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,
2004
[ ] 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 August 10, 2004: 6,136,859
ITEM 1. FINANCIAL STATEMENTS
DIGITAL POWER CORPORATION
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
IN U.S. DOLLARS
UNAUDITED
INDEX
Page
----------------
Consolidated Balance Sheet 3 - 4
Consolidated Statements of Operations 5
Statements of Changes in Shareholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8 - 13
- - - - - - - -
DIGITAL POWER CORPORATION
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
U.S. dollars in thousands
June 30,
2004
----------------
Unaudited
----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,124
Restricted cash 296
Trade receivables, net of allowance for doubtful
accounts of $ 62 at June 30, 2004 1,491
Prepaid expenses and other current assets 257
Inventories 1,643
----------------
Total current assets 4,811
-----
----------------
LONG-TERM LEASE DEPOSITS 18
----------------
PROPERTY AND EQUIPMENT, NET 284
----------------
Total assets $ 5,113
-----
================
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
June 30,
2004
----------------
Unaudited
----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,207
Other current liabilities 865
----------------
Total current liabilities 2,072
-----
----------------
SHAREHOLDERS' EQUITY:
Series A redeemable, convertible preferred shares no par value: 500,000 shares authorized, 0 shares
issued and outstanding at June 30, 2004 -
Preferred shares, no par value: 1,500,000 shares authorized, 0 shares issued and outstanding at June
30, 2004 -
Common shares, no par value: 10,000,000 shares authorized; 5,931,941 shares issued and outstanding
at June 30, 2004 11,036
Additional paid-in capital 1,962
Deferred stock compensation (16)
Accumulated deficit (9,948)
Accumulated other comprehensive income 7
----------------
Total shareholders' equity 3,041
-----
----------------
----------------
Total liabilities and shareholders' equity $ 5,113
-----
================
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
Six months ended Three months ended
June 30, June 30,
------------------------------ --------------------------------
2004 2003 2004 2003
--------------- -------------- --------------- ---------------
Unaudited Unaudited
------------------------------ --------------------------------
Revenues $ 3,968 $ 3,729 $ 2,139 $ 1,596
Cost of revenues 3,004 2,704 1,611 1,166
--------------- -------------- --------------- ---------------
Gross profit 964 1,025 528 430
--------------- -------------- --------------- ---------------
Operating expenses:
Engineering and product development 292 273 155 128
Selling and marketing 622 518 319 259
General and administrative 555 647 275 337
--------------- -------------- --------------- ---------------
Total operating expenses 1,469 1,438 749 724
-----
--------------- -------------- --------------- ---------------
Operating loss (505) (413) (221) (294)
Financial income (expenses), net 2 7 (30) 11
--------------- -------------- --------------- ---------------
Loss before income taxes (503) (406) (251) (283)
Income taxes - (26) - (18)
--------------- -------------- --------------- ---------------
Net loss $ (503) $ (380) $ (251) $ (265)
=============== ============== =============== ===============
Basic and diluted net loss per share $ (0.09) $ (0.08) $ (0.04) $ (0.05)
=============== ============== =============== ===============
Weighted average number of shares used in computing basic
and diluted loss per share 5,692,013 4,960,680 5,718,674 5,410,680
=============== ============== =============== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
DIGITAL POWER CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
Additional
Common shares Additional Deferred paid-in other Total other Total
------------------ paid-in stock Accumulated comprehensive comprehensive shareholders'
Number Amount capital compensation deficit income (loss) loss equity
--------- ------- ---------- ------------ ----------- ------------- -------------- -------------
Balance as of
January 1, 2004 5,410,680 $11,036 $ 1,437 $ - $ (9,445) $ (6) $ 3,022
Issuance of Common
shares, net 511,261 - 493 - - - 493
Deferred stock
compensation related
to options granted to
an employee - - 25 (25) - - -
Amortization of
deferred stock
compensation related
to options granted to
an employee - - - 9 - - 9
Exercise of options 10,000 - 7 - - - 7
Comprehensive loss:
Net loss - - - - (503) - $ (503) (503)
Foreign currency
translation
adjustments - - - - - 13 13 13
--------- ------- ---------- ------------ ----------- ------------- ------------- -----------
Total other
comprehensive loss $ (490)
=============
Balance as of
June 30, 2004 (Unaudited) 5,931,941 $11,036 $ 1,962 $ (16) $ (9,948) $ 7 $3,041
========= ======= ========== ============ =========== ============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
