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,
1998
[ ] 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)
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 <square> No <checked-box>
Number of shares of common stock outstanding as of June 30, 1998: 2,717,435
<PAGE>2
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash $ 149,207
Cash - Restricted 600,000
Accounts receivable - trade, net of allowance for doubtful
accounts of $200,000 3,642,494
Other receivables 285,624
Inventory, net 6,676,864
Prepaid expenses and deposits 218,672
Deferred income taxes 119,139
___________
Total current assets $11,692,000
PROPERTY AND EQUIPMENT, net 1,299,216
GOODWILL, net 1,099,397
DEPOSITS 30,901
-----------
TOTAL ASSETS $14,121,514
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current debt $ 1,750,000
Current portion of long-term debt 85,596
Current portion of capital lease obligations 12,283
Accounts payable 1,999,675
Accrued liabilities 1,851,064
-----------
Total current liabilities 5,698,618
LONG-TERM DEBT, less current portion 192,267
LONG-TERM DEFERRED INCOME TAX LIABILITY 32,227
-----------
Total liabilities 5,923,112
-----------
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;
2,717,435 shares issued and outstanding 8,918,323
Warrants 96,678
Additional paid-in capital 381,260
Accumulated deficit (990,090)
Unearned employee stock ownership plan shares (277,863)
Foreign currency translation adjustment 70,094
----------
Total stockholders' equity 8,198,402
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,121,514
===========
</TABLE>
See accompanying notes to these condensed consolidated financial
statements.
<PAGE>3
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
<S> <C> <C> <C> <C>
1998 1997 1998 1997
REVENUES $4,575,030 $5,023,548 $9,630,361 $8,822,702
COST OF GOODS SOLD 3,535,150 3,843,359 7,070,504 6,642,805
---------- ---------- ---------- ----------
Gross Margin 1,039,880 1,180,189 2,559,857 2,179,897
---------- ---------- ---------- ----------
OPERATING EXPENSES
Engineering and product development 271,223 209,583 541,119 415,829
Marketing and selling 369,636 162,027 714,115 281,088
General and administrative 388,775 208,283 694,827 435,926
---------- ---------- ---------- ----------
Total operating expenses 1,029,634 579,893 1,950,061 1,132,843
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 10,246 600,296 609,796 1,047,054
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSES):
Interest income 109 7,576 1,989 30,763
Interest expense (67,841) (15,590) (115,075) (43,350)
Translation loss (11,439) (11,907) (14,960) (14,107)
---------- ---------- ---------- ----------
Other income (expense) (79,171) (19,921) (128,046) (26,694)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (68,925) 580,375 481,750 1,020,360
PROVISION (BENEFIT) FOR INCOME TAXE (73,342) 213,543 182,900 418,895
---------- ---------- ---------- ----------
NET INCOME 4,417 366,832 298,850 601,465
---------- ---------- ---------- ----------
Other comprehensive income from foreign
currency translation adjustment (12,573) - 70,094 -
---------- ---------- ---------- ----------
Comprehensive income $ (8,156) $ 366,832 $ 368,944 $ 601,465
========== ========== ========== ==========
NET INCOME PER SHARE
BASIC $ * $ 0.15 $ 0.11 $ 0.24
========== ========== ========== ==========
DILUTED $ * $ 0.11 $ 0.09 $ 0.17
========== ========== ========== ==========
</TABLE>
* Less than $0.01
See accompanying notes to these condensed consolidated financial
statements.
