UNITED STATES
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, 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 November 10, 2004: 6,136,859
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGITAL POWER CORPORATION
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
IN U.S. DOLLARS
UNAUDITED
INDEX
Page
--------
Review Report of Unaudited Interim Consolidated Financial Statements 2
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 - 12
- - - - - - - - - -
DIGITAL POWER CORPORATION
CONSOLIDATED BALANCE SHEET
-------------------------------------------------------------------------------------------------------------------
U.S. dollars in thousands
September 30,
2004
-------------
Unaudited
-------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,249
Restricted cash 231
Trade receivables, net of allowance for doubtful accounts of $61 at September 30, 2004 1,631
Prepaid expenses and other current assets 201
Inventories 1,527
-------------
Total current assets 4,839
----- -------------
LONG-TERM LEASE DEPOSITS 18
-------------
PROPERTY AND EQUIPMENT, NET 256
-------------
Total assets $ 5,113
----- =============
The accompanying notes are an integral part of the consolidated financial
statements.
DIGITAL POWER CORPORATION
CONSOLIDATED BALANCE SHEET
---------------------------------------------------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
September 30,
2004
------------------
Unaudited
------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,300
Other current liabilities 754
------------------
Total current liabilities 2,054
----- ------------------
SHAREHOLDERS' EQUITY:
Series A redeemable, convertible Preferred shares, no par value: 500,000 shares authorized,
0 shares issued and outstanding at September 30, 2004 -
Preferred shares, no par value: 1,500,000 shares authorized, 0 shares issued and outstanding at
September 30, 2004 -
Common shares, no par value: 10,000,000 shares authorized; 6,136,859 shares issued and
outstanding at September 30, 2004 11,036
Additional paid-in capital 2,212
Deferred stock compensation (15)
Accumulated deficit (10,178)
Accumulated other comprehensive income 4
------------------
Total shareholders' equity 3,059
----- ------------------
Total liabilities and shareholders' equity $ 5,113
----- ==================
The accompanying notes are an integral part of the consolidated financial
statements.
DIGITAL POWER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------------------------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
Nine months ended Three months ended
September 30, September 30,
--------------------------------- ---------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Unaudited
---------------------------------------------------------------------
Revenues $ 6,158 $ 5,338 $ 2,190 $ 1,609
Cost of revenues 4,673 3,883 1,669 1,179
--------------- --------------- --------------- ---------------
Gross profit 1,485 1,455 521 430
--------------- --------------- --------------- ---------------
Operating expenses:
Engineering and product development 449 384 157 111
Selling and marketing 947 784 325 266
General and administrative 811 946 256 299
--------------------------------- --------------- ---------------
Total operating expenses 2,207 2,114 738 676
----- --------------- --------------- --------------- ---------------
Operating loss (722) (659) (217) (246)
Financial income (expenses), net (5) 12 (7) 5
Other expenses (6) - (6) -
--------------- --------------- --------------- ---------------
Loss before income taxes (733) (647) (230) (241)
Income taxes - (73) - (47)
--------------- --------------- --------------- ---------------
Net loss $ (733) $ (574) $ (230) $ (194)
=============== =============== =============== ===============
Basic and diluted net loss per share $ (0.13) $ (0.11) $ (0.04) $ (0.04)
=============== =============== =============== ===============
Weighted average number of shares used in
computing basic and diluted net loss per share 5,772,868 5,110,680 6,121,096 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 data
Accumulated
Common shares Additional Deferred 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 716,179 - 743 - - - 743
Deferred stock
compensation related
to options granted
to an employee - - 25 (25) - - -
Amortization of
deferred stock
compensation related
to options granted
to an employee - - - 10 - - 10
Exercise of options 10,000 - 7 - - - 7
Comprehensive loss:
Net loss - - - - (733) - $ (733) (733)
Foreign currency
translation
adjustments - - - - - 10 10 10
--------- -------- ---------- ------------- ----------- ------------- ------------- -------------
Total other
comprehensive loss $ (723)
=============
Balance as of
September 30, 2004
(unaudited) 6,136,859 $ 11,036 $ 2,212 $ (15) $ (10,178) $ 4 $ 3,059
========= ======== ========== ============= =========== ============= =============
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
Nine months ended Three months ended
September 30, September 30,