DIGITAL POWER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------------------------------------------
U.S. dollars in thousands
Six months ended Three months ended
June 30, June 30,
------------------------------ --------------------------------
2004 2003 2004 2003
--------------- -------------- --------------- ---------------
Unaudited Unaudited
------------------------------ --------------------------------
Cash flows from operating activities:
Net loss $ (503) $ (380) $ (251) $ (265)
Adjustments required to reconcile net loss to net cash
used in operating activities:
Depreciation 50 71 25 34
Compensation related to options granted to an employee 9 - 3 -
Decrease in deferred income taxes - 342 - -
Decrease in trade receivables 139 632 18 428
Decrease (increase) in prepaid expenses and other
current assets (121) 9 (16) 23
Decrease (increase) in inventories 55 (152) 27 (155)
Increase (decrease) in accounts payable 130 (344) 320 (166)
Decrease in other current liabilities (176) (350) (409) (137)
--------------- -------------- --------------- ---------------
Net cash used in operating activities (417) (172) (283) (238)
--------------- -------------- --------------- ---------------
Cash flows from investing activities:
Restricted short-term bank deposit - 600 - 600
Purchase of property and equipment (12) (42) (8) (23)
Proceeds from long-term loan - 13 - 7
--------------- -------------- --------------- ---------------
Net cash provided by (used in) investing activities (12) 571 (8) 584
--------------- -------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from short-term bank credit - 40 - -
Proceeds from issuance of Common shares - 600 - 600
Proceeds from long-term loan from a bank - 12 - 12
Payments made on short-term bank credit - (290) - (290)
Principal payments on capital lease obligations - (27) - (17)
Issuance of shares pursuant to an investment by Telkoor
Telecom Ltd. 493 - 247 -
Exercise of options granted to an employee 7 - 7 -
--------------- -------------- --------------- ---------------
Net cash provided by financing activities 500 335 254 305
--------------- -------------- --------------- ---------------
Effect of exchange rate changes on cash and cash
equivalents 3 7 (3) 22
--------------- -------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents 74 741 (40) 673
Cash and cash equivalents at the beginning of the period 1,050 616 1,164 684
--------------- -------------- --------------- ---------------
Cash and cash equivalents at the end of the period $ 1,124 $ 1,357 $ 1,124 $ 1,357
=============== ============== =============== ===============
Supplemental disclosure of cash flows activities:
Cash paid during the period for interest $ - $ 8 $ - $ 3
=============== ============== =============== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
U.S. dollars in thousands
NOTE 1:- GENERAL
Digital Power Corporation ("the Company" or "DPC") was
incorporated in 1969, under the General Corporation Law of the
state of California. The Company has a wholly-owned subsidiary,
Digital Power Limited ("DPL"), located in the United Kingdom. The
Company and its subsidiary are currently engaged in the design,
manufacture and sale of switching power supplies and converters.
The Company has two reportable geographic segments - North
America (sales through DPC) and Europe (sales through DPL).
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
a. The significant accounting policies applied in the annual
financial statements of the Company as of December 31, 2003,
are applied consistently in these financial statements. In
addition, the following accounting policy is applied:
The accompanying unaudited consolidated financial statements
as of June 30, 2004 and for the six months ended June 30,
2004 and 2003 are unaudiated and reflect all adjustments
(consisting only of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair
presentation of the financial position and operating results
for the interim periods. The condensed consolidated
financial statements should be read in conjunction with the
consolidated financial statements and notes thereto,
together with management's discussion and analysis of the
financial condition and results of operations, contained in
the Company Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2003. The results of operations for the
six months ended June 30, 2004 are not necessarily
indicative of the results for the entire fiscal year ending
December 31, 2004.
b. Accounting for stock-based compensation:
The Company and its subsidiary has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25") in accounting for
its employee stock option plans. Under APB No. 25, when the
exercise price of the Company's share options is less than
the market price of the underlying shares on the date of
grant, compensation expense is recognized.
