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,
2003
[ ] 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 11, 2003: 5,410,680
DIGITAL POWER CORPORATION
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2003
IN U.S. DOLLARS
UNAUDITED
INDEX
Page
----
Review Report of Unaudited Interim
Consolidated Financial Statements 2
Consolidated Balance Sheets 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
- - - - - - - - - -
2
[GRAPHIC OMITTED] Kost Forer & Gabbay Phone: 972-3-6232525
ERNST & YOUNG 3 Aminadav St. Fax: 972-3-5622555
Tel-Aviv 67067, Israel
The Board of Directors
Digital Power Corporation
-------------------------
Re: Review report of unaudited interim consolidated financial
statements as of and for the nine months and three months ended
September 30, 2003
-----------------------------------------------------------------
We have reviewed the accompanying consolidated balance sheets of Digital
Power Corporation ("the Company") and its subsidiary as of September 30, 2003
and 2002, and the related interim consolidated statements of operations and
statements of cash flows for the nine months and three months ended September
30, 2003 and 2002 and the statements of changes in shareholders' equity for the
nine months ended September 30, 2003. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements in order for them to be
in conformity with accounting principles generally accepted in the United
States.
/s/ Kost Forer & Gabbay
--------------------------------
Tel-Aviv, Israel KOST FORER & GABBAY
November 11, 2003 A Member of Ernst & Young Global
3
DIGITAL POWER CORPORATION
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands
September 30, December 31,
------------------------------
2003 2002 2002
--------------- ------------ -------------------
Unaudited
------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,302 $ 210 $ 616
Restricted short-term bank deposit - 600 600
Trade receivables, net of doubtful accounts of $49,
$269 and $39 at September 30, 2003 and 2002
and December 31, 2002, respectively 1,241 2,265 1,982
Deferred income taxes 62 - 649
Other current assets 173 114 134
Inventories 1,653 1,572 1,451
------------ --------------- -------------------
Total current assets 4,431 4,761 5,432
-----
------------ --------------- -------------------
OTHER LONG-TERM ASSETS 24 77 43
------------ --------------- -------------------
PROPERTY AND EQUIPMENT, NET 330 400 364
------------ --------------- -------------------
Total assets $ 4,785 $ 5,238 $ 5,839
-----
============ =============== ===================
The accompanying notes are an integral part of the consolidated financial
statements.
4
DIGITAL POWER CORPORATION
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share data
September 30, December 31,
---------------------------------
2003 2002 2002
--------------- --------------- -------------------
Unaudited
---------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit $ - $ 145 $ 250
Current maturities of capital lease obligation and long-
term loan from a bank 10 36 27
Accounts payable 902 1,297 1,349
Other current liabilities 563 1,043 974
--------------- --------------- -------------------
Total current liabilities 1,475 2,521 2,600
-----
--------------- --------------- -------------------
SHAREHOLDERS' EQUITY:
Series A Redeemable, Convertible Preferred shares no
par value: 500,000 shares authorized, 0 shares issued
and outstanding at September 30, 2003 and 2002 and
December 31, 2002 - - -
Preferred shares, no par value: 1,500,000 shares
authorized, 0 shares issued and outstanding at
September 30, 2003 and 2002 and December 31, 2002 - - -
Common shares, no par value: 10,000,000 shares
authorized; 5,410,680, 4,510,680 and 4,510,680 shares
issued and outstanding at September 30, 2003 and
2002 and December 31, 2002, respectively 11,036 11,036 11,036
Additional paid-in capital 1,437 733 837
Accumulated deficit (9,056) (8,858) (8,482)
Accumulated other comprehensive loss (107) (194) (152)
--------------- --------------- -------------------
Total shareholders' equity 3,310 2,717 3,239
--------------- --------------- -------------------
Total liabilities and shareholders' equity $ 4,785 $ 5,238 $ 5,839
=============== =============== ===================
5
DIGITAL POWER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
Nine months ended Three months ended Year ended
September 30, September 30, December 31,
------------------------------ ------------------------------
2003 2002 2003 2002 2002
------------- -------------- -------------- -------------- -----------------
