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, 2002
[ ] 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 June 30, 2002: 4,510,680
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2002 2001 2001
________________________ ______________
(Unaudited) **
--
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,022,335 $ 765,144 $ 1,242,900
Accounts receivable, net of allowance for doubtful accounts of
$284,318, $322,815 and $370,000 at June 30, 2002 and 2001, and
December 31, 2001 respectively 1,987,374 1,824,550 2,203,664
Income tax refund receivable 20,609 29,200 72,388
Other receivables 85,758 74,963 91,971
Inventories, net 1,583,776 2,522,104 1,999,168
Prepaid expenses and deposits 100,358 112,410 47,534
--------- --------- ---------
Total current assets 4,800,210 5,328,371 5,657,625
PROPERTY AND EQUIPMENT, net 715,107 996,089 820,318
OTHER ASSETS 29,432 37,141 35,116
--------- --------- ---------
TOTAL ASSETS $ 5,544,749 $ 6,361,601 $ 6,513,059
================ ================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ - $ 850,000 $ 652,261
Current portion of capital lease obligation 36,588 35,193 35,856
Accounts payable 1,473,137 1,664,521 1,590,830
Accrued liabilities 1,442,061 1,693,095 1,510,719
Total current liabilities 2,951,786 4,242,809 3,789,666
CAPITAL LEASE OBLIGATIONS, less current portion 7,623 40,823 24,376
OTHER LONG TERM LIABILITIES 12,488 15,485 13,607
--------- -------- ---------
Total liabilities 2,971,897 4,299,117 3,827,649
--------- --------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock issuable in series, no par value; 2,000,000 shares
authorized, no shares issued and outstanding - - -
Common stock, no par value, 10,000,000 shares authorized;
4,510,680 3,260,680 and 4,510,680 shares issued and outstanding
at June 30, 2002 and 2001 and December 31, 2001, respectively
11,036,251 9,786,251 11,036,251
Additional paid-in capital 733,256 733,256 733,256
Accumulated deficit (8,961,918) (8,071,053) (8,771,654)
Accumulated other comprehensive loss (234,737) (385,970) (312,443)
----------- ----------- -----------
Total shareholders' equity 2,572,852 2,062,484 2,685,410
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,544,749 $ 6,361,601 $ 6,513,059
================ ================ ================
** Condensed from December 31, 2001 audited financial statements included in the
Company's Form 10-KSB
See accompanying notes to these condensed consolidated financial statements.
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE FOR THE SIX FOR THE YEAR
MONTHS ENDED MONTHS ENDED ENDED
JUNE 30, JUNE 30, DECEMBER 31,
________________________________________________________________________________________
2002 2001 2002 2001 2001
________________________________________________________________________________________
(unaudited) (unaudited) **
REVENUES $ 2,358,100 $ 2,489,748 $ 4,540,949 $ 5,749,095 $ 10,329,857
COST OF GOODS SOLD 1,637,234 6,105,266 3,284,498 8,737,517 11,939,985
------------- --------- --------- --------- ----------
Gross margin (loss) 720,866 (3,615,518) 1,256,451 (2,988,422) (1,610,128)
------------- --------- --------- --------- ----------
OPERATING EXPENSES
Research and development 183,383 313,729 372,809 631,076 1,065,872
Marketing and selling 268,996 222,805 522,116 477,487 863,898
General and administrative 278,554 509,370 528,655 970,219 2,177,611
