options granted to
consultants and service providers - - - - 90
Decrease (increase) in trade receivables 632 216 428 (44) 358
Decrease (increase) in deferred income taxes, net 342 - - - (649)
Decrease in other current assets 9 6 23 29 40
Decrease (increase) in inventories (152) 415 (155) 34 634
Decrease in other long-term assets - 6 - 2 6
Increase (decrease) in accounts payable (344) (118) (166) 49 (242)
Increase (decrease) in other current liabilities (350) (69) (137) (9) (15)
Other - 3 - 3 (14)
--------------------------------------------------------------
Net cash provided by (used in) operating activities (172) 428 (238) 144 516
--------------------------------------------------------------
Cash flows from investing activities:
Restricted short-term bank deposit 600 - 600 - (600)
Purchase of property and equipment (42) 58) (23) (55) (37)
Proceeds from disposal of a subsidiary - - - - (12)
Investment in long term loan - - - - (50)
Proceeds from long-term loan 13 - 7 - -
--------------------------------------------------------------
Net cash provided by (used in) investing activities 571 (58) 584 (55) (699)
--------------------------------------------------------------
Cash flows from financing activities:
Proceeds from short term bank credit 40 - - - 250
Proceeds from issuance of Common shares 600 - 600
Proceeds from long-term loan from a bank 12 - 12 - -
Payments made on short-term bank credit (290) (652) (290) (552) (652)
Principal payments on capital lease obligations (27) (16) (17) (4) (21)
--------------------------------------------------------------
Net cash provided by (used in) financing activities 335 (668) 305 (556) (423)
--------------------------------------------------------------
Effect of exchange rate changes on cash 7 77 22 107 (21)
--------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 741 (221) 673 (360) (627)
Cash and cash equivalents at the beginning of the
period 616 1,243 684 1,382 1,243
--------------------------------------------------------------
Cash and cash equivalents at the end of the period $1,357 $1,022 $ 1,357 $1,022 $ 616
==============================================================
Supplemental disclosure of cash flows activities:
Cash paid during the period for interest $ 8 $ 17 $ 3 $ 3 $ 26
==============================================================
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The accompanying notes are an integral part of the consolidated financial statements.
NOTE 1:- GENERAL
Digital Power Corporation (the "Company" or "DPC") was incorporated in 1969, under the General Corporation Law of the state of California. The Company has a wholly-owned subsidiary, Digital Power Limited ("DPL"), located in the United Kingdom. The Company and its subsidiary are currently engaged in the design, manufacture and sale of switching power supplies and converters. The Company has two reportable geographic segments - North America (sales through DPC) and Europe (sales through DPL).
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
a. The significant accounting policies applied in the annual financial statements of the Company as of December 31, 2002, are applied consistently in these financial statements. In addition, the following accounting policy is applied:
The accompanying unaudited consolidated financial statements as of June 30, 2003 and for the six months ended June 30, 2003 and 2002 are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management's discussion and analysis of the financial condition and results of operations, contained in the Company Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002. The results of operations for the six months ended June 30, 2003 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2003.
b. Accounting for stock-based compensation:
The Company and its subsidiary has elected to follow Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB No. 25") in accounting for its employee stock option plans. Under APB No. 25, when the exercise price of the Company's share options is less than the market price of the underlying shares on the date of grant, compensation expense is recognized.
The Company and its subsidiary apply SFAS No. 123, and Emerging Issues Task Force No. 96-18 "Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF 96-18"), with respect to options issued to non-employees SFAS No. 123 requires use of an option valuation model to measure the fair value of the options at the grant date.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (cont.)
Under Statement of Financial Accounting Standard No. 123 "Accounting for Stock Based compensation ("SFAS No. 123") SFAS No. 123, pro forma information regarding net earnings (loss) and net earnings (loss) per share is required and has been determined as if the Company had accounted for its employee options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes Option Valuation Model, with the following weighted-average assumptions for June 30, 2003 and 2002 and December 31, 2002. Expected volatility of 45.6% ranging from 55.0% - 125.9% and 33.8% respectively, risk-free interest rates of 1.5%, ranging from 4.23% to 5.6% and 1.5%, respectively, dividend yield of 0% for each period, and a weighted-average expected life of the option of 4 years for each period. Stock compensation, for pro-forma purposes, is amortized over the vesting period.