Unaudited
---------------------------------------------------------------
Revenues $ 5,338 $ 6,772 $ 1,609 $ 2,230 $ 8,775
Cost of revenues 3,883 4,873 1,179 1,588 6,310
------------- -------------- -------------- -------------- -----------------
Gross profit 1,455 1,899 430 642 2,465
------------- -------------- -------------- -------------- -----------------
Operating expenses:
Engineering and product development 384 600 111 227 749
Selling and marketing 784 761 266 238 1,014
General and administrative 946 866 299 343 1,228
------------------------------ -------------- -------------- -----------------
Total operating expenses 2,114 2,227 676 808 2,991
----- ------------- -------------- -------------- -------------- -----------------
Operating loss (659) (328) (246) (166) (526)
Capital gain from disposal of a
subsidiary - 280 - 280 280
Financial income (expenses), net 12 11 5 (1) 6
------------- -------------- -------------- -------------- -----------------
Income (loss) before tax benefit
(taxes on income) (647) (37) (241) 113 (240)
Tax benefit (taxes on income) 73 (49) 47 (9) 530
------------- -------------- -------------- -------------- -----------------
Net income (loss) $ (574) $ (86) $ (194) $ 104 $ 290
============= ============== ============== ============== =================
Basic and diluted earnings (loss)
per share $ (0.11) $ (0.02) $ (0.04) $ 0.02 $ 0.06
============= ============== ============== ============== =================
Weighted average number of shares
used in computing basic and
diluted earnings (loss) per share 5,110,680 4,510,680 5,410,680 4,510,680 4,510,680
============= ============== ============== ============== =================
The accompanying notes are an integral part of the consolidated financial
statements.
6
DIGITAL POWER CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share data
Accumulated
Additional other Total Total
Common shares paid-in Accumulated comprehensive comprehensive share-
-------------------- capital deficit loss income (loss) holders'
Number Amount equity
--------- -------- ------- --------- ----------- ------------ ----------
Balance as of January 1, 2002 4,510,680 $ 11,036 $ 733 $(8,772) $ (312) $ 2,685
Stock compensation related to warrants
issued to bank for financing transaction - - 20 - - 20
Stock compensation related to options
granted to consultants and service
providers - - 84 - - 84
Comprehensive income:
Net income - - - 290 - $ 290 290
Foreign currency translation adjustments - - - - 160 160 160
---------- ---------- ------ ---------- ----------- -------------- ----------
Total comprehensive income $ 450
==============
Balance as of December 31, 2002 4,510,680 11,036 837 (8,482) (152) 3,239
Issuance of Common shares 900,000 - 600 - - 600
Comprehensive loss:
Net loss - - - (574) - $ (574) (574)
Foreign currency translation adjustments - - - - 45 45 45
---------- -------- ------ --------- ----------- --------------- ---------
Total comprehensive loss $ (529)
===============
Balance as of September 30, 2003 (unaudited) 5,410,680 $ 11,036 $ 1,437 $(9,056) $ (107) $ 3,310
=========== ======== ====== ========= =========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
7
DIGITAL POWER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Nine months ended Three months ended Year ended
September 30, September 30, December 31,
--------------------------- --------------------------
2003 2002 2003 2002 2002
------------- ------------- ------------ ------------ ----------------
Unaudited
------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (574) $ (86) $ (194) $ 104 $ 290
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 102 217 31 58 298
Capital gain from disposal of a subsidiary - (280) - (280) (280)
Compensation related to options granted to
consultants and service providers 758 - - - 90
Decrease (increase) in trade receivables 588 (61) 126 (278) 358
Deferred income taxes, net (37) 52 246 46 (649)
Decrease (increase) in other current assets (182) 27 (46) (25) 40
Decrease (increase) in inventories - 426 (30) 10 634
Decrease (increase) in other long-term
assets - (114) - (67) 6
Decrease in accounts payable (457) (244) (113) (126) (242)
Increase (decrease) in other current
liabilities (415) 69 (65) 140 (15)
Other - - - (4) (14)
------------- ------------- ------------ ------------ ----------------
Net cash provided by (used in) operating
activities (217) 6 (45) (422) 516
------------- ------------- ------------ ------------ ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted short-term bank deposit 600 (600) - (600) (600)