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The Company and its subsidiary apply Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), and Emerging Issues Task
Force No. 96-18, "Accounting for Equity Instruments that are
Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services" ("EITF 96-18"),
with respect to options issued to non-employees SFAS No. 123
requires use of an option valuation model to measure the
fair value of the options at the grant date.
Under SFAS No. 123, proforma information regarding net loss
and loss per share is required and has been determined as if
the Company had accounted for its employee options under the
fair value method of that statement. The fair value for
these options was estimated at the date of grant using a
Black-Scholes Option Valuation Model, with the following
weighted-average assumptions for June 30, 2004 and 2003,
expected volatility of 113% and 46%, respectively, risk-free
interest rates of 4.7% and 1.5%, respectively, dividend
yield of 0% for each period, and a weighted-average expected
life of the option of 4 years for each period. Stock
compensation, for pro-forma purposes, is amortized over the
vesting period.
The following table illustrates the effect on net loss and
loss per share as if the fair value method had been applied
to all outstanding and unvested awards in each period:
Six months ended
June 30,
--------------------------------
2004 2003
-------------- --------------
Unaudited
--------------------------------
Net loss available to Ordinary shares - as reported $ (503) $ (380)
Deduct - stock-based employee compensation - intrinsic value 9 -
Add - stock-based employee compensation -fair value (115) (31)
-------------- --------------
Pro forma net loss $ (609) (411)
============== ==============
Loss per share:
Basic and diluted net loss, as reported $ (0.09) $ (0.08)
============== ==============
Pro forma basic and diluted net loss $ (0.11) $ (0.08)
============== ==============
U.S. dollars in thousands
NOTE 3:- SHARE CAPITAL
a. On January 12, 2004, the Company entered into an agreement
to sell 290,023 shares of Common Stock to Telkoor Telecom
Ltd. in consideration of $ 246, net of issuance expenses.
b. On June 16, 2004, the Company entered into an agreement to
sell 221,238 shares of Common stock to Telkoor Ltd., in
consideration of $ 247, net of issuance expenses.
Additionally, under the abovementioned agreement, Telkoor
may purchase additional shares of Common stock for an
aggregate consideration of $ 250, prior to or on December
31, 2004, as determined in the agreement.
NOTE 4:- LEGAL PROCEEDINGS
On April 2, 2003, a claim was filed against the Company by
Tek-Tron Enterprises Inc. ("Tek-Tron") in the state court of
Pennsylvania, specifically, the Court of Common Pleas of Bucks
County, at Case No. 0302116-24-1. Tek-Tron was seeking damages of
approximately $ 300. This case is a complaint for breach of
contract and conversion of parts and infrastructure owned by
Tek-Tron located in the Company's former subsidiary, Poder
Digital S.A.'s, Mexico manufacturing plant.
In April 2004, the Company signed a settlement agreement with
Tek-Tron according to which the Company agreed to pay a total of
$ 90 in two installments. As of June 30, 2004, the Company paid $
75. Under the settlement agreement, Tek-Tron shall have the right
to receive the inventory from the Company and to compel
arbitration limited to the sum of $ 50, in case the parties do
not agree on a resolution regarding the inventory list. The
inventory list is currently disputed among the parties and no
resolution has been reached regarding the inventory list.
NOTE 5:- SEGMENTS, MAJOR CUSTOMERS AND GEOGRAPHICAL INFORMATION
The Company has two reportable geographic segments, see Note 1
for a brief description of the Company's business. The data is
presented in accordance with Statement of Financial Accounting
Standard No.131, "Disclosure About Segments of an Enterprise and
Related Information" ("SFAS No. 131").