Impairment of goodwill - 948,263 - 948,263 946,263
------------- --------- --------- --------- ---------
Total operating expenses 730,933 1,994,167 1,423,580 3,027,045 5,053,644
------------- --------- --------- ---------
LOSS FROM OPERATIONS (10,067) (5,609,685) (167,129) (6,015,467) (6,663,772)
OTHER INCOME (EXPENSE)
Interest income 25,940 2,748 28,698 9,916 12,829
Interest expense (5,906) (17,386) (17,378) (31,799) (63,461)
Other income (expense) 9,689 9,689 - (4,364)
Loss on disposal of assets - (22,769) - (4,428) (22,769) (23,069)
------------ --------- -------- --------- ---------
Other income (expense) 29,723 (37,407) 16,581 (44,652) (78,065)
------------ --------- -------- --------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 19,656 (5,647,092) (150,548) (6,060,119) (6,741,837)
INCOME TAX PROVISION 14,046 (88,000) 39,716 280,000 298,883
------------ --------- -------- --------- ----------
NET INCOME (LOSS) $ 5,610 $ (5,559,092) $ (190,264) $ (6,340,119) $ (7,040,720)
============== ================= ============== ================ =============
Basic net income (loss) per share $ 0.01 $ (1.70) $ (0.04) $ (1.94) $ (2.07)
============== ================= ============== ================ =============
Diluted net income (loss) per share $ 0.01 $ (1.70) $ (0.04) $ (1.94) $ (2.07)
============== ================= ============== ================ =============
** Condensed from December 31, 2001 audited financial statements included in the
Company's Form 10-KSB
See accompanying notes to these condensed consolidated financial statements.
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON STOCK PAIN-IN ACCUMULATED COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT (LOSS) EQUITY (LOSS)
___________________ __________ ___________ _____________ ____________ _____________
BALANCES, January 1, 2001 3,260,680 $ 9,786,251 $ 733,256 $ (1,730,934) $ (247,299) $ 8,541,274
Issuance of common stock to
Telkoor Telecom, Ltd pursuant
to investment agreement
1,250,000 1,250,000 - - - 1,250,000
Comprehensive loss:
Net loss - - - (7,040,720) - (7,040,720) $(7,040,720)
Foreign currency translation
adjustment - - - - (65,144) (65,144) (65,144)
-----------
Total comprehensive loss - - - - - - $(7,105,864)
--------- ---------- ------- --------- --------- --------- ===========
BALANCES, December 31, 2001 4,510,680 11,036,251 733,256 (8,771,654) (312,443) 2,685,410
Comprehensive loss:
Net loss - - - (190,264) (190,264) $ (190,264)
Foreign currency translation
adjustment - - - - 77,706 77,706 77,706
-----------
Total comprehensive loss - - - - - - $ (112,558)
--------- ----------- ---------- ----------- ----------- ------------
BALANCES, June 30, 2002 4,510,680 $11,036,251 $ 733,256 $(8,961,918) $ (234,737) $ 2,572,852
========= =========== ========== =========== =========== ============
BALANCES, April 1, 2002 4,510,680 11,036,251 733,256 (8,967,528) (342,373) 2,459,606
Comprehensive loss:
Net income - - - 5,610 - 5,610 $ 5,610
Foreign currency translation
adjustment - - - - 107,636 107,636 107,636
-----------
Total comprehensive income - - - - - - $ 113,246
---------- ----------- ---------- ----------- --------- ----------- ==========
BALANCES, June 30, 2002 4,510,680 $11,036,251 $ 733,256 $(8,961,918) (234,737) $ 2,572,852
========== =========== ========== =========== ========= ===========
See accompanying notes to these condensed consolidated financial statements.