The following table illustrates the effect on net income (loss) and earnings (loss) per share as if the fair value method had been applied to all outstanding and unvested awards in each period:
Six months ended Year ended
June 30, December 31,
--------------------------------
2003 2002 2002
-------------- -------------- ------------------
Unaudited
--------------------------------
Net income (loss), as reported $ (380) $ (190) $ 290
Deduct: Total stock-based compensation
expense determined under fair value
method for all awards, net of related
tax effect (31) (30) (607)
-------------- -------------- ------------------
Pro forma net loss $ (411) $ (220) $ (317)
============== ============== ==================
Basic and diluted net earnings (loss) per
share, as reported $ (0.08) $ (0.04) $ 0.06
============== ============== ==================
Basic and diluted net loss per share, pro $ (0.08) $ (0.05) $ (0.07)
forma ============== ============== ==================
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NOTE 3:- SHARE CAPITAL
a. On March 31, 2003, the Company entered into an agreement to sell 900,000 shares of Common stock to Telkoor Telecom Ltd. in consideration for $600. As part of the transaction, Telkoor Telecom Ltd.'s warrant to purchase 900,000 shares was cancelled.
b. On April 3, 2003, the Company issued the 900,000 shares to Telkoor and received the total consideration of $600.
NOTE 4:- PENDING LITIGATION
A claim was filed against the Company by one of its former customers in the amount of $300.
Company's management believes that the fundamental allegations in the complaint are false and intends to vigorously defend itself.
At this point, management and the Company's legal counsel are of the opinion that it is not possible to predict the likelihood of an unfavorable outcome or the range of a potential verdict against the Company.
NOTE 5:- SEGMENTS, MAJOR CUSTOMERS AND GEOGRAPHICAL INFORMATION
The Company has two reportable geographic segments, see Note 1 for a brief description of the Company's business. The data is presented in accordance with Statement of Financial Accounting Standard No.131, "Disclosure About Segments of an Enterprise and Related Information" ("SFAS No. 131").
The following data presents the revenues, expenditures and other operating data of the Company's geographic operating segments:
Six months ended June 30, 2003 (unaudited)
-----------------------------------------------------------------
DPC DPL Eliminations Total
------------- ------------- ---------------- -------------
Revenues $ 1,863 $ 1,866 $ - $ 3,729
Intersegment revenues 410 - (410) -
------------- ------------- ---------------- -------------
Total revenues $ 2,273 $ 1,866 $ (410) $ 3,729
============= ============= ================ =============
Depreciation expenses $ 17 $ 54 $ - $ 71
============= ============= ================ =============
Operating loss $ (265) $ (148) $ - $ (413)
============= ============= ================ =============
Financial income, net 7
=============
Loss before tax benefit (406)
=============
Tax benefit $ - $ 26 $ - 26
============= ============= ================ =============
Net loss $ (277) $ (103) $ - $ (380)
============= ============= ================ =============
Expenditures for segment assets as of
June 30, 2003 $ 12 $ 30 $ - $ 42
============= ============= ================ =============
Identifiable assets as of June 30, 2003 $ 1,992 $ 2,851 $ - $ 4,843
============= ============= ================ =============
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NOTE 5:- SEGMENTS, CUSTOMERS AND GEOGRAPHICAL INFORMATION (cont.)