The following data presents the revenues, expenditures and other
operating data of the Company's geographic operating segments:
Six months ended June 30, 2004 (Unaudited)
------------------------------------------------------------------------
DPC DPL Eliminations Total
---------------- --------------- --------------- ---------------
Revenues $ 1,855 $ 2,113 $ - $ 3,968
Intersegment revenues 417 - (417) -
---------------- --------------- --------------- ---------------
Total revenues $ 2,272 $ 2,113 $ (417) $ 3,968
================ =============== =============== ===============
Depreciation expense $ 15 $ 35 $ - $ 50
================ =============== =============== ===============
Operating loss $ (359) $ (146) $ - $ (505)
================ =============== =============== ===============
Financial income, net $ 2
===============
Net loss $ (353) $ (150) $ - $ (503)
================ =============== =============== ===============
Expenditures for segment assets as
of June 30, 2004 $ 8 $ 4 $ - $ 12
================ =============== =============== ===============
Identifiable assets as of
June 30, 2004 $ 2,072 $ 3,041 $ - $ 5,113
================ =============== =============== ===============
U.S. dollars in thousands
NOTE 5:- SEGMENTS CUSTOMERS AND GEOGRAPHICAL INFORMATION (Cont.)
Six months ended June 30, 2003 (Unaudited)
------------------------------------------------------------------------
DPC DPL Eliminations Total
--------------- --------------- --------------- ---------------
Revenues $ 1,863 $ 1,866 $ - $ 3,729
Intersegment revenues 410 - (410) -
--------------- --------------- --------------- ---------------
Total revenues $ 2,273 $ 1,866 $ (410) $ 3,729
=============== =============== =============== ===============
Depreciation expenses $ 17 $ 54 $ - $ 71
=============== =============== =============== ===============
Operating loss $ (265) $ (148) $ - $ (413)
=============== =============== =============== ===============
Financial expenses, net $ 7
===============
Loss before tax benefit $ (406)
===============
Tax benefit $ - $ 26 $ - $ 26
=============== =============== =============== ===============
Net loss $ (273) $ (107) $ - $ (380)
=============== =============== =============== ===============
Expenditures for segment assets
as of June 30, 2003 $ 12 $ 30 $ - $ 42
=============== =============== =============== ===============
Identifiable assets as of
June 30, 2003 $ 1,992 $ 2,851 $ - $ 4,843
=============== =============== =============== ===============
Three months ended June 30, 2004 (Unaudited)
------------------------------------------------------------------------
DPC DPL Eliminations Total
---------------- --------------- --------------- ---------------
Revenues $ 1,071 $ 1,068 $ - $ 2,139
Intersegment revenues 279 - (279) -
---------------- --------------- --------------- ---------------
Total revenues $ 1,350 $ 1,068 $ (279) $ 2,139
================ =============== =============== ===============
Depreciation expense $ 8 $ 17 $ - $ 25
================ =============== =============== ===============
Operating loss $ (126) $ (95) $ - $ (221)
================ =============== =============== ===============
Financial expenses, net $ (30)
===============
Net loss $ (116) $ (135) $ - $ (251)
================ =============== =============== ===============
Expenditures for segment assets as
of June 30, 2004 $ 8 $ - $ - $ 8
================ =============== =============== ===============
Identifiable assets as of
June 30, 2004 $ 2,072 $ 3,041 $ - $ 5,113
================ =============== =============== ===============
U.S. dollars in thousands
NOTE 5:- SEGMENTS CUSTOMERS AND GEOGRAPHICAL INFORMATION (Cont.)
Three months ended June 30, 2003 (Unaudited)
------------------------------------------------------------------------
DPC DPL Eliminations Total
---------------- --------------- --------------- ---------------
Revenues $ 869 $ 727 $ - $ 1,596
Intersegment revenues 207 - (207) -
---------------- --------------- --------------- ---------------
Total revenues $ 1,076 $ 727 $ (207) $ 1,596
================ =============== =============== ===============
Depreciation expenses $ 9 $ 25 $ - $ 34
================ =============== =============== ===============
Operating loss $ (155) $ (139) $ - $ (294)
================ =============== =============== ===============
Financial income, net $ 11
===============
Loss before tax benefit $ (283)
===============
Tax benefit $ - $ 18 $ - $ 18
================ =============== =============== ===============
Net loss $ (160) $ (105) $ - $ (265)
================ =============== =============== ===============
Expenditures for segment assets
for the three months ended June
30, 2003 $ 12 $ 2 $ - $ 14
================ =============== =============== ===============
Identifiable assets as of June 30,
2003 $ 1,992 $ 2,851 $ - $ 4,843
================ =============== =============== ===============
U.S. dollars in thousands
NOTE 6:- SUBSEQUENT EVENTS
In July 2004, the Company issued 204,918 shares of Common stock
to a new investor, in consideration of $250. Additionally, under
the agreement between the Company and the investor, the investor
may purchase additional shares of Common stock for an aggregate
consideration of $250 prior to or on December 31, 2004, as
determined in the agreement.