Purchase of property and equipment (62) (27) (20) 31 (37)
Proceeds from disposal of a subsidiary - (11) - (11) (12)
Investment in long-term loan - - - - (50)
Proceeds from long-term loan 19 - 6 - -
------------- ------------- ------------ ------------ ----------------
Net cash provided by (used in) investing
activities 557 (638) (14) (580) (699)
------------- ------------- ------------ ------------ ----------------
Cash flows from financing activities:
Proceeds from short-term bank credit 40 145 - 145 250
Proceeds from issuance of Common shares 600 - - -
Proceeds from long-term loan from a bank 12 - - - -
Payments made on short term bank credit (290) (652) - - (652)
Principal payments on capital lease
obligations and long-term loan (29) (12) (2) 4 (21)
------------- ------------- ------------ ------------ ----------------
Net cash provided by (used in) financing
activities 333 (519) (2) 149 (423)
------------- ------------- ------------ ------------ ----------------
Effect of exchange rate changes on cash 13 118 6 41 (21)
------------- ------------- ------------ ------------ ----------------
Increase (decrease) in cash and cash equivalents 686 (1,033) (55) (812) (627)
Cash and cash equivalents at the beginning of
the period 616 1,243 1,357 1,022 1,243
------------- ------------- ------------ ------------ ----------------
Cash and cash equivalents at the end of the
period $ 1,302 $ 210 $ 1,302 $ 210 $ 616
============= ============= ============ ============ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS ACTIVITIES:
Cash paid during the period for interest $ 8 $ - - $ - $ 26
============= ============= ============ ============ ================
The accompanying notes are an integral part of the consolidated financial
statements
8
DIGITAL POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
In U.S. dollars
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, 2002, are
applied consistently in these financial statements. In addition,
the following accounting policy is applied:
The accompanying unaudited interim consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles in the United States for interim
financial information. Accordingly, they do not include all the
information and footnotes required by generally accepted
accounting principles in the United States for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for
the nine months period ended September 30, 2003 are not
necessarily indicative of the results that may be expected for
the year ended December 31, 2003.
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 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.
The Company and its subsidiary apply 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.
9
DIGITAL POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
In U.S. dollars
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (cont.)
Under Statement of Financial Accounting Standard No. 123
"Accounting for Stock Based compensation ("SFAS No. 123") SFAS
No. 123, pro forma information regarding net earnings (loss) and
net earnings (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, 2003 and 2002 and December 31,
2002. Expected volatility of 45.6% ranging from 55.0% - 125.9%
and 33.8%, respectively, risk-free interest rates of 1.5%,
ranging from 4.23% to 5.6% and 1%, 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 income (loss)
and earnings (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, Year ended
-------------------------------- December 31,
2003 2002 2002
-------------- -------------- ------------------
Unaudited
--------------------------------
Net income (loss), as reported $ (574) $ (86) $ 290
Deduct: Total stock-based compensation
expense determined under fair value
method for all awards, net of related
tax effect (48) (67) (607)
-------------- -------------- ------------------
Pro forma net loss $ (622) $ (153) $ (317)
============== ============== ==================
Basic and diluted net earnings (loss) per
share, as reported $ (0.11) $ (0.02) $ 0.06
============== ============== ==================
Basic and diluted net loss per share, pro
forma $ (0.12) $ (0.03) $ (0.07)
============== ============== ==================
NOTE 3:- SHARE CAPITAL
On March 31, 2003, the Company entered into an agreement to sell
900,000 shares of Common stock to Telkoor Telecom Ltd. in
consideration of $ 600. As part of the transaction, Telkoor Telecom
Ltd.'s warrant to purchase 900,000 shares was cancelled. The Company
issued the shares on April 3, 2003.