Six months ended June 30, 2002 (unaudited)
-----------------------------------------------------------------
DPC DPL Eliminations Total
------------- ------------- ---------------- -------------
Revenues $ 2,585 $ 1,956 $ - $ 4,541
Intersegment revenues 213 - (213) -
------------- ------------- ---------------- -------------
Total revenues $ 2,798 $ 1,956 $ (213) $ 4,541
============= ============= ================ =============
Depreciation expenses $ 104 $ 55 $ - $ 159
============= ============= ================ =============
Operating loss $ (289) $ 122 - $ (167)
============= ============= ================ =============
Financial income, net 12
=============
Other income 5
=============
Loss before taxes on income (150)
=============
Taxes on income $ - $ 40 $ - $ 40
============= ============= ================ =============
Net income (loss) $ (289) $ 99 $ - $ (190)
============= ============= ================ =============
Expenditures for segment assets for the
three months ended June 30, 2002 $ 44 $ 14 $ - $ 58
============= ============= ================ =============
Identifiable assets as of June 30, 2002 $ 2,842 $ 2,703 $ - $ 5,545
============= ============= ================ =============
Three months ended June 30, 2003 (unaudited)
-----------------------------------------------------------------
DPC DPL Eliminations Total
------------- ------------- --------------- -------------
Revenues $ 869 $ 727 $ - $ 1,596
Intersegment revenues 207 - (207) -
------------- ------------- --------------- -------------
Total revenues $ 1,076 $ 727 $ (207) $ 1,596
============= ============= =============== =============
Depreciation expenses $ 9 $ 25 $ - $ 34
============= ============= =============== =============
Operating loss $ (155) $ (139) $ - $ (294)
============= ============= =============== =============
Financial income, net 11
=============
Loss before tax benefit (283)
=============
Tax benefit $ - $ 18 $ - $ 18
============= ============= =============== =============
Net loss $ (160) $ (105) $ - $ (265)
============= ============= =============== =============
Expenditures for segment assets for the
three months ended June 30, 2003 $ 12 $ 2 $ - $ 14
============= ============= =============== =============
Identifiable assets as of June 30, 2003 $ 1,992 $ 2,851 $ - $ 4,843
============= ============= =============== =============
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NOTE 5:- SEGMENTS CUSTOMERS AND GEOGRAPHICAL INFORMATION (cont.)
Three months ended June 30, 2002 (unaudited)
-----------------------------------------------------------------
DPC DPL Eliminations Total
------------- ------------- ---------------- -------------
Revenues $ 1,325 $ 1,033 $ - $ 2,358
Intersegment revenues 115 - (115) -
------------- ------------- ---------------- -------------
Total revenues $ 1,440 $ 1,033 $ (115) $ 2,358
============= ============= ================ =============
Depreciation expenses $ 45 $ 29 $ - $ 74
============= ============= ================ =============
Operating loss $ (72) $ 62 - $ (10)
============= ============= ================ =============
Financial income, net 20
=============
Other income 10
=============
Loss before taxes on income 20
=============
Taxes on income - $ 14 - $ 14
============= ============= ================ =============
Net income (loss) $ (63) $ 69 $ - $ 6
============= ============= ================ =============
Expenditures for segment assets for the
three months ended June 30, 2002 $ 40 $ 14 $ - $ 54
============= ============= ================ =============
Identifiable assets as of June 30, 2002 $ 2,842 $ 2,703 $ - $ 5,545
============= ============= ================ =============
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NOTE 5:- SEGMENTS CUSTOMERS AND GEOGRAPHICAL INFORMATION (cont.)
Year ended December 31, 2002
-----------------------------------------------------------------
DPC DPL Eliminations Total
------------- ------------- ---------------- -------------
Revenues $ 4,348 $ 4,427 $ - $ 8,775
Intersegment revenues 383 - (383) -
------------- ------------- ---------------- -------------
Total revenues $ 4,731 $ 4,427 $ (383) $ 8,775
============= ============= ================ =============
Operating income (loss) $ (761) $ 235 $ - $ (526)
============= ============= ================ =============
Capital gain from disposal of a $ 280 $ - $ - 280
subsidiary
============= ============= ================ =============
Financial income, net 6
=============
Loss before tax benefit (240)
=============
Tax benefit $ 649 $ (119) $ - $ 530
============= ============= ================ =============
Net income $ 151 $ 139 $ - $ 290
============= ============= ================ =============
Additional information:
Depreciation expenses $ 184 $ 114 $ - $ 298
============= ============= ================ =============
Expenditures for segment assets as of
December 31, 2002 $ 13 $ 24 $ - $ 37
============= ============= ================ =============
Identifiable assets as of December 31,
2002 $ 2,292 $ 2,898 $ - $ 5,190
============= ============= ================ =============
- - - - - - - - -
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
With the exception of historical facts stated herein, the matters discussed in this report are "forward looking" statements that involve risks and uncertainties that could cause actual results to differ materially from projected results. Such "forward looking" statements include, but are not necessarily limited to, statements regarding anticipated levels of future revenues and earnings from operations of the Company. Factors that could cause actual results to differ materially include, in addition to other factors identified in this report, dependence on the computer and other electronic equipment industries, competition in the power supply industry, dependence on manufacturers in Mexico and China and other risks factors detailed in the Company's Form 10-KSB for the year ended December 31, 2002. Readers of this report are cautioned not to put undue reliance on "forward looking" statements which are, by their nature, uncertain as reliable indicators of future performance. The Company disclaims any intent or obligation to publicly update these "forward looking" statements, whether as a result of new information, future events, or otherwise.