- - - - - - - - -
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, dependence on the electronic equipment industry,
competition in the power supply industry, dependence on manufacturers in Mexico,
China and other risks factors detailed in the Company's Form 10-KSB for the year
ended December 31, 2003. 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.
GENERAL
We are engaged in the business of designing, developing, manufacturing,
marketing and selling switching power supplies to telecommunications, data
communication , test and measurement equipment, office and factory automation
and instrumentation equipment manufacturers. Revenues are generated from sales
to distributors, OEMs in the telecommunication, data communication, test and
measurements equipment, office and factory automation and instrumentation
manufacturers' equipment in North America, Europe, and the United Kingdom.
We have continued our efforts to increase sales to existing and new customers,
and continue our strategy to manufacture our product in the Far East. Until
revenues increase to a sufficient amount to offset our expenses, we anticipate
that we will continue to experience net losses for the near future. We believe
that our cash will be sufficient to fund those losses.
In June 2004, we raised $247,000 through the sale of 221,238 shares of common
stock at $1.13 per share net of issuance expenses. In July 2004, we raised an
additional $250,000 through the sale of 204,918 shares of common stock at $1.22
per share. We intend to use the additional financing as working capital to
implement our business plan.
THREE AND SIX MONTHS ENDED JUNE 30, 2004, COMPARED TO JUNE 30, 2003
REVENUES
Total revenues increased by 34.0% to $2,139,000 for the three months ended June
30, 2004, from $1,596,000 for the three months ended June 30, 2003.
Revenues from the domestic operations of DPC increased 23.2% to $1,071,000 for
the second quarter ended June 30, 2004, from $869,000 for the second quarter
ended June 30, 2003. Revenues from the Company's European operations of DPL
increased 47.0% to $1,068,000 for the second quarter ended June 30, 2004, from
$727,000 for the second quarter ended June 30, 2003. The revenue increase in the
second quarter of 2004 is mainly due to increase in sales of our new products
and military products.
For the six months ended June 30, 2004, revenues increased by 6.4% to $3,968,000
from $3,729,000 for the six months ended June 30, 2003. Revenues attributed to
the domestic operations of DPC were $1,855,000 for the six months ended June 30,
2004, approximately at the same level of $1,863,000 for the same period last
year. Revenues from the Company's European operations of DPL increased 13.3% to
$2,113,000 for the six months ended June 31, 2004, from $1,866,000 for the six
months ended June 30, 2003. The increase in revenue from the Company's European
operations of DPL is mainly due to higher sales of our new products and military
products.
GROSS MARGINS
Gross margins were 24.7% for the three months ended June 30, 2004, compared to
26.9% for the three months ended June 30, 2003. The decrease in gross margins
can be primarily attributed to the shift in product mix. Gross margins were
24.3% for the six months ended June 30, 2004 compared to 27.5% for the six
months ended June 30, 2003. The decrease in gross margins can be primarily
attributed to the shifting in product mix.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were 7.2% of revenues for the three
months ended June 30, 2004, and 8.0% for the three months ended June 30, 2003.
In actual dollars, engineering and product development increased by $27,000.