--------------------------------- ---------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Unaudited
---------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (733) $ (574) $ (230) $ (194)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 79 102 29 31
Loss on sale of property and equipment 6 - 6 -
Compensation related to options granted to
consultant and service providers - 758 - -
Compensation related to options granted to an
employee 10 - 1 -
Decrease (increase) in deferred income taxes - (37) - 246
Decrease (increase) in trade receivables (4) 588 (143) 126
Decrease (increase) in prepaid expenses and
other current assets (65) (182) 56 (46)
Decrease (increase) in inventories 168 - 113 (30)
Increase (decrease) in accounts payable 224 (457) 94 (113)
Decrease in other current liabilities (286) (415) (110) (65)
--------------- --------------- --------------- ---------------
Net cash used in operating activities (601) (217) (184) (45)
--------------- --------------- --------------- ---------------
Cash flows from investing activities:
Restricted short-term bank deposit 65 600 65 -
Purchase of property and equipment (22) (62) (10) (20)
Proceeds from sale of property and equipment 3 - 3 -
Proceeds from long-term loan - 19 - 6
--------------- --------------- --------------- ---------------
Net cash provided by (used in) investing activities 46 557 58 (14)
--------------- --------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from short-term bank credit - 40 - -
Proceeds from issuance of Common shares 743 600 250 -
Proceeds from long-term loan from a bank - 12 - -
Payments made on short term bank credit - (290) - -
Principal payments on capital lease obligations - (29) - (2)
Exercise of options granted to an employee 7 - - -
--------------- --------------- --------------- ---------------
Net cash provided by (used in) financing activities 750 333 250 (2)
--------------- --------------- --------------- ---------------
Effect of exchange rate changes on cash and cash
equivalents 4 13 1 6
--------------- --------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents 199 686 125 (55)
Cash and cash equivalents at beginning of period 1,050 616 1,124 1,357
--------------- --------------- --------------- ---------------
Cash and cash equivalents at end of period $ 1,249 $ 1,302 $ 1,249 $ 1,302
=============== =============== =============== ===============
Supplemental disclosure of cash flows activities:
Cash paid during the period for interest $ - $ 8 $ - $ -
=============== =============== =============== ===============
The accompanying notes are an integral part of the consolidated financial
statements
DIGITAL POWER CORPORATION
NOTES TO 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 September 30, 2004 and for the nine months and three months
ended September 30, 2004 and 2003 are unaudited 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 nine months ended September 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 have elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25") in accounting for their 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.
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 the use of
an option valuation model to measure the fair value of the
options at the date of grant.
DIGITAL POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Under SFAS No. 123, pro forma 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 September 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:
Nine months ended
September 30,
--------------------------------
2004 2003
-------------- --------------
Unaudited
--------------------------------
Net loss available to Ordinary shares - as reported $ (733) $ (574)
Deduct - stock-based employee compensation - intrinsic
value 10 -
Add - stock-based employee compensation -fair value (143) (48)
-------------- --------------
Pro forma net loss $ (866) (622)
============== ==============
Loss per share:
Basic and diluted net loss, as reported $ (0.13) $ (0.11)
============== ==============
Pro forma basic and diluted net loss $ (0.15) $ (0.12)
============== ==============
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.
("Telkoor"), 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, 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.
c. On June 29, 2004, the Company entered into an agreement to sell
204,918 shares of Common stock to a new investor, in
consideration of $ 250, of which the closing took place in July
2004. Additionally, under the abovementioned agreement, the new
investor may purchase additional shares of Common stock for an
aggregate consideration of $ 250, prior to or on December 31,
2004.
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
installments. As of September 2004, the Company paid the full $90.
Additionally, under the settlement agreement, Tek-Tron has the
abilitiy to seek arbitration limited to the sum of $50 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 for which the
Company has a maximum liability of $50 under the settlement agreement.