<PAGE>4
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
1998 1997
Cash Flows from Operating Activities:
Net income $ 298,850 $ 601,465
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 179,325 65,581
Deferred income taxes (67,700)
Deferred tax expense (15,234)
Compensation recognized upon issuance
of stock or stock options 48,032
Contribution to ESOP 47,560 41,128
Foreign currency translation adjustment 14,960 14,107
Changes in operating assets and liabilities:
Cash - restricted (600,000)
Accounts Receivable 509,305 (720,390)
Other receivable (9,075) (47,418)
Inventory (1,090,776) (978,601)
Prepaid expenses (89,422) (28,539)
Other assets (2,070)
Deposits (13,641)
Accounts payable (1,089,267) 440,551
Accrued liabilities 953,080 (353,824)
---------- ----------
Net adjustments (1,155,153) (1,637,175)
---------- ----------
Net cash used in operating activities (856,303) (1,035,710)
---------- ----------
Cash Flows from Investing Activities:
Acquisition of Gresham Power Electronics (2,974,411)
Purchases of property and equipment (46,695) (264,272)
Proceeds from sale of asset 8,528
---------- ----------
Net cash used in investing activities (3,012,578) (264,272)
---------- ----------
Cash Flows from Financing Activities:
Proceeds from sale of common stock and warrants 495,628
Payments on long-term debt (47,560)
Principal payments on notes payable (176,607)
Payments on capital lease obligations (5,918) (6,549)
Net proceeds from exercise of stock options and
warrants 61,150 22,500
Proceeds from line of credit 1,750,000 1,990,000
Principal payments on line of credit (3,187,330)
---------- ----------
Net cash provided by financing activities 1,757,672 (862,358)
---------- ----------
Effect of Exchange Rate Changes on Cash 55,134 (14,107)
---------- ----------
Net Increase (Decrease) in cash (2,056,075) (2,176,447)
Cash and cash equivalents, beginning of period 2,205,282 2,955,299
---------- ----------
Cash and cash equivalents, end of period $ 149,207 $ 778,852
========== ==========
Supplemental Cash Flow Information:
Cash payments for:
Interest $ 108,877 $ 53,789
========== ==========
Income taxes $ 288,850 $ 637,402
========== ==========
See accompanying notes to these condensed consolidated financial
statements.
<PAGE>5
DIGITAL POWER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(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, 1997.
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, 1998, the results of
operations for the three month and six month periods ended June 30,
1998 and 1997, and cash flows for the six months ended June 30, 1998
and 1997. The results for the period ended June 30, 1998, are not
necessarily indicative of the results to be expected for the entire
fiscal year ending December 31, 1998.
On January 26, 1998, the Company acquired the assets of Gresham
Power Electronics, a division of Gresham Lion Technology Ltd., a
European corporation. The Company paid U.S. $2.7 million cash plus
earn-out and acquisition costs. The net asset value (NAV) will be
determined as of January 26, 1998, and will be equal to the value of
the fixed assets, accounts receivable, and inventory, less the value
of the agreed liabilities. The cash consideration will be increased
by U.S. $1.6284 for each pound that the NAV exceeds U.K.
<pound-sterling>1,100,000 and decreased in the same way. From the
transfer date to June 30, 1998, an accounting will be done and
additional consideration shall be paid as follows: (a) U.S. $1.15
for every pound of earnings before interest, taxes, and purchaser
group charges in excess of U.K. <pound-sterling>250,000 up to a
maximum payment of U.S. $300,000; and (b) U.S. $300,000 in the event
that the post-compensation NAV equals or exceeds U.K.
<pound-sterling>1,000,000. The additional consideration due under
the agreement is currently estimated to be U.S. $400,000. As a
result of the acquisition, the financial statements for the period
ended June 30, 1998, are not comparable to the financial statements
for the period ended June 30, 1997.
The Company has filed a Form 8-K announcing this acquisition.
However, the required audited financial statements and pro forma
financial information have not been filed and will be filed as soon
as practicable.
<PAGE>6
NOTE 2 - EARNINGS PER SHARE
The following represents the calculation of earnings per share:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997
BASIC
Net Income $ 4,417 $ 366,832 $ 298,850 $ 601,465
Less - preferred stock dividends - - - -
---------- ---------- ---------- ----------
Net income applicable to common
shareholders $ 4,417 $ 366,832 $ 298,850 $ 601,465
Weighted average number of
common shares 2,704,377 2,521,627 2,701,566 2,512,137
Basic earnings per share $ * $ 0.15 $ 0.11 $ 0.24
---------- ---------- ---------- ----------
DILUTED
Net income applicable to common
shareholders $ 4,417 $ 366,832 $ 298,850 $ 601,465
Preferred stock dividend - - - -
---------- ---------- ---------- ----------
Net income available to common
shareholders plus assumed
conversion $ 4,417 $ 366,832 $ 298,850 $ 601,465
---------- ---------- ---------- ----------
Weighted average number of common
shares 2,704,377 2,521,627 2,701,566 2,512,137
Common stock equivalent shares
representing shares issuable
upon exercise of stock options 367,409 517,579 386,347 508,108
Common stock equivalent shares
representing shares issuable
upon exercise of warrants 65,468 451,615 116,228 450,138
---------- ---------- ---------- ----------
Weighted average number of shares
used in calculation of diluted
income per share 3,137,254 3,490,821 3,204,141 3,470,383
---------- ---------- ---------- ----------
Diluted earnings per share $ * $ 0.11 $ 0.09 $ 0.17
---------- ---------- ---------- ----------
*Less than $0.01
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
<PAGE>7
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, and "Certain
Considerations" section in the Company's Form 10-KSB for the year
ended December 31, 1997. 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, 1998, COMPARED TO JUNE
30, 1997
REVENUES
Revenues decreased by 8.9% to $4,575,030 for the three months ended
June 30, 1998, from $5,023,548 for the three months ended June 30,
1997. Revenues from the Company's United Kingdom's operations of
Digital Power Ltd. were $1,725,583 for the second quarter ended June
30, 1998. However, revenues attributed to the United States
operations decreased by 25.0% from the same quarter during the prior
year. The decrease in revenues can be attributed to the loss of the
Company's largest customer at the end of 1997. Although this
customer had some minor purchases during the first quarter, no
revenues were recorded during the three months ended June 30, 1998.
