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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, 2005
[ ] 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
incorporation or organization) Identification No.)
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 8, 2005, 6,161,859
================================================================================
DIGITAL POWER CORPORATION
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2005
IN U.S. DOLLARS
UNAUDITED
INDEX
PAGE
-------
Report of Independent Registered Public Accounting Firm 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 - 13
2
[LOGO OF ERNST & YOUNG]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS OF
DIGITAL POWER CORPORATION
We have reviewed the accompanying consolidated balance sheet of Digital
Power Corporation ("the Company") and its subsidiary as of September 30, 2005,
and the related consolidated statements of operations for the nine-month and
three-month periods ended September 30, 2005 and 2004, changes in shareholders'
equity for the nine-month period ended September 30, 2005, and the consolidated
statements of cash flows for the nine-month periods ended September 30, 2005 and
2004. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with the standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of 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 consolidated interim financial statements referred to
above for them to be in conformity with U.S. generally accepted accounting
principles.
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
November 15, 2005 A Member of Ernst & Young Global
3
DIGITAL POWER CORPORATION
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
SEPTEMBER 30,
2005
-------------
Unaudited
-------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,147
Restricted cash 281
Trade receivables, net of allowance for doubtful
accounts of $ 56 at September 30, 2005 1,700
Prepaid expenses and other current assets 140
Inventories 2,227
-------------
Total current assets 5,495
----- -------------
LEASE DEPOSITS 18
-------------
PROPERTY AND EQUIPMENT, NET 191
-------------
Total assets $ 5,704
----- =============
The accompanying notes are an integral part of the consolidated financial
statements.
4
DIGITAL POWER CORPORATION
CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
SEPTEMBER 30,
2005
-------------
Unaudited
-------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,777
Related party - trade payables account 476
Deferred revenues 363
Other current liabilities 377
Convertible note (Note 4) 250
-------------
Total current liabilities 3,243
----- -------------
SHAREHOLDERS' EQUITY:
Series A Redeemable, Convertible Preferred shares no
par value: 500,000 shares authorized; 0 shares
issued and outstanding at September 30, 2005 -
Preferred shares, no par value: 1,500,000 shares
authorized; 0 shares issued and outstanding at
September 30, 2005 -
Common shares, no par value: 10,000,000 shares
authorized; 6,161,859 shares issued and
outstanding at September 30, 2005 11,036
Additional paid-in capital 2,227
Deferred stock compensation (8)
Accumulated deficit (10,780)
Accumulated other comprehensive loss (14)
-------------
Total shareholders' equity 2,461
----- -------------
Total liabilities and shareholders' equity $ 5,704
----- =============
The accompanying notes are an integral part of the consolidated financial
statements.
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
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Unaudited
-----------------------------------------------------
Revenues $ 7,187 $ 6,158 $ 2,969 $ 2,190
Cost of revenues 5,090 4,673 2,120 1,669
----------- ----------- ----------- -----------
Gross profit 2,097 1,485 849 521
----------- ----------- ----------- -----------
Operating expenses:
Engineering and product development 374 449 151 157
Selling and marketing 999 947 319 325
General and administrative 797 811 268 256
----------- ----------- ----------- -----------
Total operating expenses 2,170 2,207 738 738
----- ----------- ----------- ----------- -----------
Operating income (loss) (73) (722) 111 (217)
Financial income (expenses), net (87) (5) 1 (7)
