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 June 30, 2000
[ ] 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
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 x No o
Number of shares of common stock outstanding as of June 30, 2000: 2,812,435
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
(unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 605,853
Accounts receivable - trade, net of allowance for
doubtful accounts of $210,454 3,211,352
Income tax refund receivable 19,556
Other receivables 125,534
Inventory, net 4,836,375
Prepaid expenses and deposits 129,280
Deferred income taxes 360,136
------------
Total current assets 9,288,086
PROPERTY AND EQUIPMENT, net 1,161,782
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED
net of amortization of $432,428 1,019,762
DEPOSITS 13,909
------------
TOTAL ASSETS $ 11,483,539
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 940,000
Current portion of capital lease obligations 43,877
Accounts payable 1,456,550
Income taxes payable 120,000
Accrued liabilities 1,250,897
------------
Total current liabilities 3,811,324
CAPITAL LEASE OBLIGATIONS, less current portion 63,546
DEFERRED INCOME TAXES 9,344
------------
Total liabilities 3,884,214
------------
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY:
Preferred stock issuable in series, no par value, 2,000,000 shares
authorized; no shares issued and outstanding -
Common Stock, no par value, 10,000,000 shares authorized;
2,812,435 shares issued and outstanding 9,091,348
Additional paid-in capital 279,110
Accumulated deficit (1,724,965)
Accumulated other comprehensive loss (46,168)
------------
Total stockholders' equity 7,599,325
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,483,539
============
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See accompanying notes to these condensed consolidated financial statements.
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
----------- ----------- ------------ -----------
REVENUES $ 4,287,433 $ 4,332,948 $ 8,525,708 $ 7,549,411
COST OF GOODS SOLD 3,038,070 3,279,891 6,016,381 5,763,266
----------- ----------- ------------ -----------
Gross Margin 1,249,363 1,053,057 2,509,327 1,786,145
----------- ----------- ------------ -----------
OPERATING EXPENSES
Engineering and product development 267,120 210,516 549,912 431,282
Marketing and selling 387,418 317,978 703,642 597,984
General and administrative 522,801 363,582 973,687 715,474
----------- ----------- ------------ -----------
Total operating expenses 1,177,339 892,076 2,227,241 1,744,740
----------- ----------- ------------ -----------
INCOME FROM OPERATIONS 72,024 160,981 282,086 41,405
----------- ----------- ------------ -----------
OTHER INCOME (EXPENSES):
Interest income 2,969 3,474 9,460 7,508
Interest expense (25,893) (46,775) (50,784) (98,888)
Translation loss (4,622) (3,679) (4,957) (6,260)
Gain (loss) on disposal of assets 1,568 - 1,568 -
----------- ----------- ------------ -----------
Other income (expense) (25,978) (46,980) (44,713) (97,640)
----------- ----------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES 46,046 114,001 237,373 (56,235)
PROVISION FOR INCOME TAXES 30,000 53,500 130,000 38,800
----------- ----------- ------------ -----------
NET INCOME (LOSS) 16,046 60,501 107,373 (95,035)
----------- ----------- ------------ -----------
Other comprehensive loss:
Foreign currency translation adjustment (180,765) (85,562) (238,923) (169,677)
----------- ----------- ------------ -----------
COMPREHENSIVE LOSS $ (164,719) $ (25,061) $ (131,550) $ (264,712)
=========== =========== ============ ===========
NET INCOME (LOSS) PER SHARE
BASIC $ 0.01 $ 0.02 $ 0.04 $ (0.03)
=========== =========== ============ ===========
DILUTED $ 0.01 $ 0.02 $ 0.03 $ (0.03)
=========== =========== ============ ===========
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See accompanying notes to these condensed consolidated financial statements.
