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 September 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)
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 |_|
Number of shares of common stock outstanding as of September 30, 2000: 3,255,570
<PAGE>2
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
(unaudited)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash $ 1,249,851
Accounts receivable - trade, net of allowance for doubtful accounts of $210,444 3,458,544
Income tax refund receivable 19,556
Other receivables 145,562
Inventory, net 5,088,500
Prepaid expenses and deposits 279,572
Deferred income taxes 311,220
------------
Total current assets 10,552,805
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,651,810 1,120,617
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED
net of amortization of $432,428 964,112
DEPOSITS 16,956
------------
TOTAL ASSETS $ 12,654,490
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 940,000
Current portion of capital lease obligations 47,318
Accounts payable 1,791,262
Accrued liabilities 1,339,923
-------------
Total current liabilities 4,118,503
CAPITAL LEASE OBLIGATIONS, less current position 70,978
DEFERRED INCOME TAXES 9,344
-------------
Total liabilities 4,198,825
-------------
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;
3,255,570 shares issued and outstanding 9,766,622
Additional paid-in capital 430,194
Accumulated deficit (1,611,062)
Accumulated other comprehensive income (130,089)
-------------
Total stockholders' equity 8,455,665
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,654,490
=============
See accompanying notes to these condensed consolidated financial statements.
</TABLE>
<PAGE>3
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<S> <C> <C> <C> <C>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
REVENUES $ 5,118,412 $ 4,424,676 $ 13,644,120 $ 11,974,087
COST OF GOODS SOLD 3,686,061 3,246,669 9,702,442 9,009,935
------------- ------------- ------------- -------------
Gross Margin 1,432,351 1,178,007 3,941,678 2,964,152
------------- ------------- ------------- -------------
OPERATING EXPENSES
Engineering and product development 318,300 329,189 868,212 760,471
Marketing and selling 360,908 296,269 1,064,550 894,253
General and administrative 536,256 355,826 1,509,943 1,071,300
------------- ------------- ------------- -------------
Total operating expenses 1,215,464 981,284 3,442,705 2,726,024
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 216,887 196,723 498,973 238,128
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSES):
Interest income 468 5,132 9,928 12,640
Interest expense (24,475) (41,474) (75,259) (140,362)
Translation (loss) gain 311 (2,958) (4,646) (9,218)
Gain (loss) on disposal of assets 6,111 -- 7,679 --
------------- ------------- ------------- -------------
Other income (expense) (17,585) (39,300) (62,298) (136,940)
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 199,302 157,423 436,675 101,188
PROVISION FOR INCOME TAXES 85,400 60,100 215,400 98,900
------------- ------------- ------------- -------------
NET INCOME 113,902 97,323 221,275 2,288
------------- ------------- ------------- -------------
Other comprehensive income (loss):
Foreign currency translation adjustment (83,921) 159,172 (322,844) (10,505)
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME (LOSS) $ 29,981 $ 256,495 $ (101,569) $ (8,217)
============= ============= ============= =============
NET INCOME PER SHARE
BASIC $ 0.04 $ 0.04 $ 0.08 $ *
============= ============= ============= =============
DILUTED $ 0.03 $ 0.03 $ 0.06 $ *
============= ============= ============= =============
* Less than $0.01
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
<PAGE>4
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<S> <C> <C>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
------------ ------------
Cash Flows from Operating Activities:
Net income $ 221,275 $ 2,288
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 411,374 358,381
Gain on disposal of asset (7,679) --
Contribution to ESOP -- 117,113
Foreign currency translation adjustment 4,646 9,218
Inventory reserve 21,173 --
Warranty reserve 1,516 --
Income tax benefit from exercise of stock options 151,084 --
Changes in operating assets and liabilities:
Accounts receivable (645,464) 24,851
Other receivables (45,687) 24,924
Income tax refund receivable 51,432 217,189
Inventory (578,412) 650,110
Prepaid expenses (218,246) (35,836)
Deposits (2,898) 26,319
Accounts payable 595,092 280,820
Accrued liabilities 173,681 (444,922)
Other long-term liabilities (25,000) (10,043)
------------ ------------
Net cash provided by operating activities 107,887 1,220,412
------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment (76,291) (123,893)
Proceeds from sale of asset 16,709 --
------------ ------------
Net cash used in investing activities (59,582) (123,893)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from exercise of stock options 753,932 --
Payments on long-term debt -- (117,114)
Payments on capital lease obligations (49,616) (32,466)
Principal payments on notes payable
Net cash provided by (used in) financing activities -- (1,266,846)
------------ ------------
704,316 (1,416,426)
------------ ------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (327,478) (19,723)
------------ ------------
Net decrease in cash and cash equivalents 425,143 (339,630)
Cash and cash equivalents, beginning of period 824,708 867,607
------------ ------------
Cash and cash equivalents, end of period $ 1,249,851 $ 527,977
============ ============
</TABLE>
See accompanying notes to these condensed consolidated financial statements
<PAGE>5
DIGITAL POWER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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
September 30, 2000, the results of operations for the three month and nine month
periods ended September 30, 2000 and 1999, and cash flows for the nine months
ended September 30, 2000 and 1999. The results for the period ended September
30, 2000, are not necessarily indicative of the results to be expected for the
entire fiscal year ending December 31, 2000.