10
DIGITAL POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
In U.S. dollars
NOTE 4:- PENDING LITIGATION
A claim was filed against the Company by one of its former customers
in the amount of $ 300.
Company's management believes that the fundamental allegations in the
complaint are false and intends to vigorously defend itself.
At this point, management and the Company's legal counsel are of the
opinion that it is not currently possible to predict the likelihood of
an unfavorable outcome or the range of a potential verdict against the
Company.
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, 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
============= ============= ================ =============
11
DIGITAL POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
In U.S. dollars
NOTE 5:- SEGMENTS, MAJOR CUSTOMERS AND GEOGRAPHICAL INFORMATION (cont.)
Nine months ended September 30, 2002 (unaudited)
-----------------------------------------------------------------
DPC DPL Eliminations Total
------------- ------------- ---------------- -------------
Revenues $ 3,384 $ 3,388 $ - $ 6,772
Intersegment revenues 258 - (258) -
------------- ------------- ---------------- -------------
Total revenues $ 3,642 $ 3,388 $ (258) $ 6,772
============= ============= ================ =============
Depreciation expenses $ 133 $ 84 $ - $ 217
============= ============= ================ =============
Operating loss $ (136) $ (192) $ - $ (328)
============= ============= ================ =============
Capital gain from disposal
of a subsidiary $ 280 $ - $ - $ 280
============= ============= ================ =============
Financial income, net $ 11
=============
Loss before taxes on income $ (37)
=============
Taxes on income $ - $ (49) $ - $ (49)
============= ============= ================ =============
Net income (loss) $ (123) $ 37 $ - $ (86)
============= ============= ================ =============
Expenditures for segment assets at
September 30, 2002 $ 13 $ 14 $ - $ 27
============= ============= ================ =============
Identifiable assets at September 30,
2002 $ 2,107 $ 3,131 $ - $ 5,238
============= ============= ================ =============
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
============= ============= ================ =============
12
DIGITAL POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
In U.S. dollars
NOTE 5:- SEGMENTS, MAJOR CUSTOMERS AND GEOGRAPHICAL INFORMATION (cont.)
Three months ended September 30, 2002 (unaudited)
-----------------------------------------------------------------
DPC DPL Eliminations Total
------------- ------------- ---------------- -------------
Revenues $ 799 $ 1,431 $ - $ 2,230
Intersegment revenues 44 - (44) -
------------- ------------- ---------------- -------------
Total revenues $ 843 $ 1,431 $ (44) $ 2,230
============= ============= ================ =============
Depreciation expenses $ 29 $ 29 $ - $ 58
============= ============= ================ =============
Operating loss $ - $ - $ - $ (166)
============= ============= ================ =============
Capital gain from disposal
of a subsidiary $ 280 $ - $ - $ 280
============= ============= ================ =============
Financial expense, net $ (1)
=============
Income before taxes on income $ 113
=============
Taxes on income $ - $ (9) $ - $ (9)
============= ============= ================ =============
Net income (loss) $ 105 $ (1) $ - $ 104
============= ============= ================ =============
Expenditures for segment assets for the
three months ended September 30, 2002 $ - $ - $ - $ -
============= ============= ================ =============
Identifiable assets at September 30,
2002 $ 2,107 $ 3,131 $ - $ 5,238
============= ============= ================ =============
13
DIGITAL POWER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
In U.S. dollars
NOTE 5:- SEGMENTS, MAJOR CUSTOMERS AND GEOGRAPHICAL INFORMATION (cont.)