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON STOCK PAID-IN ACCUMULATED COMPREHENSIVE SHAREHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT (LOSS) EQUITY (LOSS)
_______________________ __________ _____________ ______________ ______________ ____________
BALANCES, January 1, 2001 3,260,680 $ 9,786,251 $ 733,256 $ (1,730,934) $ (247,299) $ 8,541,274
Comprehensive loss:
Net loss - - - (6,340,119) - (6,340,119) $ (6,340,119)
Foreign currency translation
adjustment - - - - (138,671) (138,671) (138,671)
-------------
Total comprehensive loss - - - - - - $ (6,478,790)
--------- ----------- --------- ------------- ---------- ------------- ==============
BALANCES, June 30, 2001 3,680,680 $ 9,786,251 $ 733,256 $ (8,071,053) $ (385,970) $ 2,062,484
BALANCES, April 1, 2001 3,680,680 $ 9,786,251 $ 733,256 $ (2,511,961) $ (397,156) $ 7,610,390
Comprehensive loss:
Net loss - - - (5,559,092) - (5,559,092) $ (5,559,092)
Foreign currency translation
adjustment - - - - 11,186 11,186 11,186
-------------
Total comprehensive loss - - - - - - $ (5,547,906)
--------- ----------- --------- ------------- ----------- ------------- =============
BALANCES, June 30, 2001 3,680,680 $ 9,786,251 $ 733,256 $ (8,071,053) $ (385,970) $ 2,062,484
========= =========== ========= ============= =========== =============
See accompanying notes to these condensed consolidated financial statements.
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FOR THE SIX FOR THE YEAR
MONTHS ENDED MONTHS ENDED ENDED
JUNE 30, JUNE 30, DECEMBER 31,
2002 2001 2002 2001 2001
__________________________ _________________________ _________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,610 $ (5,559,092) $ (190,264) $ (6,340,119) $ (7,040,720)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 73,707 89,308 159,280 216,590 450,752
Loss on disposal of assets 4,428 22,769 4,428 22,769 23,069
Deferred income taxes - (124) - 349,522 334,037
- (40,000)
Warranty Expense - (40,000)
Increase in provision for inventory
obsolescence - 3,250,560 - 3,250,560 2,714,941
Allowance for doubtful accounts (99,812) (91,397) (85,682) (91,397) 158,130
Impairment of goodwill - 946,263 - 946,263 946,263
Severance accrual - 658,000 - 658,000 658,000
Changes in operating assets
and liabilities:
Accounts receivable 56,398 699,603 301,972 1,522,929 894,288
Income tax refund receivable (15,281) 6,213 150,000 106,812
Other receivables 106,654 20,886 51,779 15,491 (1,517)
Inventories 34,308 (408,800) 415,392 (629,000) 364,709
Prepaid expenses and deposits (62,952) 85,071 (52,824) 101,288 166,164
Other assets 2,362 (869) 5,684 (8,590) (6,565)
Accounts payable 49,168 291,216 (117,693) (284,662) (358,353)
Accrued liabilities (9,461) (95,670) (68,658) (94,612) (252,177)
Other long-term liabilities (1,298) (1,121) - 13,607
-------- --------- ------- --------- ---------
Net cash provided by (used
in) operating activities $ 143,831 $(132,276) $ 428,506 $(254,968) $ (828,560)
-------- --------- ------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (54,632) (34,528) (58,496) (74,507) (133,281)
Proceeds from sale of assets - 5,758 - 5,758 5,876
-------- --------- -------- -------- ---------
Net cash (used in) investing (54,632) (28,770) (58,496) (68,749) (127,405)
-------- --------- -------- -------- ---------
(Continued)
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FOR THE SIX FOR THE YEAR
MONTHS ENDED MONTHS ENDED ENDED
JUNE 30 JUNE 30, DECEMBER 31,
2002 2001 2002 2001 2001
___________________________ _______________________ ___________
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds received (payments made) on
notes payable (552,290) (652,260) 450,000 252,261
Principal payments on capital lease
obligations (4,239) (13,381) (16,021) (28,875) (44,659)
Investment from Telkoor Telecom, Ltd. - - - - 1,250,000
-------- -------- --------- --------- --------
Net cash provided by (used in) (556,529) (13,381) (668,281) 421,125 1,457,602
-------- -------- --------- --------- ---------
financing activities
EFFECT OF EXCHANGE RATE CHANGES ON CASH
107,636 11,186 77,706 (138,671) (65,144)
-------- -------- --------- --------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS
(359,694) (163.241) (220,565) (41,263) 436,493
-------- -------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, beginning of
period 1,382,029 928,385 1,242,900 806,407 806,407
-------- -------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period
$ 1,022,335 $ 765,144 $ 1,022,335 $ 765,144 $1,242,900
================ ================ ================ =========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Interest $ 3,268 $ 17,081 $ 17,081 $ 19,093 $ 67,009
================ ================ ================ =========== ==========
Income taxes $ - $ - $ - $ - $ 97,918
================ ================ ================ =========== ==========
(Continued)
See accompanying notes to these consolidated financial statements.