Company's management and its legal advisor are unable to assess the
outcome of such arbitration proceeding.
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:
Nine months ended September 30, 2004 (unaudited)
-----------------------------------------------------------------
DPC DPL Eliminations Total
------------- ------------- ---------------- -------------
Revenues $ 2,874 $ 3,284 $ - $ 6,158
Intersegment revenues 613 - (613) -
------------- ------------- ---------------- -------------
Total revenues $ 3,487 $ 3,284 $ (613) $ 6,158
============= ============= ================ =============
Depreciation expenses $ 23 $ 56 $ - $ 79
============= ============= ================ =============
Operating loss $ (452) $ (270) $ - $ (722)
============= ============= ================ =============
Financial expenses, net $ (5)
=============
Other expenses $ (6)
=============
Net loss $ (450) $ (283) $ - $ (733)
============= ============= ================ =============
Expenditures for segment assets at
September 30, 2004 $ 15 $ 7 $ - $ 22
============= ============= ================ =============
Identifiable assets at September 30,
2004 $ 2,040 $ 3,073 $ - $ 5,113
============= ============= ================ =============
NOTE 5:- SEGMENTS, MAJOR CUSTOMERS AND GEOGRAPHICAL INFORMATION (Cont.)
Nine months ended September 30, 2003 (unaudited)
-----------------------------------------------------------------
DPC DPL Eliminations Total
------------- ------------- ---------------- -------------
Revenues $ 2,718 $ 2,620 $ - $ 5,338
Intersegment revenues 535 - (535) -
------------- ------------- ---------------- -------------
Total revenues $ 3,253 $ 2,620 $ (535) $ 5,338
============= ============= ================ =============
Depreciation expenses $ 25 $ 77 $ - $ 102
============= ============= ================ =============
Operating loss $ (441) $ (218) $ - $ (659)
============= ============= ================ =============
Financial income, net $ 12
=============
Loss before tax benefit $ (647)
=============
Tax benefit $ - $ 73 $ - $ 73
============= ============= ================ =============
Net loss $ (450) $ (124) $ - $ (574)
============= ============= ================ =============
Expenditures for segment assets at
September 30, 2003 $ 12 $ 50 $ - $ 62
============= ============= ================ =============
Identifiable assets at September 30,
2003 $ 1,956 $ 2,767 $ - $ 4,723
============= ============= ================ =============
Three months ended September 30, 2004 (unaudited)
-----------------------------------------------------------------
DPC DPL Eliminations Total
------------- ------------- ---------------- -------------
Revenues $ 1,019 $ 1,171 $ - $ 2,190
Intersegment revenues 196 - (196) -
------------- ------------- ---------------- -------------
Total revenues $ 1,215 $ 1,171 $ (196) $ 2,190
============= ============= ================ =============
Depreciation expenses $ 8 $ 21 $ - $ 29
============= ============= ================ =============
Operating loss $ (93) $ (124) $ - $ (217)
============= ============= ================ =============
Financial expenses, net $ (7)
=============
Other expenses $ (6)
=============
Net loss $ (97) $ (133) $ - $ (230)
============= ============= ================ =============
Expenditures for segment assets at
September 30, 2004 $ 7 $ 3 $ - $ 10
============= ============= ================ =============
Identifiable assets at September 30,
2004 $ 2,040 $ 3,073 $ - $ 5,113
============= ============= ================ =============
NOTE 5: SEGMENTS, MAJOR CUSTOMERS AND GEOGRAPHICAL INFORMATION (Cont.)