Engineering and product development expenses were 7.4% of revenues for the six
months ended June 30, 2004, compared to 7.3% of revenues for the six months
ended June 30, 2003
SELLING AND MARKETING
Selling and marketing expenses were 14.9% of revenues for the three months ended
June 30, 2004, compared to 16.2% for the three months ended June 30, 2003. In
absolute dollars, the selling and marketing expenditures increased by $60,000
mainly due to increase in travel and advertising expenses as part of our efforts
to increase sales in the future. Selling and marketing expenses were 15.7% of
revenues for the six months ended June 30, 2004, compared to 13.9% for the six
months ended June 30, 2003. The increase in selling and marketing were primarily
due to new hires and increase in advertising and travel expenses.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were 12.9% of revenues for the three months
ended June 30, 2004, compared to 21.1% for the three months ended June 30, 2003.
In actual dollars, general and administrative expenditures decreased by $62,000
mainly due to reduction in executive compensation costs. General and
administrative expenses were 14.0% of revenues for the six months ended June 30,
2004, compared to 17.4% for the six months ended June 30, 2003. In actual
dollars, general and administrative expenses decreased by $92,000, primarily due
to reduction in executive compensation costs.
FINANCIAL INCOME
Financial expense net was $30,000 for the three months ended June 30, 2004,
compared to financial income net of $11,000 for the three months ended June 30,
2003. The financial expense resulted mainly from the exchange rate fluctuation.
Financial income was $2,000 for the six months ended June 30, 2004, compare to
$7,000 for the six months ended June 30, 2003.
LOSS BEFORE INCOME TAXES
For the three months ended June 30, 2004, the Company had a loss before income
taxes of $251,000 compared to a loss before income taxes of $283,000 for the
three months ended June 2003. The loss decrease is mainly due to the increase in
revenues. Loss before income taxes for the six months ended June 30, 2004
increased to $503,000 compared to $406,000 for the six months ended June 30,
2003. The loss increase is mainly due to the reduction in gross margin.
TAX BENEFIT
The tax benefit of $18,000 for the second quarter of 2003 was from the Company's
European operations of DPL.
NET LOSS
Net loss for the three months ended June 30, 2004, was $251,000 compared to net
loss of $265,000 for the three months ended June 30, 2003. Net loss for the six
months ended June 30, 2004 was $503,000, compared to a net loss of $380,000 for
the six months ended June 30, 2003. Net loss increased mainly due to lower gross
margin.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 2004, the Company had cash, cash equivalents $1,124,000 and working
capital of $2,739,000. This compares with cash and cash equivalents of
$1,357,000 and working capital of $3,128,000 at June 30, 2003. The decrease in
working capital is mainly due to operating losses offset partially by the
Telkoor Telecom Ltd.'s investments of $493,000 during the six months ended June
30, 2004.
Cash used in operating activities for the Company totaled $283,000 for the three
months ended June 30, 2004, compared to $238,000 for the three months ended June
30, 2003. Cash used in investing activities was $8,000 for the three months
ended June 30, 2004, compared to cash provided by investing activities of
$584,000 for the three months ended June 30, 2003. Net cash provided by
financing activities was $254,000 for the three months ended June 30, 2004,
compared to net cash provided by financing activities of $305,000 for the three
months ended June 30, 2003.
The Company has an available line of credit with Silicon Valley Bank ("SVB").
The Company can borrow up to $1,200,000 against eligible accounts receivable and
other financial covenants. The rate for this line of credit would be at Silicon
Valley Bank's prime rate plus 1.75%. In order to utilize the line of credit, the
Company is required to maintain certain ratios and be in compliance with other
covenants. As of June 30, 2004, the Company has not utilized its line of credit.
The Company's subsidiary has a $271,000 line of credit with Lloyds TSB Bank.
Borrowing under this line of credit bears interest of 1.75% per annum over the
bank's base rate. The Company's subsidiary has not utilized its line of credit.
Subsequent to the quarter end, we sold 204,918 shares of Common stock to
Fortron/Source Corp. for the aggregate consideration of $250,000. Under the
agreements with Telkoor Telecom in June 2004 and with Fortron/Source Corp. in
July 2004, Fortron/Source Corp. and Telkoor Telecom Ltd. may purchase additional
shares of Common stock for an aggregate consideration of $250,000 each prior to
or on December 31, 2004.
The Company believes it has adequate resources at this time to continue its
promotional efforts to increase sales in the electronic industry market.