<PAGE>6
NOTE 2 - EARNINGS PER SHARE
The following represents the calculation of earnings per share:
<TABLE>
<S> <C> <C> <C> <C>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ --------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
BASIC
Net income $ 113,902 $ 97,323 $ 221,275 $ 2,288
Weighted average number of common shares 2,904,480 2,771,435 2,831,461 2,771,435
----------- ----------- ----------- -----------
Basic earnings per share $ 0.04 $ 0.04 $ 0.08 $ *
=========== =========== =========== ===========
DILUTED
Net income $ 113,902 $ 97,323 $ 221,275 $ 2,288
----------- ----------- ----------- -----------
Weighted average number of common shares 2,904,480 2,771,435 2,831,461 2,771,435
Common stock equivalent shares representing
shares issuable upon exercise of stock
options 845,767 64,981 636,743 65,226
Common stock equivalent shares representing
shares issuable upon exercise of warrants 32,272 -- -- --
----------- ----------- ----------- -----------
Weighted average number of shares used in
calculation of diluted income per share 3,782,519 2,836,416 3,468,204 2,836,661
----------- ----------- ----------- -----------
Diluted earnings per share $ 0.03 $ 0.03 $ 0.06 $ *
=========== =========== =========== ===========
* Less than
$0.01
</TABLE>
<PAGE>7
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:
<TABLE>
<S> <C> <C> <C> <C> <C>
For the Three Months Ended September 30, 2000
DPC PD DPL Eliminations Totals
---------- ------------- ------------- --------------- ----------
Revenues $3,605,830 $ 12 $ 1,512,570 $ -- $5,118,412
========== ============= ============= =============== ==========
Intersegment
Revenues $ 114,560 $ 663,862 $ -- $ (778,422) $ --
========== ============= ============= =============== ==========
Interest
Income $ 30,520 $ 327 $ (1,666) $ (28,713) $ 468
========== ============= ============= =============== ==========
Interest
Expense $ 24,372 $ 234 $ 28,582 $ (28,713) $ 24,475
========== ============= ============= =============== ==========
Income Tax
Expense $ 70,000 $ -- $ 15,400 $ -- $ 85,400
========== ============= ============= =============== ==========
Income
(loss) $ 162,753 $ (57,650) $ 8,799 $ -- $ 113,902
========== ============= ============= =============== ==========
For the Three Months Ended September 30, 1999
DPC PD DPL Eliminations Totals
------------- -------------- ------------- --------------- ----------
Revenues $ 2,570,215 $ 9,888 $ 1,844,573 $ -- $4,424,676
============= ============== ============= =============== ==========
Intersegment
Revenues $ 68,109 $ 544,757 $ -- $ (612,866) $ --
============= ============== ============= =============== ==========
Interest
Income $ 32,892 $ 953 $ -- $ (28,713) $ 5,132
============= ============== ============= =============== ==========
Interest
Expense $ 32,662 $ 2,277 $ 35,248 $ (28,713) $ 41,474
============= ============== ============= =============== ==========
Income Tax
Expense $ -- $ -- $ 60,100 $ -- $ 60,100
============= ============== ============= =============== ==========
Income
(loss) $ 14,324 $ (18,155) $ 101,154 $ -- $ 97,323
============= ============== ============= =============== ==========
</TABLE>
<PAGE>8
<TABLE>
<S> <C> <C> <C> <C> <C>
For the Nine Months Ended September 30, 2000
DPC PD DPL Eliminations Totals
------------ -------------- -------------- -------------- -----------
Revenues $ 9,378,402 $ 10,016 $ 4,255,702 $ -- $13,644,120
============ ============== ============== ============== ===========