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the
United States of America for complete financial statements. For further
information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-KSB for the fiscal year
ended December 31, 2001.
In the opinion of management, the unaudited condensed consolidated
financial statements contain all adjustments consisting only of normal
recurring accruals considered necessary to present fairly the Company's
financial position at June 30, 2002 and 2001, the results of operations,
statement of shareholders' equity and cash flows for the three and six
months then ended. The results for the period ended June 30, 2002, are not
necessarily indicative of the results to be expected for the entire fiscal
year ending December 31, 2002.
2. SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies applied in the preparation of these
financial statements are identical to those followed in the preparation of
the latest annual financial statements.
3. EARNINGS PER SHARE
The following represents the calculation of income (loss) per share:
FOR THE THREE MONTHS FOR THE SIX MONTHS FOR THE YEAR
ENDED ENDED ENDED
JUNE 30, JUNE 30, DECEMBER 31,
2002 2001 2002 2001 2001
BASIC & DILUTED
Net income (loss) $ 5,610 $ (5,559,092) $ (190,264) $ (6,340,119) $ (7,040,720)
Less: Preferred stock dividends - - - - -
Net income (loss) applicable to
common shareholders $ 5,610 $ (5,559,092) $ (190,264) $ (6,340,119) $ (7,040,720)
Weighted average number of common
shares 4,510,680 3,260,680 4,510,680 3,260,680 3,407,930
Basic income (loss) per share $ 0.01 $ (1.70) $ (0.04) $ (1.94) $ (2.07)
Diluted income (loss) per share $ 0.01 $ (1.70) $ (0.04) $ (1.94) $ (2.07)
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. SEGMENT INFORMATION:
The Company has identified its segments based upon its geographic
operations. These segments are represented by each of the Company's
individual legal entities: Digital Power Corporation (DPC), Poder Digital,
S.A. de C.V. (PD) and Digital Power Limited (DPL). Segment information is
as follows:
For the Three Months Ended June 30, 2002
DPC PD DPL Eliminations Totals
Revenues $ 1,423,606 $ $ 934,494 $ - $ 2,358,100
-
Intersegment
Revenues $ 114,786 $ 256,009 $ - $ (370,795) $ -
Interest
Income $ 3,178 $ 6 $ 25,303 $ (2,547) $ 25,940
Interest
Expense $ 4,800 $ 375 $ 3,278 $ (2,547) $ 5,906
Income Tax
Expense $ - $ - $ 14,046 $ - $ 14,046
Net income (loss)
$ 86,609 $ (150,215) $ 69,216 $ - $ 5,610
For the Three Months Ended June 30, 2001
DPC PD DPL Eliminations Totals
Revenues $ 1,431,631 $ 427 $ 1,057,690 $ - $ 2,489,748
Intersegment
Revenues $ 193,637 $ 630,981 $ 880 $ (825,498) $ -
Interest
Income $ 7,201 $ 478 $ 1,364 $ (6,295) $ 2,748
Interest
Expense $ 17,221 $ 165 $ 6,295 $ (6,295) $ 17,386
Income Tax
Expense
(benefit) $ - $ - $ (88,000) $ - $ (88,000)
Net income
(loss) $ (5,368,042) $ 25,369 $ (216,419) $ - $ (5,559,092)
For the Six Months Ended June 30, 2002
DPC PD DPL Eliminations Totals
Revenues $ 2,585,367 $ - $ 1,955,582 $ - $ 4,540,949
Intersegment
Revenues $ 213,224 $ 495,822 $ - $ (709,046) $ -
Interest
Income $ 7,502 $ 22 $ 24,553 $ (3,379) $ 28,698
Interest
Expense $ 13,045 $ - $ 7,712 $ (3,379) $ 17,378
Income Tax
Expense $ - $ - $ 39,716 $ - $ 39,716
Net income