In addition, the electronics industry is experiencing some softness
in the demand for the Company's products which adversely affect the
Company's revenues during the second quarter.
For the six months ended June 30, 1998, revenues increased by 9.2%
to $9,630,361 from $8,822,702 for the six months ended June 30,
1997. The increase in revenues during the six months ended June 30,
1998, can be attributed to the acquisition of Gresham Power in the
United Kingdom on January 26, 1998. For the six months ended June
30, 1998, Gresham Power contributed $3,505,450 to the Company's
revenues.
GROSS MARGINS
Gross margins were 22.7% for the three months ended June 30, 1998,
compared to 23.5% for the three months ended June 30, 1997. The
decrease in gross margins can primarily be attributed to reduced
shipment level of higher margin products.
Gross margins were 26.6% for the six months ended June 30, 1998,
compared to 24.7% for the six months ended June 30, 1997. The
improvement in gross margins can primarily be attributed to
favorable product mix.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were 16.6% of revenues
for the three months ended June 30, 1998, compared to 7.4% for the
three months ended June 30, 1997. Selling, general and
administrative expenses were 14.6% of revenues for the six months
ended June 30, 1998, compared to 8.1% for the six months ended June
30, 1997. The increase is due, in part, to the inclusion of
selling, general and administrative expenses related to the
acquisition of Gresham Power in January 1998. In addition, during
the second quarter ended June 30, 1998, the Company reduced the
number of workers at its plant located in Guadalajara, Mexico. In
<PAGE>8
connection with the reduction in workers, the Company was required
to make severance payments in the amount of approximately $60,000,
which were recorded during the second quarter.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were 5.9% of revenues
for the three months ended June 30, 1998, and 4.2% for the three
months ended June 30, 1997. Engineering and product development
expenses were 5.6% of revenues for the six months ended June 30,
1998, compared to 4.7% for the six months ended June 30, 1997. The
increase in engineering and product development is a result of an
effort by the Company to develop new products for its customers.
The increase is due primarily to the engagement of engineering
consultants to help develop new products.
INTEREST EXPENSE
Interest expense, net of interest income, was $67,732 for the three
months ended June 30, 1998, compared to $8,014 for the three months
ended June 30, 1997. Interest expense, net of interest income, was
$113,086 for the six months ended June 30, 1998, compared to $12,587
for the six months ended June 30, 1997. The increase in interest
expense related to the increase in borrowing used to acquire Gresham
Power.
INCOME (LOSS) BEFORE INCOME TAXES
For the three months ended June 30, 1998, the Company incurred a net
loss of ($68,925) compared to income before income taxes of $580,375
for the three months ended June 30, 1997. For the six months ended
June 30, 1998, the Company had an income of before income taxes of
$481,750 compared to $1,020,360 for the six months ended June 30,
1997.
INCOME TAX
Provision for income tax decreased from $213,543 for the three
months ended June 30, 1997, to a credit of $73,342 for the three
months ended June 30, 1998, and from $418,895 for the six months
ended June 30, 1997, to $182,900 for the six months ended June 30,
1998, as a result of a loss during the three months ended June 30,
1998.
NET INCOME
Net income for the three months ended June 30, 1998, was $4,417
compared to $366,832 for the three months ended June 30, 1997, a
decrease of 98.8%. Net income for the six months ended June 30,
1998, was $298,850 compared to $601,465 for the six months ended
June 30, 1997, a decrease of 50.3%. The decrease in net income was
due to decreased revenues during the second quarter ended June 30,
1998, primarily related to the Company's United States operations,
and an increase in expenses related to severance payments made to
laid-off workers in Mexico.
<PAGE>9
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 1998, the Company had cash of $149,207 and working
capital of $5,993,382. This compares with cash of $778,852 and
working capital of $5,314,256 at June 30, 1997. The increase in
working capital was due to an increase in inventory and receivables,
offset by an increase in accounts payable and bank line of credit
borrowings resulting in a decrease in cash and cash equivalents,
although the decrease in cash is related to cash used to acquire
Gresham Power. Cash used in operating activities for the Company
totaled $856,303 and $1,035,710 for the six months ended June 30,
1998 and 1997.