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED
JUNE 30,
2000 1999
----------- -----------
Cash Flows from Operating Activities:
Net income (loss) $ 107,373 $ (95,035)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 194,946 267,816
Contribution to ESOP - 46,003
Foreign currency translation adjustment 335 6,260
Changes in operating assets and liabilities:
Accounts receivable (398,914) 426,025
Other receivables (25,017) (48,945)
Income tax refund receivable 51,432 215,917
Inventory (305,114) 454,976
Prepaid expenses (67,954) (44,739)
Deposits 150 (42,427)
Accounts payable 260,380 314,872
Accrued liabilities 157,256 (341,975)
Other long-term liabilities (25,000) 19,957
----------- -----------
Net adjustments (157,500) 1,273,740
----------- -----------
Net cash provided by (used in) operating activities (50,127) 1,178,705
Cash Flows from Investing Activities:
Purchases of property and equipment (97,138) (37,234)
----------- -----------
Net cash used in investing activities (97,138) (37,234)
Cash Flows from Financing Activities:
Proceeds from exercise of stock options including
related tax benefits 78,669 -
Payments on long-term debt - (46,002)
Payments on capital lease obligations (25,094) (19,637)
Principal payments on notes payable - (677,209)
----------- -----------
Net cash provided by (used in) financing activities 53,575 (742,848)
Effect of Exchange Rate Changes on Cash (125,165) (175,938)
----------- -----------
Net increase (decrease) in cash and cash equivalents (218,855) 222,685
Cash and cash equivalents, beginning of period 824,708 867,607
----------- -----------
Cash and cash equivalents, end of period $ 605,853 $ 1,090,292
=========== ===========
Supplemental Cash Flow Information:
Cash payments for:
Interest $ 107,011 $ 99,807
=========== ===========
Income taxes $ 15,480 $ 36,957
=========== ===========
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See accompanying notes to these condensed consolidated financial statements.
DIGITAL POWER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated 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, 1999.
In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments consisting only of normal recurring accruals considered necessary to present fairly the Company's financial position at June 30, 2000, the results of operations for the three month and six month periods ended June 30, 2000 and 1999, and cash flows for the six months ended June 30, 2000 and 1999. The results for the period ended June 30, 2000, are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2000.
NOTE 2 - EARNINGS PER SHARE
The following represents the calculation of earnings per share:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
BASIC
Net Income (loss) $ 16,046 $ 60,501 $ 107,373 $ (95,035)
Less - preferred stock dividends - - - -
----------- ----------- ----------- -----------
Net income (loss) applicable to common
shareholders 16,046 60,501 107,373 (95,035)
Weighted average number of common shares 2,805,754 2,771,435 2,794,550 2,771,435
----------- ----------- ----------- -----------
Basic earnings (loss) per share $ 0.01 $ 0.02 $ 0.04 $ (0.03)
=========== =========== =========== ===========
DILUTED
Net income (loss) applicable to common
shareholders $ 16,046 $ 60,501 $ 107,373 $ (95,035)
Preferred stock dividend - - - -
----------- ----------- ----------- -----------
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FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
BASIC
Net income (loss) available to common
Shareholders plus assumed conversion 16,046 60,501 107,373 (95,035)
----------- ----------- ----------- -----------
Weighted average number of common shares 2,805,754 2,771,435 2,794,550 2,771,435
Common stock equivalent shares representing
Shares issuable upon exercise of stock
Options 400,865 65,150 417,242 65,350
----------- ----------- ----------- -----------
Weighted average number of shares used in
Calculation of diluted income (loss)
per share 3,206,619 2,836,585 3,211,792 2,836,785
----------- ----------- ----------- -----------
Diluted earnings (loss) per share $ 0.01 $ 0.02 $ 0.03 $ (0.03)
=========== =========== =========== ===========
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NOTE 3 - SEGMENT REPORTING
The company has identified its segments based upon its geographic operations. These segments are represented by each of the Company's individual legal entities: Digital Power Corporation (DPC), Poder Digital, S.A. de C.V. (PD) and Digital Power Limited (DPL). Segment information is as follows:
For the Three Months Ended June 30, 2000
DPC PD DPL Eliminations Totals
Revenues $ 2,948,782 $ 9,964 $ 1,328,687 $ -- $ 4,287,433
============ =========== ============ =========== ============
Intersegment
Revenues $ 163,574 $ 594,720 $ -- $ (758,294) $ --
============ =========== ============ =========== ============
Interest
Income $ 29,415 $ 497 $ 1,457 $ (28,400) $ 2,969
============ =========== ============ =========== ============
Interest
Expense $ 22,426 $ 404 $ 31,463 $ (28,400) $ 25,893
============ =========== ============ =========== ============
Income Tax
Expense
(Benefit) $ 32,000 $ -- $ (2,000) $ -- $ 30,000
============ =========== ============ =========== ============
Income
(loss) $ 61,932 $ (5,384) $ (40,502) $ -- $ 16,046
============ =========== ============ =========== ============
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For the Three Months Ended June 30, 1999
DPC PD DPL Eliminations Totals
Revenues $ 2,501,309 $ 9,625 $ 1,822,014 $ -- $ 4,332,948
============ =========== ============ =========== ============