Intersegment
Revenues $ 380,952 $ 1,805,742 $ -- $ (2,186,694) $ --
============ ============== ============== ============== ===========
Interest
Income $ 89,443 $ 1,390 $ 4,608 $ (85,513) $ 9,928
============ ============== ============== ============== ===========
Interest
Expense $ 67,626 $ 1,490 $ 91,656 $ (85,513) $ 75,259
============ ============== ============== ============== ===========
Income Tax
Expense $ 200,000 $ -- $ 15,400 $ -- $ 215,400
============ ============== ============== ============== ===========
Income
(loss) $ 354,749 $ (54,105) $ (79,369) $ -- $ 221,275
============ ============== ============== ============== ===========
For the Nine Months Ended September 30, 1999
DPC PD DPL Eliminations Totals
-------------- --------------- ------------- -------------- -----------
Revenues $ 7,003,497 $ 19,540 $ 4,951,050 $ -- $11,974,087
============== =============== ============= ============== ===========
Intersegment
Revenues $ 169,019 $ 1,585,206 $ -- $ (1,754,225) $ --
============== =============== ============= ============== ===========
Interest
Income $ 95,289 $ 2,552 $ -- $ (85,201) $ 12,640
============== =============== ============= ============== ===========
Interest
Expense $ 100,841 $ 5,466 $ 119,256 $ (85,201) $ 140,362
============== =============== ============= ============== ===========
Income Tax
Expense $ -- $ -- $ 98,900 $ -- $ 98,900
============== =============== ============= ============== ===========
Income
(loss) $ (80,845) $ (34,379) $ 117,512 $ -- $ 2,288
============== =============== ============= ============== ===========
</TABLE>
<PAGE>9
NOTE 4 - INCOME TAXES
Income tax expense is comprised of the following
<TABLE>
<S> <C> <C> <C> <C>
For The Three Months Ending For The Nine Months Ending
September 30, September 30,
---------------------------------- ---------------------------
2000 1999 2000 1999
-------------- --------- ---------- ------------
Federal $ 53,000 $ -- $ 155,000 $ --
State 17,000 -- 45,000 --
Foreign 15,400 60,100 15,400 98,900
-------------- --------- ---------- ------------
Total $ 85,400 $ 60,100 $ 215,400 $ 98,900
============== ========= ========== ============
</TABLE>
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 NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000, COMPARED TO SEPTEMBER 30,
1999
REVENUES
Revenues increased by 15.7% to $5,118,412 for the three months ended September
30, 2000, from $4,424,676 for the three months ended September 30, 1999.
Revenues from the Company's United Kingdom's operations of Digital Power Ltd.
decreased 18.0% to $1,512,570 for the three months ended September 30, 2000,
from $1,844,573 for the three months ended September 30, 1999. Revenues
attributed to the United States operations increased by 40.5% from the same
quarter during the prior year due primarily to increases in units shipped to
five large United States OEM customers. The decrease in UK 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 nine months ended September 30, 2000, revenues increased by 14.0% to
$13,644,120 from $11,974,087 for the nine months ended September 30, 1999. The
increase in revenues during the nine months ended September 30, 2000, can be
attributed primarily to significant increases in units shipped to five large
<PAGE>10
United States OEM customers. For the nine months ended September 30, 2000,
Digital Power Ltd. contributed $4,255,702 to the Company's revenues compared to
$4,951,050 for the nine months ended September 30, 1999.