(loss) $ 54,237 $ (343,162) $ 98,661 $ - $ (190,264)
For the Six Months Ended June 31, 2001
DPC PD DPL Eliminations Totals
Revenues $ 3,391,113 $ 1,125 $ 2,356,857 $ - $ 5,749,095
Intersegment
Revenues $ 435,824 $ 1,411,148 $ 880 $ (1,847,852) $ -
Interest
Income $ 18,316 $ 668 $ 7,197 $ (16,265) $ 9,916
Interest
Expense $ 31,407 $ 392 $ 16,265 $ (16,265) $ 31,799
Income Tax
Expense $ 350,500 $ - $ (70,500) $ - $ 280,000
Net income
(loss) $ (6,245,456) $ 61,284 $ (155,947) $ - $ (6,340,119)
For the Year Ended December 31, 2001
DPC PD DPL Eliminations Totals
Revenues $ 6,475,533 $ - $ 3,854,324 $ - $ 10,329,857
Intersegment
Revenues $ - $ 778,450 $ 599,848 $ (1,378,298) $ -
Interest
Income $ 24,350 $ 310 $ 12,519 $ (24,350) $ 12,829
Interest
Expense $ 56,874 $ - $ 30,937 $ (24,350) $ 63,461
Depreciation and
amortization $ 196,555 $ 139,526 $ 114,671 $ - $ 450,752
Income Tax
Expense $ 350,523 $ 11,356 $ (62,996) $ - $ 298,883
Net income
(loss) $ (5,360,730) $ (1,596,321) $ (207,140) $ 123,471 $ (7,040,720)
Expenditures for
Segment Assets $ 104,257 $ 5,424 $ 23,600 - $ 133,281
Segment Assets $ 6,833,699 $ 409,601 $ 2,562,562 $ (3,292,803) $ 6,513,059
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
To the Shareholders and Board of Directors
Digital Power Corporation and Subsidiaries
Fremont, California
We have reviewed the accompanying consolidated balance sheets of Digital Power
Corporation and subsidiaries as of June 30, 2002 and 2001, and related
consolidated statements of operations, shareholders' equity, and cash flows for
the three and six month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with the standards established by the
American Institute of Certified Public Accountants. A review of interim
financial statements 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 examination in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
consolidated financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements in order for them
to be in conformity with accounting principles generally accepted in the United
States of America.
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
August 13, 2002
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 computer and other electronic
equipment industry, competition in the power supply industry, dependence on the
Guadalajara, Mexico facility and manufacturer in China, and other risks factors
detailed in the Company's Form 10-KSB for the year ended December 31, 2001.
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.
The financial statements included in this report include additional information
not otherwise required by regulations of the Securities and Exchange Commission.
The Company is providing this additional information in connection with Telkoor
Telecom Ltd.'s filings with the securities agencies in Israel.
THREE AND SIX MONTHS PERIODS ENDED JUNE 30, 2002, COMPARED TO JUNE 30, 2001
REVENUES
Revenues decreased by 5.3% to $2,358,100 for the three months ended June 30,
2002, from $2,489,748 for the second quarter ended June 30, 2001. Revenues from
the Company's United Kingdom's operations of Digital Power Ltd. decreased 11.6%
to $934,494 for the second quarter ended June 30, 2002, from $1,057,690 for the
second quarter ended June 30, 2001.
