U.S. 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 March 31,
1997
COMMISSION FILE NUMBER 1-12711
DIGITAL POWER CORPORATION
(Exact name of small business issuer as specified in its charter)
California 94-1721931
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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41920 Christy Street, Fremont, CA 94538-3158
(Address of principal executive offices)
(510) 657-2635
(Issuer's telephone number)
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 <checked-box> No <square>
Number of shares of common stock outstanding as of March 31, 1997: 2,521,025
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DIGITAL POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
ASSETS
CURRENT ASSETS:
Cash $ 1,415,671
Accounts receivable - trade, net of allowance for
doubtful accounts of $170,000 2,648,881
Other receivables 191,629
Inventory, net 3,700,413
Prepaid expenses and deposits 59,918
Deferred income taxes 120,700
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Total current assets 8,137,212
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PROPERTY AND EQUIPMENT, net 780,626
DEPOSITS 21,691
------------
TOTAL ASSETS $ 8,939,529
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current debt $ -
Current portion of long-term debt 86,601
Current portion of capital lease obligations 13,547
Accounts payable 1,873,267
Accrued liabilities 1,152,331
------------
Total current liabilities 3,125,746
LONG-TERM DEBT, less current portion 354,111
OBLIGATIONS UNDER CAPITAL LEASE, less current portion 14,830
-----------
Total liabilities 3,494,687
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COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY:
Series A cumulative redeemable convertible preferred
stock, no par value, 2,000,000 shares authorized,
0 shares issued and outstanding -
Common stock, no par value, 10,000,000 shares authorized,
2,521,025 shares issued and outstanding 8,265,544
Warrants 75,104
Accumulated deficit (2,455,095)
Unearned employee stock ownership plan shares (440,711)
------------
Total stockholders' equity 5,444,842
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,939,529
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SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
DIGITAL POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED
MARCH 31,
1997 1996
REVENUES $ 3,799,154 $ 3,042,103
COST OF GOODS SOLD 2,799,446 2,428,105
------------ ------------
Gross Margin 999,708 613,998
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OPERATING EXPENSES:
Engineering and product development 206,246 128,407
Marketing and selling 119,061 100,346
General and administrative 227,643 144,479
------------ -----------
Total operating expenses 552,950 373,232
------------ -----------
INCOME FROM OPERATIONS 446,758 240,766
------------ -----------
OTHER INCOME (EXPENSE):
Interest income 23,187 6,594
Interest expense (27,760) (29,072)
Translation loss (2,200) (9,542)
------------ ----------
Other income (expense) (6,773) (32,020)
------------ ----------
INCOME BEFORE INCOME TAXES 439,985 208,746
PROVISION (BENEFIT) FOR INCOME TAXES 205,352 96,313
------------ ---------
NET INCOME $ 234,633 $ 112,433
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NET INCOME APPLICABLE TO COMMON
SHAREHOLDERS $ 234,633 $ 89,591
============= ===========
NET INCOME PER COMMON SHARE:
Primary $ 0.07 $ 0.07
============= ===========
Fully diluted $ 0.07 $ 0.07
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WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 3,200,365 1,272,366
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SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
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DIGITAL POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
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THREE MONTHS ENDED
MARCH 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 234,633 $ 112,433
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Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 29,231 22,502
Deferred income taxes (67,700) -
Contribution to ESOP 20,417 -
Foreign currency translation adjustment 2,200 9,542
Changes in operating assets and liabilities:
Accounts receivable (142,724) (456,595)
Other receivables (108,141) -
Inventory (868,085) 133,599
Prepaid expenses (31,182) (4,030)
Other assets (4,263) (3,009)
Accounts payable 452,498 (225,000)
Other accrued liabilities (48,481) 284,711
------------ -----------
Net adjustments (766,230) (238,280)
------------ -----------
Net cash used in operating activities (531,597) (125,847)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (156,503) (77,058)
------------ -----------
Net cash used in investing activities (156,503) (77,058)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock and warrants 493,628 -
Proceeds from exercise of stock options 13,500 -
Principal payments on notes payable (155,896) (8,679)
Principal payments on capital lease obligations (3,230) (2,861)
Proceeds from line of credit 1,990,000 2,660,000
Principal payments on line of credit (3,187,330) (2,555,724)
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Net cash (used in) provided by financing activities (849,328) 92,736
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DIGITAL POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
THREE MONTHS ENDED
MARCH 31,
1997 1996
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,200) (9,542)
------------- -------------
NET DECREASE IN CASH (1,539,628) (119,711)
CASH AND CASH EQUIVALENTS, beginning of period 2,955,299 302,417
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CASH AND CASH EQUIVALENTS, end of period $ 1,415,671 $ 182,706
============= ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Interest $ 40,757 $ 28,503
============= ===========
Income taxes $ 256,402 $ 36,000
============= ===========
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SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
DIGITAL POWER CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the fiscal year ended December 31, 1996.