Cash used in investing activities was $3,012,578 for the six months
ended June 30, 1998, compared to $264,272 for the six months ended
June 30, 1997. During the six months ended June 30, 1998, the
Company completed the acquisition of Gresham Power. Net cash
provided (used) by financing activities was $1,757,672 for the six
months ended June 30, 1998, compared to $(862,358). During the six
months ended June 30, 1998, the Company borrowed $1,750,000 from the
bank in connection with the acquisition of Gresham Power.
As previously reported, a large OEM customer canceled a contract in
late 1997. This customer was billed cancellation charges for the
cost of unique materials and assemblies. After negotiations between
the Company and OEM, the Company and the OEM agreed to an amount of
cancellation charges. These cancellation charges were recorded and
paid in July and will have a positive impact on operating income in
the third quarter although the exact amount of the impact cannot be
determined at this time.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year.
Any of the Company's, or its suppliers' and customers' computer
programs that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could
result in system failures or miscalculations causing disruptions of
operations including, among other things, a temporary inability to
process transactions, send invoices, or engage in similar normal
business activities.
The Company has recently acquired new software and has been informed
by its suppliers that such software used by the Company is Year 2000
compliant. The software from these suppliers is used in major areas
of the Company's operations such as for financial, sales,
warehousing and administrative purposes. The Company has no
internally generated software. In connection with the acquisition
of Gresham Power, the Company has determined that Gresham Power's
existing software will not be Year 2000 compliant, and intends to
acquire new software to address the Year 2000 Issue. Other than
Gresham Power, and after reasonable investigation, the Company has
not yet identified any other Year 2000 problem but will continue to
monitor the issue. However, there can be no assurances that the
Year 2000 problem will not occur with respect to the Company's
computer systems.
Neither the Company nor its subsidiaries has initiated formal
communications with significant suppliers and large customers to
determine the extent to which those third parties' failure to remedy
their own Year 2000 Issues would materially effect the Company and
its subsidiaries. The Company has not received any indication from
its suppliers and large customers that the Year 2000 Issue may
materially effect their ability to conduct business and the Company
has no current plans to formally undertake such an assessment.
<PAGE>10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDS
As previously reported on Form 10-QSB for the quarter ended March
31, 1998, the Company is involved in certain litigation. No new
material developments occurred during the quarter ended June 30,
1998.
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 20, 1998, the Company held its annual meeting of shareholders
for the election of directors and to approve an amendment to
increase the number of shares of Common Stock subject to the 1996
stock option plan as follows:
ELECTION OF DIRECTOR FOR VOTES WITHHELD
Robert J. Boschert 1,282,658 154,739
Scott C. MacDonald 1,283,581 153,816
Thomas W. O'Neil, Jr. 1,282,658 154,739
Chris Schofield 1,282,658 154,739
Robert O. Smith 1,282,658 154,739
FOR AGAINST ABSTAIN
Approval to amendment to increase the
number of shares subject to the 1996 1,226,959 191,455 12,133
stock option plan
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
27.1 Financial Data Schedule
<PAGE>11
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 14, 1998 ROBERT O. SMITH
------------------------------
Robert O. Smith
Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 1998 PHILIP G. SWANY
------------------------------
Philip G. Swany
Chief Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
10-QSB FOR THE PERIOD ENDED JUNE 30, 1998 FOR DIGITAL POWER CORPORATION
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 149,207
<SECURITIES> 0
<RECEIVABLES> 3,842,494
<ALLOWANCES> (200,000)
<INVENTORY> 6,676,864
<CURRENT-ASSETS> 11,692,000
<PP&E> 2,368,000
<DEPRECIATION> (1,068,784)
<TOTAL-ASSETS> 14,121,514
<CURRENT-LIABILITIES> 5,698,618
<BONDS> 0
0
0
<COMMON> 8,918,323
<OTHER-SE> (719,921)
<TOTAL-LIABILITY-AND-EQUITY> 14,121,514
<SALES> 9,630,361
<TOTAL-REVENUES> 9,630,361
<CGS> 7,070,504
<TOTAL-COSTS> 7,070,504
<OTHER-EXPENSES> 1,950,061
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (115,075)
<INCOME-PRETAX> 481,750
<INCOME-TAX> 182,900
<INCOME-CONTINUING> 298,850
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 298,850
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.09
</TABLE>