Intersegment
Revenues $ 56,071 $ 693,257 $ -- $ (749,328) $ --
============ =========== ============ =========== ============
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DPC PD DPL Eliminations Totals
Interest
Income $ 31,705 $ 169 $ -- $ (28,400) $ 3,474
============ =========== ============ =========== ============
Interest
Expense $ 32,985 $ 2,591 $ 39,599 $ (28,400) $ 46,775
============ =========== ============ =========== ============
Income Tax
Expense $ -- $ -- $ 53,500 $ -- $ 53,500
============ =========== ============ =========== ============
Income
(loss) $ (24,772) $ (14,844) $ 100,117 $ -- $ 60,501
============ =========== ============ =========== ============
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For the Six Months Ended June 30, 2000
DPC PD DPL Eliminations Totals
Revenues $ 5,772,572 $ 10,004 $ 2,743,132 $ -- $ 8,525,708
============ =========== ============ =========== ============
Intersegment
Revenues $ 266,392 $ 1,141,880 $ -- $(1,408,272) $ --
============ =========== ============ =========== ============
Interest
Income $ 58,923 $ 1,063 $ 6,274 $ (56,800) $ 9,460
============ =========== ============ =========== ============
Interest
Expense $ 43,254 $ 1,256 $ 63,074 $ (56,800) $ 50,784
============ =========== ============ =========== ============
Income Tax
Expense $ 130,000 $ -- $ -- $ -- $ 130,000
============ =========== ============ =========== ============
Income
(loss) $ 191,996 $ 3,545 $ (88,168) $ -- $ 107,373
============ =========== ============ =========== ============
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For the Six Months Ended June 30, 1999
DPC PD DPL Eliminations Totals
Revenues $ 4,433,282 $ 9,652 $ 3,106,477 $ -- $ 7,549,411
============ =========== ============ =========== ============
Intersegment
Revenues $ 100,910 $ 1,040,449 $ -- $(1,141,359) $ --
============ =========== ============ =========== ============
Interest
Income $ 62,397 $ 1,599 $ -- $ (56,488) $ 7,508
============ =========== ============ =========== ============
Interest
Expense $ 68,179 $ 3,189 $ 84,008 $ (56,488) $ 98,888
============ =========== ============ =========== ============
Income Tax
Expense $ -- $ -- $ 38,800 $ -- $ 38,800
============ =========== ============ =========== ============
Income
(loss) $ (95,169) $ (16,224) $ 16,358 $ -- $ (95,035)
============ =========== ============ =========== ============
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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, 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 "Certain Considerations" section in the Company's Form 10-KSB for the year ended December 31, 1999. 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 MONTH PERIODS ENDED JUNE 30, 2000, COMPARED TO JUNE 30, 1999
REVENUES
Revenues decreased by 1.1% to $4,287,433 for the three months ended June 30, 2000, from $4,332,948 for the three months ended June 30, 1999. Revenues from the Company's United Kingdom's operations of Digital Power Ltd. decreased 27.1% to $1,328,687 for the second quarter ended June 30, 2000, from $1,822,014 for the second quarter ended June 30, 1999. Revenues attributed to the United States operations increased by 17.9% from the same quarter during the prior year due primarily to increases in units shipped to five large United States OEM customers. The overall decrease in revenues can be attributed primarily to the soft market conditions for some of Digital Power Ltd. older product lines, including military and defense products.
For the six months ended June 30, 2000, revenues increased by 12.9% to $8,525,708 from $7,549,411 for the six months ended June 30, 1999. The increase in revenues during the six months ended June 30, 2000, can be attributed primarily to significant increases in units shipped to five large United States OEM customers. For the six months ended June 30, 2000, Digital Power Ltd. contributed $2,743,132 to the Company's revenues compared to $3,106,477 for the six months ended June 30, 1999.
GROSS MARGINS
Gross margins were 29.1% for the three months ended June 30, 2000, compared to 24.3% for the three months ended June 30, 1999. The improvement in gross margins can primarily be attributed to the above mentioned increase in OEM business, which tends to have better gross margins, and cost reductions resulting from an increase in units manufactured in China.
Gross margins were 29.4% for the six months ended June 30, 2000, compared to 23.7% for the six months ended June 30, 1999. The increase in gross margins can primarily be attributed to increased OEM business and manufacturing in China, as noted above.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were 21.2% of revenues for the three months ended June 30, 2000, compared to 15.7% for the three months ended June 30, 1999. Selling, general and administrative expenses were 19.7% of revenues for the six months ended June 30, 2000, compared to 17.4% for the six months ended June 30, 1999. Increased selling, general and administrative expenses can be attributed primarily to an increased marketing staff, increased commissions paid and increased investor relations expenses.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were 6.2% of revenues for the three months ended June 30, 2000, and 4.9% for the three months ended June 30, 1999. Engineering and product development expenses were 6.5% of revenues for the six months ended June 30, 2000, compared to 5.7% for the six months ended June 30, 1999. The increases in engineering and product development expenses reflect the Company's continuing commitment to new product development.