For the six months ended June 30, 2002, revenues decreased by 21.0% to
$4,540,949 from $5,749,095 for the six months ended June 30, 2001. For the six
months ended June 30, 2002, Digital Power Ltd. contributed $1,955,582 to the
Company's revenues compared to $2,356,857 for the six months ended June 30,
2001. The decrease in revenues was attributed primarily to the continued
softness in the telecommunications industry.
GROSS MARGINS
Gross margins were 30.6% for the three months ended June 30, 2002, compared to
(145.2)% for the three months ended June 30, 2001. Gross margins were 27.7% for
the six months ended June 30, 2002, compared to (52)% for the six months ended
June 30, 2001. The increase in gross margins can be primarily attributed to the
provision for inventory obsolescence of $3,250,560 during three months ended
June 30, 2001, reduced labor costs from the lay off of employees in PD at
Guadalajara Mexico in 2001 and implementation of a more sophisticated inventory
control. Also contributing to the increase in gross margins for the three months
ended June 30, 2002 was the reversal of $102,214 in accrued cancellation
charges. The reversal of this accrual was due in part to the recent resumption
of the sale of products to a customer who had previously cancelled his purchase
order.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were 23.2% of revenues for the
three months ended June 30, 2002, compared to 29.4% for the three months ended
June 30, 2001. In actual dollar, these expenses were down 25.2%, while revenues
were down 5.3%. Selling, general and administrative expenses were 23.1% of
revenues for the six months ended June 30, 2002, compared to 25.2% for the six
months ended June 30, 2001. Reduced selling, general and administrative expenses
can be attributed primarily to a decreased commissions paid and a reduction in
salary for administrative staff due to a 20% pay cut beginning in fourth quarter
of 2001.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were 7.8% of revenues for the three
months ended June 30, 2002, and 12.6% for the three months ended June 30, 2001.
Engineering and product development expenses were 8.2% of revenues for the six
months ended June 30, 2002, compared to 11.0% for the six months ended June 30,
2001. Actual dollar expenditures decreased $130,346 from $313,729 for the three
months ended June 30, 2001 to $183,383 for the three months ended June 30, 2002
and decreased $258,267 from $631,076 for the six months ended June 30, 2001 to
$372,809 for the six months ended June 30, 2002. The decreases in engineering
and product development expenses are mainly due to the reduced labor cost from
the lay of an engineer and reducing the cost of outside services.
INTEREST EXPENSE
Interest expense was $5,906 for the three months ended June 30, 2002, compared
to $17,386 for the three months ended June 30, 2001. Interest expense, was
$17,378 for the six months ended June 30, 2002 compared to $31,799 for the six
months ended June 30, 2001. The decrease in interest expense is primarily due to
reduced average borrowing balance on the Company line of credit, and replacement
of Digital Power Ltd. receivables financing with a bank line of credit with a
more favorable interest rate. Also, at the end of June 2002, the balance of the
line of credit with San Jose National Bank had been paid off.
INCOME (LOSS) BEFORE INCOME TAXES
For the three months ended June 30, 2002, the Company had an income before
income taxes of $19,656 compared to a loss before income taxes of $5,647,092 for
the three months ended June 30, 2001. For the six months ended June 30, 2002,
the Company had a loss before income taxes of $150,548 compared to loss before
income taxes of $6,060,119 for the six months ended June 30, 2001. As mentioned
below, reduced labor expenses resulting from last year's lay off and the
increase in our gross margin percentage contributed to our income.
INCOME TAX
Provision for income tax increased from an income tax benefit of $88,000 for the
three months ended June 30, 2001, to $14,046 for the second quarter of 2002. Due
to the net loss, DPC has no income tax provisions. The $14,046 income tax
provision in the second quarter of 2002 was solely for DPL. Provision for income
tax decreased from $280,000 for the six months ended June 30, 2001 to $39,716
for the six months ended June 30, 2002. A write off of a deferred asset of
$350,523 was included in the provision for income tax in the first quarter of
2001.