In the opinion of management, the unaudited condensed financial statements contain all adjustments considered necessary to present fairly the Company's financial position at March 31, 1997, results of operations for the three month periods ended March 31, 1997 and 1996 and cash flows for the three months ended March 31, 1997 and 1996. The results for the period ended March 31, 1997, are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 1997.
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, a high degree of customer concentration, dependence on the computer and other electronic equipment industry, competition in the power supply industry, dependence on the Guadalajara, Mexico facility, and other risks factors detailed in the Company's Securities and Exchange Commission ("SEC") filings including the risk factors set forth in Company's Registration Statement on Form SB-2, SEC File No. 333-14199. 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 MONTHS ENDED MARCH 31, 1997, COMPARED TO MARCH 31, 1996.
REVENUES
Revenues increased by 24.9% to $3,799,154 for the first quarter ended March 31, 1997, from $3,042,103 for the first quarter ended March 31, 1996. Of this $757,051 increase in sales, one OEM
customer accounted for $374,695, or 49.5%. The largest single OEM customer for the current quarter accounted for 8.4% of total revenues compared to 26.6% for the first quarter of 1996. The large OEM accounting for 26.6% of first quarter 1996 revenues has decreased the number of power supplies it purchased from the Company. Further, this OEM 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. Management believes that this OEM will cease purchasing power supplies from the Company after the second quarter of 1997. The Company is seeking to design a new higher wattage power supply to satisfy the needs of this OEM. Further, the Company believes that increased sales to new and other existing OEM customers will offset the loss in sales to the OEM. No assurance can be given, however, that even if the Company is able to design a new higher wattage power supply that satisfies the needs of the OEM, that it will purchase such power supply from the Company, or that the Company will be able to increase sales of power supplies to other OEM's to offset the loss in sales.
GROSS MARGINS
Gross margins were 26.3% for the first quarter ended March 31, 1997, compared to 20.2% for the first quarter ended March 31, 1996. The improvement in gross margins can primarily be attributed to greater capacity utilization and to production improvements due to larger production runs of the US100 series.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were 9.1% of revenues for the first quarter ended March 31, 1997, compared to 8.0% for the first quarter ended March 31, 1996. The increase in selling, general and administrative expenses was due to increased staffing, salary adjustments and the increased legal and accounting expenses required by public companies for financial and regulatory reporting.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were 5.4% of revenues for the first quarter ended March 31, 1997, and 4.2% for the first quarter ended March 31, 1996. This increase in expenses was due primarily to engineering staff additions, salary adjustments and increased consulting fees for advanced development effort.
INTEREST EXPENSE
Interest expense, net of interest income, was $4,573 for the first quarter ended March 31, 1997, compared to $22,478 for the first quarter ended March 31, 1996. The decrease in interest was due to reduced borrowings and greater interest income from invested proceeds from the Company's initial public offering.
INCOME BEFORE INCOME TAXES
Income before income taxes increased by $231,239 from $208,746 for the first quarter ended March 31, 1996, to $439,985 for the first quarter ended March 31, 1997. This increase can be attributed to
the improvement in gross margins, which more than offset the increases in the Company's operating expenses.
INCOME TAX
Provision for income tax increased from $96,000 in the first quarter ended March 31, 1996, to $205,000 for the first quarter ended March 31, 1997, generally in line with the Company's increase in pre-tax income.
