SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
| X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996 OR
| _ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________
Commission File No. 0-1921
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POWER DESIGNS INC.
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(Name of Small Business Issuer as specified in its charter)
New York 11-1708714
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
14 Commerce Drive, Danbury, Connecticut 11717
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(Address of principal executive offices) (Zip Code)
(203) 748-7001
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(Issuer's Telephone Number, Including Area Code)
250 Executive Drive, Edgewood, New York, 11717
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the issuer was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes |_| No |X|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes |_| No |X|
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: 2,391,493 as of November 13, 1996
Transitional Small Business Disclosure Format (check one) Yes |_| No |X|
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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<PAGE>
POWER DESIGNS, INC.
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Consolidated Financial Statements
September 30, 1996 and 1995
(Unaudited)
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<PAGE>
POWER DESIGNS, INC.
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Condensed Consolidated Balance Sheet
(Unaudited)
September 30, 1996 and 1995
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ASSETS
1996 1995
---- ----
Current assets:
Accounts receivable $ 71,162 $ 35,074
Inventories 207,297 201,507
Prepaid expenses 4,452 4,079
----------- -----------
Total current assets 282,911 240,660
----------- -----------
Property and equipment, less
accumulated depreciation 4,246 6,132
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Other assets:
Acquisition deposit 440,000 --
Investment in partnership 21,221 21,294
Security deposits 3,855 3,855
----------- -----------
465,076 25,149
----------- -----------
$ 752,233 $ 271,941
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Cash overdraft $ 4,153 $ 5,387
Accounts payable and accrued expenses 201,673 166,241
Current portion of long-term debt 1,619,775 574,107
Payables related to reorganization
including accrued interest 261,531 237,804
----------- -----------
Total liabilities 2,087,132 983,539
----------- -----------
Stockholders' deficit:
Common stock; $.0001 par value, 10,000,000
shares authorized, 2,391,493 shares
issued and outstanding at September 30, 1996;
2,176,259 shares, issued and outstanding
at September 30, 1995 240 218
Preferred stock; $.01 par value; 1,000,000
shares authorized; shares issued and
outstanding - none -- --
Additional paid in capital 820,732 784,754
Deficit (2,155,871) (1,496,570)
----------- -----------
Total stockholders' deficit (1,334,899) (711,598)
----------- -----------
$ 752,233 $ 271,941
=========== ===========
The accompanying notes are an integral part of these condensed
financial statements.
<PAGE>
POWER DESIGNS, INC.
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Condensed Consolidated Statement of Operations
(Unaudited)
For The Three Months ended September 30, 1996 and 1995
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1996 1995
---- ----
Net sales $ 90,502 $ 42,331
Cost of sales 79,642 08,431
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Gross profit 10,860 33,900
Selling, general and administrative expense 108,320 70,294
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Net loss before other income (expense) (97,460) (36,394)
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Other income (expense):
Investment income 1,000 8,231
Interest expense (33,947) (16,475)
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(32,947) (8,244)
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Net loss $ (130,407) $ (44,638)
=========== ===========
Net loss per share $ (.05) $ (.02)
=========== ===========
The accompanying notes are an integral part of these condensed
financial statements.
<PAGE>
POWER DESIGNS, INC.
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Condensed Consolidated Statement of Changes in Stockholders' Deficit
(Unaudited)
For The Three Months Ended September 30, 1996 and 1995
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<TABLE>
<CAPTION>
Shares
Common Additional
Stock Common Paid In
Outstanding Stock Capital Deficit Total
----------- ----- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1995 2,176,259 $ 218 $ 784,745 $(1,451,932) $ (666,960)
Net loss -- -- -- (44,638) (44,638)
----------- ----------- ----------- ----------- -----------
Balance, September 30, 1995 2,176,259 $ 218 $ 784,754 $(1,496,570) $ (711,598)
=========== =========== =========== =========== ===========
Balance, June 30, 1996 2,391,493 $ 240 $ 820,732 $(2,025,464) $(1,204,492)
Net loss -- -- -- (130,407) (130,407)
----------- ----------- ----------- ----------- -----------
Balance, September 30, 1996 2,391,493 $ 240 $ 820,732 $(2,155,868) $(1,334,899)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
<PAGE>
POWER DESIGNS, INC.