Other expenses - (6) - (6)
----------- ----------- ----------- -----------
Net income (loss) $ (160) $ (733) $ 112 $ (230)
=========== =========== =========== ===========
Basic net earnings (loss) per share $ (0.03) $ (0.13) $ 0.02 $ (0.04)
=========== =========== =========== ===========
Diluted net earnings (loss) per share $ (0.03) $ (0.13) $ 0.02 $ (0.04)
=========== =========== =========== ===========
Weighted average number of shares used in
computing basic net earnings (loss) per share 6,161,859 5,772,868 6,161,859 6,121,096
=========== =========== =========== ===========
Weighted average number of shares used in
computing diluted net earnings (loss) per share 6,161,859 5,772,868 6,183,665 6,121,096
=========== =========== =========== ===========
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 TOTAL TOTAL
COMMON SHARES ADDITIONAL DEFERRED OTHER COMPRE- SHARE-
--------------------- PAID-IN STOCK ACCUMULATED COMPREHENSIVE HENSIVE HOLDERS'
NUMBER AMOUNT CAPITAL COMPENSATION DEFICIT INCOME (LOSS) LOSS EQUITY
--------- ---------- ----------- ------------ ----------- ------------- --------- ---------
Balance as of 6,161,859 $ 11,036 $ 2,227 $ (13) $ (10,620) $ 75 $ 2,705
January 1, 2005
Amortization of
deferred stock
compensation related
to options granted to
an employee - - - 5 - - 5
Comprehensive loss:
Net loss - - - - (160) - $ (160) (160)
Foreign currency
translation
adjustments - - - - - (89) (89) (89)
--------- ---------- ---------- ------------ ----------- ------------- --------- ---------
Total comprehensive
loss $ (249)
=========
Balance as of
September 30, 2005
(unaudited) 6,161,859 $ 11,036 $ 2,227 $ (8) $ (10,780) $ (14) $ 2,461
========= ========== =========== ============ =========== ============= =========
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
SEPTEMBER 30,
-----------------------
2005 2004
---------- ----------
Unaudited
-----------------------
Cash flows from operating activities:
-------------------------------------
Net loss $ (160) $ (733)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 64 79
Loss on sale of property and equipment - 6
Compensation related to options granted to an employee 5 10
Increase in trade receivables (52) (4)
Decrease (increase) in prepaid expenses and other current assets 25 (65)
Decrease (increase) in inventories (795) 168
Increase in accounts payable 538 224
Increase (decrease) in deferred revenues and other current liabilities 46 (286)
---------- ----------
Net cash used in operating activities (329) (601)
---------- ----------
Cash flows from investing activities:
-------------------------------------
Restricted cash (50) 65
Purchase of property and equipment (21) (22)
Proceeds from sale of property and equipment - 3
---------- ----------
Net cash provided by (used in) investing activities (71) 46
---------- ----------
Cash flows from financing activities:
-------------------------------------
Proceeds from issuance of Common shares - 743
Proceeds from a convertible note 250 -
Exercise of options granted to an employee - 7
---------- ----------
Net cash provided by financing activities 250 750
---------- ----------
Effect of exchange rate changes on cash and cash equivalents (26) 4
---------- ----------
Increase (decrease) in cash and cash equivalents (176) 199
Cash and cash equivalents at the beginning of the period 1,323 1,050
---------- ----------
Cash and cash equivalents at the end of the period $ 1,147 $ 1,249
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements
8
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,
2004, 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, 2005 and for the nine-month
periods ended September 30, 2005 and 2004 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 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, 2004. The results of operations for the nine-month
period ended September 30, 2005 are not necessarily
indicative of the results for the entire fiscal year ending
December 31, 2005.
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.
Under Statement of Financial Accounting Standard No. 123,
"Accounting for Stock Based Compensation" ("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.