Year ended December 31, 2002
-----------------------------------------------------------------
DPC DPL Eliminations Total
------------- ------------- ---------------- -------------
Revenues $ 4,348 $ 4,427 $ - $ 8,775
Intersegment revenues 383 - (383) -
------------- ------------- ---------------- -------------
Total revenues $ 4,731 $ 4,427 $ (383) $ 8,775
============= ============= ================ =============
Operating income (loss) $ (761) $ 235 $ - $ (526)
============= ============= ================ =============
Capital gain from disposal of a $ 280 $ - $ - 280
subsidiary ============= ============= ================ =============
Financial income, net 6
=============
Loss before tax benefit (240)
=============
Tax benefit $ 649 $ (119) $ - $ 530
============= ============= ================ =============
Net income $ 151 $ 139 $ - $ 290
============= ============= ================ =============
Additional information:
Depreciation expenses $ 184 $ 114 $ - $ 298
============= ============= ================ =============
Expenditures for segment assets as of
December 31, 2002 $ 13 $ 24 $ - $ 37
============= ============= ================ =============
Identifiable assets as of December 31,
2002 $ 2,292 $ 2,898 $ - $ 5,190
============= ============= ================ =============
- - - - - - - - - -
14
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 telecommunication, datacom, test
and measurement equipment industries, competition in the power supply industry,
dependence on manufacturers in Mexico and China and other risks factors detailed
in the Company's Form 10-KSB for the year ended December 31, 2002. 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, 2003, COMPARED TO SEPTEMBER 30,
2002
REVENUES
Revenues decreased by 27.8% to $1,609,000 for the three months ended September
30, 2003, from $2,230,000 for the three months ended September 30, 2002.
Revenues from the domestic operation of DPC increased 7.0% to $855,000 for the
three months ended September 30, 2003, from $799,000 for the three months ended
September 30, 2002. Revenues from the Company's United Kingdom's operations of
DPL decreased 47.3% to $754,000 for the three months ended September 30, 2003,
from $1,431,000 for the three months ended September 30, 2002.
For the nine months ended September 30, 2003, revenues decreased by 21.2% to
$5,338,000 from $6,772,000 for the nine months ended September 30, 2002.
Revenues from the domestic operation of DPC decreased 19.7% to $2,718,000 for
the nine months ended September 30, 2003, from $3,384,000 for the nine months
ended September 30, 2002. Revenues from the Company's United Kingdom's
operations of DPL decreased 22.7% to $2,620,000 for the nine months ended
September 30, 2003, from $3,388,000 for the nine months ended September 30,
2002.
The decrease in revenues for the nine months ended September 30, 2003 from
September 30, 2002 is due to continued softness in the Company's market. In
addition, where the Company has been successful in designed in products, sales
have been slower than anticipated.
15
GROSS MARGINS
Gross margins were 26.7% for the three months ended September 30, 2003, compared
to 28.8% for the three months ended September 30, 2002. For the nine months
ended September 30, 2003, gross margin was 27.3% compared to 28.0% for the nine
months ended September 30, 2002. The decrease in gross margins can be primarily
attributed to fixed cost and the decrease in revenues.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were 6.9% of revenues for the three
months ended September 30, 2003, and 10.2% for the three months ended September
30, 2002. Engineering and product development expenses were 7.2% of revenues for
the nine months ended September 30, 2003, compared to 8.9% for the nine months
ended September 30, 2002. Actual dollar expenditures were down by 51.1% for the
three months ended September 30, 2003 and 36.0% for the nine month ended
September 30, 2003. The decrease was mainly due to the reduced salary expenses.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were 35.1% of revenues for the
three months ended September 30, 2003, compared to 26.1% for the three months
ended September 30, 2002. Selling, general and administrative expenses were
32.4% of revenues for the nine months ended September 30, 2003, compared to
24.0% for the nine months ended September 30, 2002. In actual dollars, for the
three months ended September 30, 2003, selling, general and administrative
expenses decreased by 2.8% compared to the three months ended September 30,
2002. For the nine month ended September 30, 2003, the actual dollars spent on
selling, general and administrative expenses increased by 6.3% compared to the
same period last year. The increase in selling, general and administrative
expenses can be attributed mainly to the recognition of the CFO's salary for the
full nine months ended September 30, 2003, additional legal expenses and one
time expenses related to a lay off.