THREE AND SIX MONTHS PERIODS ENDED JUNE 30, 2003, COMPARED TO JUNE 30, 2002
REVENUES
Total revenues decreased by 32.3% to $1,596,000 for the three months ended June
30, 2003, from $2,358,000 for the second quarter ended June 30,2002. Revenues
from the Company's United Kingdom's operations of Digital Power Ltd. decreased
22.2% to $727,000 for the second quarter ended June 30, 2003, from $934,000 for
the second quarter ended June 30, 2002. Revenues attributed to the United States
operations decreased by 39.0% to $869,000 for the second quarter ended June 30,
2003, from $1,424,000 for the second quarter ended June 31, 2002.
For the six months ended June 30, 2003, revenues decreased by 17.9% to $3,729,000 from $4,541,000 for the six months ended June 30, 2002. Revenues from the Company's United Kingdom's operations of Digital Power Ltd. decreased 4.6% to $1,866,000 for the six months ended June 30, 2003 from $1,956,000 for the six months ended June 30, 2002. Revenues attributed to the United States operations decreased by 27.9% to $1,863,000 for the six months ended June 30, 2003, from $2,585,000 for the six months ended June 30, 2002. The decrease in revenues is partially due to the time necessary to implement new products into the customers design cycle throughout the market and due to rescheduling of deliveries by customers in the United Kingdom.
In June 2003, the Company entered into an agreement to supply approximately US$1,637,000 of power supplies to a foreign customer for military purposes. Subject to the provision in the agreement, the management believes that it will recognize the majority of the revenue from this agreement in 2004. The Company can not give any assurances that it will receive future purchases from this customer or of this quantity.
GROSS MARGINS
Gross margins were 26.9% for the three months ended June 30, 2003, compared to
30.6% for the three months ended June 30, 2002. Gross margins were 27.5% for the
six months ended June 30, 2003, compared to 27.7% for the six months ended June
30, 2002. The decrease in gross margins can be primarily attributed to the fixed
cost and the decrease in revenues.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were 8.0% of revenues for the three
months ended June 30, 2003, and 7.8% for the three months ended June 30, 2002.
Engineering and product development expenses were 7.3 % of revenues for the six
months ended June 30, 2003, compared to 8.2% for the six months ended June 30,
2002. Actual dollar expenditures were down by 30.1% for the three months ended
June 30, 2003 and 26.8 % for the six month ended June 30, 2003. The decrease was
mainly due to the reduced salaries as a result of lay offs.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were 37.3% of revenues for the
three months ended June 30, 2003, compared to 23.2% for the three months ended
June 30, 2002. Selling, general and administrative expenses were 31.2 % of
revenues for the six months ended June 30, 2003, compared to 23.1% for the six
months ended June 30, 2002. In actual dollar, these expenses were up by 8.8% for
the three months ended June 30, 2003 and 11.0% for the six month ended June 30,
2003. The increase selling, general and administrative expenses can be
attributed mainly to the hiring of the Company's CFO, the additional legal
expenses and one time expenses related to a lay off.
FINANCIAL INCOME (EXPENSES)
Interest income was $11,000 for the three months ended June 30, 2003, compared
to $20,000 for the three months ended June 30, 2002. Interest income, was $7,000
for the six months ended June 30, 2003 compared to $12,000 for the six months
ended June 30, 2002.
LOSS BEFORE INCOME TAXES
For the three months ended June 30, 2003, the Company had loss before income
taxes of $283,000 compared to income before income taxes of $20,000 for the
three months ended June 30, 2002. For the six months ended June 30, 2003, the
Company had a loss before tax benefits $406,000 compared to loss before income
taxes of $150,000 for the six months ended June 30, 2002.
INCOME TAX
For the three months ended June 30, 2003, net tax benefit was $18,000 compared
to provision for income tax of $14,000 for the three months ended June 30, 2002.
For the six months ended June 30, 2003 tax benefit was $26,000 compared to
provision for income tax of $40,000 for the six months ended June 30, 2002. The
tax benefit was from decrease of tax provision from the United Kingdom's
operation.