INTEREST EXPENSE
Interest expense, net of interest income, was $22,924 for the three months ended June 30, 2000, compared to $43,301 for the three months ended June 30, 1999. Interest expense, net of interest income, was $41,324 for the six months ended June 30, 2000, compared to $91,380 for the six months ended June 30, 1999. The decrease in interest expense is primarily due to reduced borrowings on the Company line of credit, which was reduced from $1,465,000 at the end of June 1999, to $940,000 at the end of June 2000, and replacement of Digital Power Ltd. receivables financing with a bank line of credit with a more favorable interest rate.
INCOME (LOSS) BEFORE INCOME TAXES
For the three months ended June 30, 2000, the Company had an income before income taxes of $46,046 compared to income before income taxes of $114,001 for the three months ended June 30, 1999. For the six months ended June 30, 2000, the Company had income before income taxes of $237,373 compared to a loss of $56,235 for the six months ended June 30, 1999.
INCOME TAX
The provision for income tax decreased from a tax expense of $53,500 for the three months ended June 30, 1999, to a tax expense of $30,000 for the three months ended June 30, 2000, and increased from $38,800 for the six months ended June 30, 1999, to $130,000 for the six months ended June 30, 2000.
NET INCOME
Net income for the three months ended June 30, 2000, was $16,046 compared to $60,501 for the three months ended June 30, 1999. Net income for the six months ended June 30, 2000, was $107,373, compared to a net loss of $95,035 for the six months ended June 30, 1999. The decrease in net income for the three month period was due primarily to the previously mentioned soft market conditions for some of the Digital Power Ltd. older product lines, while the increase in net
income for the six month period is primarily related to increased revenues for the six month period, primarily related to the Company's United States operations.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 2000, the Company had cash of $605,853 and working capital of $5,476,762. This compares with cash of $1,090,292 and working capital of $4,919,002 at June 30, 1999. The increase in working capital was due to an increase in accounts receivable, inventory and prepaid expenses and decrease of notes payable, accounts payable and accrued liabilities, offset by a decrease in other receivables and increase in income taxes payable, resulting in a decrease in cash and cash equivalents. Cash provided by (used in) operating activities for the Company totaled ($50,127) and $1,178,705 for the six months ended June 30, 2000 and 1999.
Cash used in investing activities was $97,138 for the six months ended June 30, 2000, compared to $37,234 for the six months ended June 30, 1999. Net cash provided by (used in) financing activities was $53,575 for the six months ended June 30, 2000, compared to ($742,848).
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 24, 2000, the Company held its annual meeting of shareholders for the election of directors as follows:
Election Of Directors For Votes Withheld --------------------- --- -------------- Robert O. Smith 1,958,954 36,300 Chris Schofield 1,948,954 46,300 Thomas W. O'Neil, Jr. 1,958,954 36,300 Scott C. McDonald 1,958,954 36,300 Robert J. Boschert 1,958,954 36,300 |
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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: August 21, 2000 /s/ Robert O. Smith
Robert O. Smith
Chief Executive Officer
(Principal Executive Officer)
Date: August 21, 2000 /s/ Philip G. Swany
Philip G. Swany
Chief Financial Officer
(Principal Financial Officer)
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| ARTICLE 5 |
| (Replace this text with the legend) |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 2000 |
| PERIOD START | JAN 01 2000 |
| PERIOD END | JUN 30 2000 |
| CASH | 605,863 |
| SECURITIES | 0 |
| RECEIVABLES | 3,421,806 |
| ALLOWANCES | 210,454 |
| INVENTORY | 4,836,375 |
| CURRENT ASSETS | 9,288,086 |
| PP&E | 2,777,838 |
| DEPRECIATION | (1,615,854) |
| TOTAL ASSETS | 11,483,539 |
| CURRENT LIABILITIES | 3,811,324 |
| BONDS | 0 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 0 |
| COMMON | 9,091,348 |
| OTHER SE | (1,492,023) |
| TOTAL LIABILITY AND EQUITY | 11,483,539 |
| SALES | 8,525,708 |
| TOTAL REVENUES | 8,525,708 |
| CGS | 6,016,381 |
| TOTAL COSTS | 6,016,381 |
| OTHER EXPENSES | 2,227,241 |
| LOSS PROVISION | 0 |
| INTEREST EXPENSE | 60,784 |
| INCOME PRETAX | 237,373 |
| INCOME TAX | 130,000 |
| INCOME CONTINUING | 107,373 |
| DISCONTINUED | 0 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | 107,373 |
| EPS BASIC | 0.04 |
| EPS DILUTED | 0.03 |