INCOME (LOSS) BEFORE TAX BENEFIT (TAXES ON IINCOME)
For the three months ended September 30, 2003, the Company had a loss before tax
benefit of $241,000 compared to an income before taxes on income of $113,000 for
the three months ended September 30, 2002. For the nine months ended September
30, 2003, the Company had a loss before tax benefit of $647,000 compared to a
loss before taxes on income of $37,000 for the nine months ended September 30,
2002. The loss increase is mainly due to the decrease in revenue in the nine
months ended September 30, 2003 and one time capital gain of $280,000 recorded
in the nine months ended September 30, 2002 as a result of the disposal of the
Mexican subsidiary, Poder Digital, S.A. de C.V.
INCOME TAXES
For the three months ended September 30, 2003, net tax benefit was $47,000
compared to provision for income taxes of $9,000 for the three months ended
September 30, 2002. For the nine months ended September 30, 2003 tax benefit was
$73,000 compared to provision for income taxes of $49,000 for the nine months
16
ended September 30, 2002. The tax benefit was mainly comprised of deferred
income taxes due to carrying back losses to prior profitable years in the
Company's United Kingdom's operations.
NET INCOME (LOSS)
Net loss for the three months ended September 30, 2003, was $194,000 compared to
net income of $104,000 for the three months ended September 30, 2002. Net loss
for the nine months ended September 30, 2003, was $574,000 compared to net loss
of $86,000 for the nine months ended September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2003, the Company had cash and cash equivalents of $1,302,000,
and working capital of $2,956,000. This compares to cash and cash equivalents of
$210,000, short term deposit of $600,000 and working capital of $2,240,000 at
September 30, 2002. Cash used by operating activities for the Company totaled
$217,000 compared to cash provided by operating activities of $6,000 for the
nine months ended September 30, 2003 and 2002 respectively.
Cash provided by investing activities was $557,000 for the nine months ended
September 30, 2003, compared to cash used in investing activities of $638,000
for the nine months ended September 30, 2002.
Net cash provided by financing activities was $333,000 for the nine months ended
September 30, 2003, compared to cash used in financing activities of $519,000
for the nine months ended September 30, 2002.
The Company renewed its line of credit with Silicon Valley Bank ("SVB") on June
5, 2003. The Company can borrow up to $1,200,000 if it maintains certain ratios
and is in compliance with other covenants. The rate for this line of credit is
Silicon Valley Bank's prime rate plus 1.75%. The Company also has a $500,000
line of credit with Lloyds TSB Bank in the UK bearing interest of 1.75% per
annum over Lloyds TSB Bank's base rate.
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
though debt or equity, which may dilute the shareholder equity.
ITEM 3. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer evaluated the
disclosure controls and procedures (pursuant to Exchange Act Rule 13a-15) of the
Company as of the end of the period covered by this report and have determined
that such controls and procedures are effective.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to exposure to legal proceedings
and claims which arise in the ordinary course of business. In the opinion of
17
management, the amount of ultimate liability with respect to any such current
actions will not materially affect the financial position or results of
operations of the Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the shareholders held on Monday, August 4, 2003 at the
Company's corporate headquarters, located at 41920 Christy Street, Fremont,
California 94538, a quorum of shareholders voted to elect the following persons
as Directors of the Company:
Name Votes For Withheld
---- --------- --------
Ben- Zion Diamont 5,086,012 22,262
David Amitai 5,086,012 22,262
Mark Thum 5,088,312 19,962
Yeheskel Manea 5,085,012 23,262
Youal Menipaz 5,085,012 23,262
Amos Kohn 5,087,312 20,962
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
-------------- ------------- -------------
August 8, 2003 August 7, 2003 Press release announcing second
quarter results
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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)
Dated: 11/11/2003 /s/ David Amitai
----------------- -----------------------------------
David Amitai
Chief Executive Officer
(Principal Executive Officer)
Dated: 11/11/2003 /s/ Haim Yatim
----------------- -----------------------------------
Haim Yatim
Chief Financial Officer
(Principal Financial and Accounting
Officer)
19