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Condensed Consolidated Statement of Cash Flows
(Unaudited)
For the Three Months Ended September 30, 1996 and 1995
------
1996 1995
---- ----
Cash flows from operating activities:
Net loss $ (130,407) $ (44,638)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 251 --
(Increase) decrease in:
Accounts receivable (37,767) (22,295)
Inventories (32,811) --
Prepaid expenses (4,452) (356)
Other assets (250,000) --
Increase (decrease) in:
Accounts payable and accrued expenses 33,170 (6,894)
Payables related to reorganization (124) (7,161)
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Cash flows used in operating activities (422,140) (81,344)
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Cash flows from financing activities:
Advances from affiliate (71,251) (34,291)
Cash received from long-term financing 495,178 117,395
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Cash flows provided by financing activities 423,927 83,004
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Net increase in cash 1,787 1,660
Cash overdraft, beginning of year (5,940) (7,047)
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Cash overdraft, end of year $ (4,153) $ (5,387)
=========== ===========
The accompanying notes are an integral part of these condensed
financial statements.
<PAGE>
POWER DESIGNS, INC.
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Notes To The Condensed Consolidated Financial Statements
For The Three Months Ended September 30, 1996 and 1995
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Note 1 - Basis of Presentation:
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim period.
The results of operations for the three month periods ended September 30, 1996
and 1995 are not necessarily indicative of the results to be expected for the
full year.
Note 2 - Subsequent Events:
On October 11, 1996, a wholly owned subsidiary of Power Designs, Inc. (PDIXF
Acquisition Corporation) acquired for approximately $4,430,000, the net assets
of two divisions of Penril Datacomm Networks, Inc. These two divisions,
Technipower Power, Inc. and Constant Power, Inc., are manufacturers of power
supplies, auto transformers, power line conditioners and uninterruptable power
supplies. Additionally, the Company repaid loans, notes payable and obligations
to creditors totalling approximately $1,490,000 that existed as of October 11,
1996. The Company also incurred approximately $260,000 in costs (financing and
organizational) related to the transaction.
Funding for the above transaction (approximately $6,180,000) was provided by the
following:
316,743 shares of preferred stock convertible to
common stock at a conversion rate to be determined
at a future date $ 265,000
Warrants convertible into 416,749 shares of
common stock at 87.5 cents per share 7,000
Subordinate debt from six individuals and
a limited partnership 1,087,000
Note payable to Inverness Corporation
(Due April 1, 1998) 2,290,000
Seller financing (Due 12/31/96) 2,750,000
Total sources 6,399,000
Less: cash deposited into PDIXF Corp.
for working capital (219,000)
-----------
$ 6,180,000
The Company expects to do a secondary stock offering prior to December 31, 1996,
which would provide the funds to repay the seller financing provided by Penril.
Should a secondary offering not occur by this date, bridge financing will need
to be secured. The Company is simultaneously working to arrange that financing.
The following proforma condensed balance sheet gives effect to the above event
as if it had occurred on September 30, 1996 without giving effect to operating
results through this period:
<PAGE>
POWER DESIGNS, INC.
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Notes To The Condensed Consolidated Financial Statements
For The Three Months Ended September 30, 1996 and 1995
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Note 2 - Subsequent Events: (Continued)
Proforma Condensed Balance Sheet
At September 30, 1996
<TABLE>
<CAPTION>
As Reported Proforma
In Accompanying Adjustments for Proforma
Financial Statements Subsequent Funds Balance Sheet
-------------------- ---------------- -------------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash $ -- $ 219,000 $ 219,000
Accounts receivable 71,162 582,000 653,162
Inventories 207,297 1,900,000 2,107,297
Prepaid expenses 4,452 -- 4,452
------------ ------------ -------------
Total current assets 282,911 2,701,000 2,983,911
------------ ------------ -------------
Property and equipment, less accumulated
depreciation 4,246 525,000 529,246
------------ ------------ -------------
Other assets:
Acquisition deposit 440,000 (190,000) 250,000
Investment in partnership 21,221 -- 21,221
Security deposits 3,855 -- 3,855
Goodwill -- 1,973,000 1,973,000
Financing fees and organizational costs -- 260,000 260,000
------------ ------------ -------------
465,076 2,043,000 2,508,076
------------ ------------ -------------
$ 752,233 $ 5,269,000 $ 6,021,233
============ ============ =============
LIABILITIES AND STOCKHOLDERS'
DEFICIT
Current liabilities:
Seller financing $ -- $ 2,750,000 $ 2,750,000
Cash overdraft 4,153 -- 4,153
Accounts payable and accrued expenses 201,673 493,442 695,115
Current portion of long-term debt 1,619,775 (1,130,346) 489,429
Payables related to reorganization,
including accrued interest 261,531 (120,256) 141,275
------------ ------------- -------------
Total liabilities 2,087,132 1,992,840 4,079,972
------------ ------------ -------------
Long-term debt:
Notes payable - affiliates -- 3,004,306 3,004,306
------------ ------------ -------------
Stockholders' deficit:
Preferred stock -- 264,854 264,854
Common stock 240 -- 240
Additional paid in capital 820,732 7,000 827,732
Deficit (2,155,871) -- (2,155,871)
------------ ------------ -------------
Total stockholders' deficit (1,334,899) 271,854 (1,063,045)
------------ ------------ -------------
$ 752,233 $ 5,269,000 $ 6,021,233
============ ============ =============
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations.