However, if the Company does not meet those goals, it may have to raise money
through debts or equity, which may dilute shareholder's equity.
ITEM 3. CONTROLS AND PROCEDURES
The Company's management with the participation of the Company's principal
executive and financial officers evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined Rule 13a-15(e) of the Exchange
Act) as of the end of the period covered by this report. The Company's
disclosure controls and procedures are designed to ensure that information
required to be disclosed by the Company in the reports it files or submits under
the Exchange Act are recorded, processed, summarized and reported on a timely
basis. Based upon their evaluation, the Company's principal executive and
financial officers concluded that the Company's disclosure controls and
procedures are effective to accumulate and communicate to the Company's
management as appropriate to allow timely decisions regarding disclosure.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 2, 2003, a claim was filed against the Company by Tek-Tron Enterprises
Inc. in the state court of Pennsylvania, specifically, the Court of Common Pleas
of Bucks County, as Case No. 0302116-24-1. Tek-Tron Enterprises, Inc was seeking
damages of approximately $300,000. This case is a complaint for breaking of
contract and conversion of parts and infrastructure owned by Tek-Tron
Enterprises, Inc. located in the Company's former subsidiary, Poder Digital
S.A's, Mexico manufacturing plant.
In April 2004, the Company signed a settlement agreement with Tek-Tron according
to which the Company agreed to pay a total of $90,000 in installments and return
certain disputed property in exchange for a full release. As of June 30, 2004,
the Company paid $75,000 with an additional payment of $15,000 is due in
September 2004. Additionally, under the settlement agreement, Tek-Tron has the
ability to seek arbitration limited to the sum of $50,000 in case the parties do
not agree on a resolution regarding the returned property. Tek-Tron has notified
the Company it believes that the disputed property contains missing or damaged
items. The Company continues to work on reaching a resolution over the returned
property which is the Company's liability limited to a maximum of $50,000 under
the settlement agreement.
ITEM 2. CHANGES IN SECURITIES
On June 25, 2004, the Company sold 221,238 shares of common stock at $1.13 per
share to Telkoor Telecom Ltd. On July 8, 2004, the Company sold 204,918 shares
of common stock at $1.22 per share to Fortron/Source Corp. Under the terms of
the stock purchase agreement, the investors may invest an additional $250,000
each on or before December 31, 2004. The purchase price per share for the
additional investment is the average closing price of the Company's common stock
twenty (20) trading days prior to notice of intent to invest. There was no
broker or placement agent in this transaction.
The sales and issuance of common stock was made by us in reliance upon the
exemptions from registration provided under Section 4(2) and 4(6) of the
Securities Act of 1933, as amended, and Rule 506 of Regulation D, promulgated by
the SEC under federal securities laws and comparable exemptions for sales to
"accredited" investors under state securities laws. The offers and sales were
made to accredited investors as defined in Rule 501(a) under the Securities Act,
no general solicitation was made by us or any person acting on our behalf; the
securities sold were subject to transfer restrictions, and the certificates for
those shares contained an appropriate legend stating that they had not been
registered under the Securities Act and may not be offered or sold absent
registration or pursuant to an exemption there from.
The Company did not repurchase any of its shares during the quarter.
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
(a) Exhibits
31.1 Certification of the CEO under the Sarbanes-Oxley Act
31.2 Certification of the CFO under the Sarbanes-Oxley Act
32 Certification of the CEO & CFO under the Sarbanes-Oxley Act
(b) Reports on Form 8-K
The Company filed the following reports
Date of Report Date of Event Item reported
-------------- ------------- -------------
May 20, 2004 May 13, 2004 Financial Results for First Quarter
July 14, 2004 June 25, 2004 Investment by Telkoor Telkoor Ltd. and
Fortron/Source Corp.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DIGITAL POWER CORPORATION
(Registrant)
Date: 8/16/2004 /s/ Jonathan Wax
-----------------------------
Jonathan Wax
Chief Executive Officer
(Principal Executive Officer)
Date: 8/16/2004 /s/ Uzi Sasson
-----------------------------
Uzi Sasson
Chief Financial Officer
(Principal Financial Officer)