GROSS MARGINS
Gross margins were 28.0% for the three months ended September 30, 2000, compared
to 26.6% for the three months ended September 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 28.9% for the nine months ended September 30, 2000, compared
to 24.8% for the nine months ended September 30, 1999. The increase in gross
margins can primarily be attributed to increased business and manufacturing in
China, as noted above.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were 17.5% of revenues for the
three months ended September 30, 2000, compared to 14.7% for the three months
ended September 30, 1999. Selling, general and administrative expenses were
18.9% of revenues for the nine months ended September 30, 2000, compared to
16.4% for the nine months ended September 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 September 30, 2000, and 7.4% for the three months ended September
30, 1999. Engineering and product development expenses were 6.4% of revenues for
the nine months ended September 30, 2000, compared to 6.4% for the nine months
ended September 30, 1999. While actual dollars spent on engineering for the
three months ended September 30, 2000 and 1999 remained flat, increased revenues
for the three months ended September 30, 2000 caused engineering and product
development expenses, as a percentage of revenues, to decrease. For the nine
months ended September 30, 2000, 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 $24,007 for the three months ended
September 30, 2000, compared to $36,342 for the three months ended September 30,
1999. Interest expense, net of interest income, was $65,331 for the nine months
ended September 30, 2000, compared to $127,722 for the nine months ended
September 30, 1999. The decrease in interest expense is related primarily to
payments made to reduce notes payable.
<PAGE>11
INCOME BEFORE INCOME TAXES
For the three months ended September 30, 2000, the Company had an income before
income taxes of $199,302 compared to income before income taxes of $157,423 for
the three months ended September 30, 1999. For the nine months ended September
30, 2000, the Company had income before income taxes of $436,675 compared to
income of $101,188 for the nine months ended September 30, 1999.
INCOME TAX
The provision for income tax increased from $60,100 for the three months ended
September 30, 1999, to $85,400 for the three months ended September 30, 2000,
and increased from $98,900 for the nine months ended September 30, 1999, to
$215,400 for the nine months ended September 30, 2000. The decrease in the
effective tax rate for the nine months ended September 30, 2000, reflects an
increased 1999 taxable income from the UK operations without a corresponding
benefit from losses generated in the US operations, resulting in an unusually
high effective tax rate for 1999.
NET INCOME
Net income for the three months ended September 30, 2000, was $113,902 compared
to $97,323 for the three months ended September 30, 1999. Net income for the
nine months ended September 30, 2000, was $221,275, compared to $2,288 for the
nine months ended September 30, 1999. The increase in net income for the three
month period was due to the reduction in operating and other expenses
implemented to bring costs in line with revenue levels, while the increase in
net income for the nine month period is related to increased revenues for the
nine month period, primarily related to the Company's United States operations.
We do not believe that our business is seasonal. In the event inflation
increases, this may have a negative effect on our sales or gross margin since we
may be required to increase the cost of our products.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2000, the Company had cash of $1,249,851 and working capital of
$6,434,302. This compares with cash of $527,977 and working capital of
$5,274,473 at September 30, 1999. The increase in working capital was due to an
increase in inventory, other receivables and prepaid expenses and a decrease in
the current portion of long term debt, offset by a decrease in accounts
receivable and income tax refund receivable and increase in accounts payable and
accrued liabilities, resulting in an increase in cash and cash equivalents. Cash
provided by operating activities for the Company totaled $107,887 and $1,220,412
for the nine months ended September 30, 2000 and 1999.
Cash used in investing activities was $59,582 for the nine months ended
September 30, 2000, compared to $123,893 for the nine months ended September 30,
1999. Net cash provided by (used in) financing activities was $704,316 for the
nine months ended September 30, 2000, compared to ($1,416,426). The cash
provided by financing activities in 2000 was primarily proceeds from the
exercise of stock options. Cash used in financing activities in 1999 was
primarily the payments on outstanding borrowings.
<PAGE>12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDS
None.
ITEM 2. CHANGES IN SECURITIES
(c) On October 25, 2000, we issued 5,000 shares of common stock and warrants to
purchase 60,000 shares of common stock at $3.88 per share to C.C.R.I. and
Donner Corp. International for investment relation services. The Company
believes that C.C.R.I. and Donner Corp. International are sophisticated
investors and the issuances were exempt from registration under Section
4(2) of the 1933 Act. No commissions were paid. 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
27.1 Financial Data Schedule
<PAGE>13
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: November 15, 2000 /s/ ROBERT O. SMITH
------------------------------
Robert O. Smith
Chief Executive Officer
(Principal Executive Officer)
Date: November 15, 2000 /s/ PHILIP G. SWANY
-----------------------------
Philip G. Swany
Chief Financial Officer
(Principal Financial Officer)