NET LOSS
Net loss for the three months ended June 30, 2003, was $265,000 compared to net
income of $6,000 for the three months ended June 30, 2002. Net loss for the six
months ended June 30, 2003, was $380,000, compared to a net loss of $190,000 for
the six months ended June 30, 2002. Net loss increase mainly due to the reduced
revenue.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 2003, the Company had cash of $1,357,000 and working capital of
$3,128,000. This compares with cash of $1,022,000 and working capital of
$1,848,000 at June 30, 2002. The increase in working capital was mainly due to
increase in deferred tax asset of $307,000, increase of $335,000 in cash,
decrease in accounts payable and other current liabilities of $1,272,000 which
was partially offset by a decrease in trade receivables and other current assets
of $700,000.
Cash used in operating activities of the Company totaled $172,000 for the six months ended June 30, 2003 compared to cash provided in operating activities for the Company of $428,000 for the six months ended June, 2002. Cash provided by investing activities was $571,000 for the six months ended June 30, 2003, compared to cash used in investing activities of $58,000 for the six months ended June 30, 2002. Net cash provided by financing activities was $335,000 for the six months ended June30, 2002, compared to the net cash used in financing activities of $668,000 for the six months ended June 30, 2002.
The Company renewed its line of credit with Silicon Valley Bank ("SVB") on June 5, 2003. The Company can borrow up to $1,200,000 if it maintains certain ratios and is in compliance with other covenants. The rate for this line of credit is Silicon Valley Bank's prime rate plus 1.75%. The Company also has a $483,000 line of credit with Lloyds TSB Bank in the UK bearing interest of 1.75% per annum over Lloyds TSB Bank's base rate.
On March 31, 2003, the Company entered into an agreement to sell 900,000 shares of Common stock to Telkoor Telecom Ltd. in consideration for $600,000. As part of the transaction, Telkoor Telecom Ltd.'s warrant to purchase 900,000 shares was cancelled. On April 3, 2003, the Company issued the 900,000 shares to Telkoor and received the total consideration of $600,000.
The Company believes it has adequate resources at this time to continue its promotional efforts to increase sales in the electronic industry market. However, if the Company does not meet those goals, it may have to raise money though debt or equity, which may dilute the shareholder equity.
ITEM 3. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer of the Company evaluated the disclosure controls and procedures of the Company as of the end of the period covered by this report and have determined that such controls and procedures are effective.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to exposure to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to any such current actions will not materially affect the financial position or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
31.1 Certification of the CEO under the Sarbanes-Oxley Act
31.2 Certification of the CFO under the Sarbanes-Oxley Act
32 Certification of the CEO & CFO under the Sarbanes-Oxley Act
(a) Reports on Form 8-K The Company filed the following reports
Date of Report Date of Event Item reported
-------------- ------------- -------------
May 19, 2003 May 12, 2003 Press release announcing first
quarter results
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: August 7, 2003 /s/ David Amitai
-----------------------
David Amitai
Chief Executive Officer
(Principal Executive
Officer)
Dated: August 7, 2003 /s/ Haim Yatim
-----------------------
Haim Yatim
Chief Financial Officer
(Principal Financial
Officer)
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EXHIBIT 31.1
CERTIFICATIONS
I, David Amitai, certify that:
1. I have reviewed this quarterly report for the quarter ended June 30, 2003 of Digital Power Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) omitted;
(c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Dated: August 7, 2003 /s/ David Amitai
-----------------------------
David Amitai,
Chief Executive Officer
(Principal Executive Officer)
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EXHIBIT 31.2
CERTIFICATIONS
I, Haim Yatim, certify that:
1. I have reviewed this quarterly report for the quarter ended June 30, 2003 of Digital Power Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) omitted;
(c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Dated: August 7, 2003 /s/ Haim Yatim
------------------------
Haim Yatim,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Digital Power Corporation (the
"Company") on Form 10-QSB for the period ending June 30, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), We, David
Amitai, Chief Executive Officer and Haim Yatim, Chief Financial Officer, of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of our
knowledge and belief:
(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Dated: August 7, 2003 /s/ David Amitai
-----------------------------
David Amitai,
Chief Executive Officer
(Principal Executive Officer)
Dated: August 7, 2003 /s/ Haim Yatim
-----------------------------
Haim Yatim,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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