Three months ended September 30, 2003 (unaudited)
-----------------------------------------------------------------
DPC DPL Eliminations Total
------------- ------------- ---------------- -------------
Revenues $ 855 $ 754 $ - $ 1,609
Intersegment revenues 125 - (125) -
------------- ------------- ---------------- -------------
Total revenues $ 980 $ 754 $ (125) $ 1,609
============= ============= ================ =============
Depreciation expenses $ 8 $ 23 $ - $ 31
============= ============= ================ =============
Operating loss $ (176) $ (70) $ - $ (246)
============= ============= ================ =============
Financial income, net $ 5
=============
Loss before tax benefit $ (241)
=============
Tax benefit $ - $ 47 $ - $ 47
============= ============= ================ =============
Net loss $ (173) $ (21) $ - $ (194)
============= ============= ================ =============
Expenditures for segment assets for the
three months ended September 30, 2003 $ 2 $ 18 $ - $ 20
============= ============= ================ =============
Identifiable assets at September 30,
2003 $ 1,956 $ 2,767 $ - $ 4,723
============= ============= ================ =============
- - - - - - - - - -
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 for the near future.
In July 2004, we raised $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 NINE MONTHS ENDED SEPTEMBER 30, 2004, COMPARED TO SEPTEMBER 30, 2003
REVENUES
For the three months ended September 30, 2004, revenues increased by 36.1% to
$2,190,000 from $1,609,000 for the nine months ended September 30, 2003. Total
revenues increased by 36.1% to $2,190,000 for the three months ended September
30, 2004, from $1,609,000 for the three months ended September 30, 2003.
Revenues from the domestic operations of DPC increased 19.2% to $1,019,000 for
the third quarter ended September 30, 2004, from $855,000 for the third quarter
ended September 30, 2003. Revenues from the Company's European operations of DPL
increased 55.3% to $1,171,000 for the third quarter ended September 30, 2004,
from $754,000 for the third quarter ended September 30, 2003. The revenue
increase in the third quarter of 2004 is mainly due to increase in sales of our
new products.
For the nine months ended September 30, 2004, revenues increased by 15.4% to
$6,158,000 from $5,338,000 for the nine months ended September 30, 2003.
Revenues attributed to the domestic operations of DPC increased 5.7% to
$2,874,000 for the nine months ended September 30, 2004, from $2,718,000 for the
nine months ended September 30, 2003. Revenues from the Company's European
operations of DPL increased 25.3% to $3,284,000 for the nine months ended
September 30, 2004, from $2,620,000 for the nine months ended September 30,
2003. The increase in revenue from the Company's European operations of DPL is
mainly due to higher sales of our new products.
GROSS MARGINS
Gross margins were 23.8% for the three months ended September 30, 2004, compared
to 26.7% for the three months ended September 30, 2003. The decrease in gross
margins can be primarily attributed to the shift in product mix. Gross margins
were 24.1% for the nine months ended September 30, 2004 compared to 27.3% for
the nine months ended September 30, 2003. The decrease in gross margins can be
primarily attributed to the shifting in product mix. The Company is working
toward its plan to increase gross margins through reducing costs and promoting
sales of higher margin products.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were 7.2% of revenues for the three
months ended September 30, 2004, and 6.9% for the three months ended September
30, 2003. In actual dollars, engineering and product development increased by
$46,000. Engineering and product development expenses were 7.3% of revenues for
the nine months ended September 30, 2004, compared to 7.2% of revenues for the
nine months ended September 30, 2003.
SELLING AND MARKETING
Selling and marketing expenses were 14.8% of revenues for the three months ended
September 30, 2004, compared to 16.5% for the three months ended September 30,
2003. In absolute dollars, the selling and marketing expenditures increased by
$59,000 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
15.4% of revenues for the nine months ended September 30, 2004, compared to
14.7% for the nine months ended September 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 11.7% of revenues for the three months
ended September 30, 2004, compared to 18.6% for the three months ended September
30, 2003. In actual dollars, general and administrative expenditures decreased
by $43,000 mainly due to reduction in the personnel hours spent on
administrative duties. General and administrative expenses were 13.2% of
revenues for the nine months ended September 30, 2004, compared to 17.7% for the
nine months ended September 30, 2003. In actual dollars, general and
administrative expenses decreased by $135,000.
FINANCIAL INCOME
Financial expense net was $7,000 for the three months ended September 30, 2004,
compared to financial income net of $5,000 for the three months ended September
30, 2003. The financial expense resulted mainly from the exchange rate
fluctuation. Financial expense was $5,000 for the nine months ended September
30, 2004, compare to financial income of $12,000 for the nine months ended
September 30, 2003.