NET INCOME (LOSS)
Net income for the three months ended June 30, 2002, was $5,610 compared to net
loss of $5,559,092 for the three months ended June 30, 2001. Net loss for the
six months ended June 30, 2002, was $190,264, compared to a net loss of
$6,340,119 for the six months ended June 30, 2001. Reduced labor expenses
resulting from last year's lay off and the increase in our gross margin
percentage contributed to our income.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 2002, the Company had cash of $1,022,335 and working capital of
$1,848,424. This compares with cash of $765,144 and working capital of
$1,085,562 at June 30, 2001. The increase in working capital was primarily due
to an increase in accounts receivable and cash and a decrease in current
liabilities. Cash provided by operating activities for the Company totaled
$428,506 for the six months ended June 30, 2002. Cash provided in operating
activities for the Company totaled $254,968 for the six months ended June, 2001.
Cash used in investing activities was $58,496 for the six months ended June 30,
2002, compared to $68,749 for the six months ended June 30, 2001. Net cash used
by financing activities was $668,281 for the six months ended June30, 2002,
compared to the net cash provided by financing activities of $421,125 for the
six months ended June 30, 2001.
A $750,000 line of credit with San Jose National Bank ("SJNB") terminated on
June 2002 due to a change in business direction at SJNB. The Company opened a
new line of credit with Silicon Valley Bank on May 31, 2002. The Company can
borrow up to $600,000 at the bank's prime rate (currently 4.75%) as long as the
Company maintains a balance of $600,000 in a certificate of deposit ("CD"). Also
the Company can borrow up to $400,000 against our eligible accounts receivable.
The rate for this line of credit would be at the bank's prime rate plus 2.0%.
Silicon Valley Bank will be granted a warrant to purchase the Company's stock
equal to 10.0% of commitment amount of Facility B at an exercise price of $1.00
per share. The warrant shall be exercisable for ten years from the date of
issuance. The warrant may be exchanged with the payment of any additional
consideration for the Borrower's stock based upon the values of the warrant and
the stock at the time of the exchange, i.e. net issuance.
Included in accrued liabilities is a $508,000 accrual for severance payments for
the Company's operations in Mexico. Management is continuing to evaluate the
Company's Mexican operations and may modify its plans. Modifications to these
plans may result in adjustments to the severance accrual.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 25, 2002, Celetron USA, Inc. filed a complaint against the Company in
the Superior Court of the State of California for the County of Alameda (Case
No. 2002-047625). Celetron is alleging breach of contract, among other claims,
in connection with the purchase of power supplies by the Company from Celetron.
Celetron has been seeking damages of approximately $126,000. The Company has
settled this suit for $70,000, which will be paid in four installment beginning
in June 2002.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 CEO Certification under Sarbanes-Oxley Act of 2002
Exhibit 99.2 CFO Certification under Sabranes-Oxley Act of 2002
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the period covered by
this report:
Date of Report Date of Event Item Reported
April 11, 2002 April 5, 2002 Filing of additional information provided
to the Israeli Securities Authorities
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIGITAL POWER CORPORATION
(Registrant)
/s/ David Amitai
Date: August 14, 2002 ____________________________
David Amitai
Executive Officer
(Principal Executive Officer)
/s/ Uri Friedlander
Date: August 14, 2002 ____________________________
Uri Friedlander
Chief Financial Officer
(Principal Financial Officer)
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002, (the "Report") by Digital Power
Corporation (the "Company"), the undersigned, as the Chief Executive Officer of
the Company, hereby certifies pursuant to Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ David Amitai
------------------------------
David Amitai
Chief Executive Officer
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002, (the "Report") by Digital Power
Corporation (the "Company"), the undersigned, as the Chief Financial Officer of
the Company, hereby certifies pursuant to Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Uri Friedlander
-----------------------------
Uri Friedlander
Chief Financial Officer