NET INCOME
Net income for the first quarter ended March 31, 1997, was $234,633 compared to $112,433 for the first quarter ended March 31, 1996, an increase of 109%. The increase in net income was due to increased revenues and improved gross margins which more than offset increases in operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Through March 31, 1997, the Company funded its operations primarily through revenues generated from operations, and proceeds from its December 1996 Initial Public Offering. On March 31, 1997, the Company had cash and cash equivalents of $1,415,671 and working capital of $5,011,466. This compares with cash and cash equivalents of $2,955,299 and working capital of $4,476,555 at December 31, 1996. The increase in working capital is primarily due to an increase in receivables and inventory, offset by an increase in accounts payable and an increase in deferred income taxes. Cash used by operating activities for the Company totaled $531,597 and $125,847 for the three months ended March 31, 1997 and 1996, respectively. Cash used in investing activities consisted of expenditures for the purchase of production and testing equipment. Such expenditures increased to $156,503 during the three months ended March 31, 1997, from $77,058 during the prior year period. During the three months ended March 31, 1997, cash used in financing activities included net reduction in borrowings of $1,197,330 offset by proceeds of $507,128 from the sale of common stock, warrants, and the exercise of stock options. During the three months ended March 31, 1997, the Company's line of credit and bank loans were paid in full. During the three months ended March 31, 1996, cash from financing activities included net borrowings from the Company's line of credit of $104,276 offset by payments on notes and capital leases of $11,540.
PART II. OTHER INFORMATION
Items 1, 2, 3, 4, and 5.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 11.1 Computation of Per Share Earnings
27.1 Financial Data Schedule
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DIGITAL POWER CORPORATION
(Registrant)
Date: May 15, 1997 ROBERT O. SMITH
Robert O. Smith
Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 1997 PHILIP G. SWANY
Philip G. Swany
Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT 11.1
DIGITAL POWER CORPORATION AND SUBSIDIARY
COMPUTATION OF NET INCOME PER SHARE
FOR THE THREE MONTHS
ENDED DECEMBER 31
1997 1996
PRIMARY
Net income $ 234,633 $ 112,433
Less - preferred stock dividends $ 22,842
Net income applicable to common shareholders $ 234,633 $ 89,591
Weighted average number of common shares 2,502,542 963,722
Add - common stock equivalent shares (determined using
the treasury stock method) representing shares issuable
upon exercise of stock options 437,309 308,644
Add - common stock equivalent shares (determined using
the treasury stock method) representing shares issuable
upon exercise of warrants 260,543 -
Weighted average number of shares used in calculation of
primary income per share 3,200,394 1,272,366
Primary net income per common share $ 0.07 $ 0.07
FULLY DILUTED
Net income for primary income per share $ 234,633 $ 89,591
Add - preferred stock dividend $ - $ 22,842
Net income used for fully diluted income
per share $ 234,633 $ 112,433
Weighted average number of shares used in calculation of
primary income per share 3,200,394 1,272,366
Add - weighted average number of shares issuable upon
conversion of preferred stock - 415,302
Weighted average number of shares used in calculation of
fully diluted income per share 3,200,394 1,687,668
Fully diluted net income per common share $ 0.07 $ 0.07
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| ARTICLE 5 |
| THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-QSB FOR THE QUARTER ENDED MARCH 31, 1997, FOR DIGITAL POWER CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. |
| PERIOD TYPE | 3 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | MAR 31 1997 |
| CASH | 1,415,671 |
| SECURITIES | 0 |
| RECEIVABLES | 2,818,881 |
| ALLOWANCES | (170,000) |
| INVENTORY | 3,700,413 |
| CURRENT ASSETS | 8,137,212 |
| PP&E | 1,827,036 |
| DEPRECIATION | (1,046,410) |
| TOTAL ASSETS | 8,939,529 |
| CURRENT LIABILITIES | 3,125,746 |
| BONDS | 0 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 0 |
| COMMON | 8,265,544 |
| OTHER SE | (2,820,702) |
| TOTAL LIABILITY AND EQUITY | 8,939,529 |
| SALES | 3,799,154 |
| TOTAL REVENUES | 3,799,154 |
| CGS | (2,799,446) |
| TOTAL COSTS | (2,799,446) |
| OTHER EXPENSES | (552,950) |
| LOSS PROVISION | 0 |
| INTEREST EXPENSE | (27,760) |
| INCOME PRETAX | (439,985) |
| INCOME TAX | (205,352) |
| INCOME CONTINUING | (234,633) |
| DISCONTINUED | 0 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | (234,633) |
| EPS PRIMARY | 0.07 |
| EPS DILUTED | 0.07 |