LOSS BEFORE INCOME TAXES
For the three months ended September 30, 2004, the Company had a loss before
income taxes of $230,000 compared to a loss before income taxes of $241,000 for
the three months ended September 2003. The loss decreased mainly due to the
increase in revenues. Loss before income taxes for the nine months ended
September 30, 2004 increased to $733,000 compared to $647,000 for the nine
months ended September 30, 2003. The loss increased mainly due to the reduction
in gross margins.
TAX BENEFIT
The tax benefit of $47,000 for the third quarter of 2003 was from the Company's
European operations of DPL.
NET LOSS
Net loss for the three months ended September 30, 2004, was $230,000 compared to
net loss of $194,000 for the three months ended September 30, 2003. Net loss for
the nine months ended September 30, 2004 was $733,000, compared to a net loss of
$574,000 for the nine months ended September 30, 2003. Net loss increased mainly
due to lower gross margins.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2004, the Company had cash, cash equivalents $1,249,000 and
working capital of $2,785,000. This compares with cash and cash equivalents of
$1,302,000 and working capital of $2,956,000 at September 30, 2003. The decrease
in working capital is mainly due to operating losses offset partially by the
Telkoor Telecom Ltd.'s and Fortron/Source investments of $743,000 after issuance
expenses during the nine months ended September 30, 2004.
Cash used in operating activities for the Company totaled $184,000 for the three
months ended September 30, 2004, compared to $45,000 for the three months ended
September 30, 2003. Cash provided by investing activities was $58,000 for the
three months ended September 30, 2004, compared to cash used in investing
activities of $14,000 for the three months ended September 30, 2003. Net cash
provided by financing activities was $250,000 for the three months ended
September 30, 2004, compared to net cash used by financing activities of $2,000
for the three months ended September 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 September, 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.
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 is 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. As of
September 2004, the Company paid the full $90,000. 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 for which the Company
has a maximum liability of $50,000 under the settlement agreement.
ITEM 2. CHANGES IN SECURITIES
As previously reported, during the third quarter, 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 securities purchase agreement, Fortron/Source Corp. 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 entering into the
securities purchase agreement. 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 an
"accredited" investor under state securities laws. The offers and sales were
made to an accredited investor 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 certificate
for those shares contained an appropriate legend stating that the shares had not
been registered under the Securities Act and may not be offered or sold absent
registration or pursuant to an exemption there from.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the shareholders was held on Thursday, October 7, 2004 at
the Company's corporate headquarters, located at 41920 Christy Street, Fremont,
California 94538. The shareholders voted to elect the following persons as
Directors of the Company:
----------------------------------------------------------------------------------------------------------------------------
Nominees Shares Voted For Shares Withholding Authority/Voted Abstentions and Broker
Against Non-Votes
----------------------------------------------------------------------------------------------------------------------------
Ben- Zion Diamont 5,802,430 77,913 0
----------------------------------------------------------------------------------------------------------------------------
David Amitai 5,804,430 75,913 0
----------------------------------------------------------------------------------------------------------------------------
Amos Kohn 5,810,930 69,413 0
----------------------------------------------------------------------------------------------------------------------------
Yeheskel Manea 5,802,030 78,313 0
----------------------------------------------------------------------------------------------------------------------------
Youval Menipaz 5,802,030 78,313 0
----------------------------------------------------------------------------------------------------------------------------
The Shareholders approved an amendment to increase the number of shares
available for grant under the 2002 Stock Option Plan by 300,000 shares.
Abstain/
Total shares voted: For Against Withheld Broker Non-Votes
--- ------- -------- ----------------
3,713,047 150,927 3,805 0
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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
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: November 15, 2004 /s/ Jonathan Wax
-------------------------------
Jonathan Wax
Chief Executive Officer
(Principal Executive Officer)
Date: November 15, 2004 /s/ Uzi Sasson
-------------------------------
Uzi Sasson
Chief Financial Officer
(Principal Financial Officer)