Current Developments
During the first quarter of fiscal year 1997, the issuer focused primarily
on its search for suitable acquisition candidates. On October 11, 1996, after
the end of the reporting period, the issuer purchased the assets of two
subsidiaries of Penril Datacomm Networks, Inc. That acquisition was reported on
a Form 8-K dated October 28, 1996. After the transaction was completed, the
issuer also began taking steps to wind down operations at its Long Island
headquarters, so that it could consolidate its managerial and manufacturing
operations at the former Penril sites in Connecticut. This move was completed on
November 5, 1996.
As is discussed in more detail in "Liquidity and Capital Resources" below,
the issuer received additional financing of about $6.2 million and issued shares
of a new class of preferred stock, $.01 par value, in connection with the
acquisition.
In early 1995, the issuer's shareholders approved a resolution calling for
the reincorporation of the issuer under Delaware law, by merging the issuer into
a Delaware corporation also named Power Designs Inc. The merger remains
unexecuted pending approval by the New York State Department of State, Division
of Corporations.
At the end of fiscal year 1995, the issuer had entered into an acquisition
agreement with Cycle Transformer, Inc. ("Cycle") and the MarTek Group
("MarTek"), under which MarTek agreed to transfer its right to purchase Cycle to
the issuer for $60,000. Concurrently, the issuer received a capital infusion
from the MarTek's owners in the amount of $146,875. The acquisition of Cycle was
later abandoned, and litigation ensued. Subsequent to the end of the fiscal
year, the issuer agreed to pay MarTek, its owners and their representatives
$185,000 in an out-of-court settlement. The full amount was paid on September
27, 1996.
Liquidity and capital resources.
In addition to the issuer's efforts to find a suitable acquisition
candidate, during the quarter ended September 30, 1996 it pursued opportunities
for additional funding, in order to address its continuing shortage of working
capital. Lack of funds for marketing efforts, in combination with the technical
and custom production aspects of the issuer's non-standard products, have
hindered expansion of sales. Accordingly, additional working capital must be
obtained to finance current operations and debts, and to fund future investment.
In particular, when the issuer emerged from bankruptcy in 1994 it entered
into a plan of reorganization which requires payments to pre-bankruptcy
creditors of
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<PAGE>
approximately $59,000 per year through fiscal 1997 and $49,000 from then through
fiscal 2000. It also received a loan of $130,500 from Venture Partners, Ltd.,
acting as agent, which requires monthly payments of principal of $1,900 from
June 30, 1995 through May 31, 1997, and a single balloon payment of $84,900 at
June 30, 1997. Finally, the issuer has capital investment requirements of
approximately $50,000 per year and deferrable capital investment requirements of
approximately $25,000 per year.
Beginning in fiscal year 1995, Venture Partners arranged for the issuer to
obtain additional capital through a Revolving Loan Agreement with a Venture
Partners affiliate, Inverness Corporation ("Inverness"). The note under the Loan
Agreement provided for 15% annual interest and, as of July 1, 1995, a credit
line of $200,000. The maximum credit line was raised to $700,000 as of June 30,
1996, at which point the issuer in fact owed $834,097. Accordingly, the credit
line was again raised on July 31, 1996, to $1,200,000.
During fiscal year 1995 the issuer issued a debenture to the MarTek Group
for $146,875, which was due on June 30, 1995 and carried interest of 10% per
annum. This debt remained outstanding until September 27, 1996, when the issuer
repaid it pursuant to an out-of-court arrangement with MarTek (see Part II, Item
1 below -- "Legal Proceedings").
Subsequent to the end of the reporting period, on October 11, 1996, the
issuer obtained significant additional outside financing, totalling
approximately $6.2 million. The financing consisted of three primary components:
a private placement of debt and equity securities for $1,087,000 to six
individuals and a limited partnership; a note payable to Inverness in the amount
of $2,290,000, and short-term seller financing from Penril of $2.75 million, due
on December 31, 1996. As part of the acquisition and financing, the issuer
created a class of preferred stock, $.01 par value, which had been authorized by
vote of the shareholders in fiscal year 1995. Shares of such preferred stock
were included with the securities placed with the six individuals and limited
partnership.
The financing permitted the issuer to pay in full several of the debts
mentioned above: the payments required under the plan of reorganization to
pre-bankruptcy creditors; the $130,500 debt outstanding to Venture Partners as
agent, and the full amount owed Inverness under the Revolving Loan Agreement.
Because of the completed acquisition of the Penril subsidiaries, the
issuer hopes to be able to supply a greater percentage of its working capital
needs through operating cash flow during the 1997 fiscal year. Nevertheless, the
issuer expects that it will be in need of additional financings through
offerings of debt or equity. The remaining capital necessary for operating
purposes and capital investment is anticipated to be supplied by financings
secured by its receivables and additional loans. It is currently exploring the
possibility either of a public offering of stock or bridge financing, but has
made no definite decisions in this regard.
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<PAGE>
The issuer currently has a deficit in shareholders' equity, meaning that
amounts owed to its creditors, including without limitation Inverness Corp.,
exceed the value of its assets. As of the end of the reporting period, the
issuer has no plans beyond the above to remedy the deficit in shareholders'
equity.
Certain statements contained in this Item 2 regarding matters that are not
historical facts, including, among others, statements regarding the future
adequacy of the issuer's working capital, its ability to raise capital through
debt or equity offerings, its ability to maintain or improve its present cash
flow, are forward looking statements (as such term is defined in the Securities
Act of 1933 and the Securities Exchange Act of 1934, as amended). Such forward
looking statements are not guarantees of future performance. There remain
substantial risks that the issuer will be unable to obtain adequate financing to
improve its performance and achieve its business goals.
Results of operations
The issuer's internal financial information for the period ended September
30, 1995 is limited because of personnel and procedural changes in the issuer's
auditing department. Nevertheless, the issuer has concluded that it can prepare
unaudited financial statements for those periods on a basis comparable to that
of the fiscal 1997 financial statements.
First three months of fiscal 1997 versus first three months of fiscal 1996
As the issuer continued to focus its attention on the acquisition of the
Penril assets, sales diminished by 35% during the reporting period as compared
with the first quarter of fiscal 1996. Professional and managerial services
required for the acquisition increased the issuer's selling, general and
administrative expenses. Furthermore, interest expenses doubled as the issuer
entered into the various loan agreements described above at "Liquidity and
Capital Resources." Accordingly, total net loss tripled on a comparative basis
between the two quarters. Management believes that the execution of the
acquisition agreement and the additional capital resulting from the related
transactions (described at "Liquidity and Capital Resources" above) will allow
the issuer to stabilize its financial position and increase cash flow. In
particular, the product lines acquired from Penril are hoped to provide
substantial new marketing opportunities and form a basis for expansion.
Certain statements contained in this Item 6 regarding matters that are not
historical facts, including, among others, statements regarding future effects
of the October 11, 1996 acquisition, the future adequacy of the issuer's working
capital, its ability to raise capital through debt or equity offerings, and its
ability to maintain or improve its present cash flow, are forward looking
statements (as such term is defined in the Securities Act of 1933 and the
Securities Exchange Act of 1934, as amended). Such forward looking statements
are not guarantees of future performance. There
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<PAGE>
remain substantial risks that the issuer will be unable to obtain adequate
financing to improve its performance and achieve its business goals.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 31, 1996 the issuer agreed to pay $185,000 in an out-of-court
arrangement to settle a lawsuit brought by two former directors of the issuer.
The full amount was paid on September 27, 1996, and relieved a debt of $146,875
owed to a company the two former directors controlled, plus accrued interest
(see Item 6 -- "Management's Discussion and Analysis -- Liquidity and Capital
Resources").
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the reporting period covered by this report
to a vote of security holders, through the solicitation of proxies, or
otherwise.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None
(b) No reports on Form 8-K have been filed during the quarter ended
September 30, 1996.
SIGNATURES
Pursuant to the requirements of the Act, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Date: December 9, 1996 POWER DESIGNS INC.
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(Registrant)
By: /s/ Rudolf Zeidler
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Rudolf Zeidler, President
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