9
DIGITAL POWER CORPORATION
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The fair value for options granted in the nine months ended
September 30, 2005 and 2004 is amortized over their vesting
period and estimated at the date of grant using a
Black-Scholes options pricing model with the following
assumptions:
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Unaudited
-------------------------------------------------
Dividend yield 0% 0% - -
Expected volatility 103% 107%-111% - -
Risk-free interest 4% 3%-3.5% - -
Expected life of up to 7 years 5-7 years - -
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 THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Unaudited
-------------------------------------------------
Net income (loss) available to
Ordinary shares - as
reported $ (160) $ (733) $ 112 $ (230)
Add - stock-based employee
compensation - intrinsic
value 5 10 2 1
Deduct - stock-based employee
compensation -fair value (99) (143) (33) (28)
---------- ---------- ---------- ----------
Pro forma net income (loss) $ (254) $ (866) $ 81 $ (257)
========== ========== ========== ==========
Basic net earnings (loss) per
share, as reported $ (0.03) $ (0.13) $ 0.02 $ (0.04)
========== ========== ========== ==========
Proforma basic net earnings
(loss) per share $ (0.04) $ (0.15) $ 0.01 $ (0.04)
========== ========== ========== ==========
Diluted net earnings (loss)
per share, as reported $ (0.03) $ (0.13) $ 0.02 $ (0.04)
========== ========== ========== ==========
Proforma diluted net earnings
(loss) per share $ (0.04) $ (0.15) $ 0.01 $ (0.04)
========== ========== ========== ==========
10
DIGITAL POWER CORPORATION
NOTE 3:- INVENTORIES
SEPTEMBER 30,
2005
-------------
Unaudited
-------------
Raw materials, parts and supplies $ 472
Work in progress 422
Finished products 1,333
-------------
$ 2,227
=============
NOTE 4:- CONVERTIBLE LOAN
In February 2005, the Company entered into a convertible loan
agreement with Telkoor, according to which Telkoor loaned a $ 250
interest free convertible note to be paid on the tenth business
day after the Company announced its financial results for 2005.
The note may be converted into Common shares at a rate of $ 1.06
per share, which is equal to the quoted market price of the
Company's Common stock on the date the Note was approved and
signed. Automatic conversion shall occur if the Company meets its
set budget for 2005. In accordance with the guidelines of APB No.
14, "Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants", EITF Issue No. 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Instruments", and EITF Issue
No. 00-27, "Application of issue No. 98-5 to Certain Convertible
Instruments", the Company has determined the Note had no
beneficial conversion feature since the conversion price was equal
to the quoted market price of the Company's Common stock at the
date the note was approved and signed.
NOTE 5:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Pending litigation:
On April 2, 2003, a claim was filed against the Company by
Tek-Tron Enterprises Inc. ("Tek-Tron"). In April 2004, the
Company signed a settlement agreement with Tek-Tron
according to which the Company paid $ 90 and returned
certain disputed inventory for a full release. The
settlement agreement allowed Tek-Tron to seek arbitration
limited to the sum of $ 50 in case the parties do not agree
on a resolution regarding the returned inventory. Tek-Tron
initiated arbitration against the Company for $ 50 plus
legal fees. The arbitration hearing was held on May 2,
2005, and Tek-Tron was awarded $ 5 in damages and no legal
fees. Tek-Tron filed an appeal of the arbitration, and in
response, the Company filed a petition to enforce the
settlement agreed. On October 31, 2005, the Company has
been notified that Tek-Tron would be withdrawing its
arbitration appeal, and dismissing this matter formally and
finally. We are waiting receipt of the official dismissal
paper.
b. On May 3, 2005, the Company received a written notice from
the American Stock Exchange ("the AMEX"), advising that the
Company was not in compliance with the AMEX's listing
requirements. In order to maintain its AMEX listing, the
Company submitted on June 3, 2005, a recovery plan which
was accepted by AMEX, and the Company will be able to
continue its listing during the plan period, subject to
AMEX's periodic reviews. If the Company is not in
compliance with the listing standards at the end of such 18
months period or fails the periodic reviews, the AMEX will
initiate delisting proceedings.
11
DIGITAL POWER CORPORATION
NOTE 6:- EVENTS DURING THE PERIOD
In April 2005, the Company granted 70,000 options to Telkoor's
employees. The Company had accounted for its options to Telkoors'
employees under the fair value method of SFAS No. 123 and EITF
96-18. The fair value for these options was estimated using a
Black-Scholes option-pricing model with the following assumptions:
risk-free interest rates of 4.4%, dividend yields of 0%,
volatility of 103.5%, and the contractual life of the options of
10 years. The fair value is amortized over the vesting period of
the options of 4 years.
During the quarter, no compensation expenses were recorded in the
financial statements due to immateriality.
NOTE 7:- 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, 2005
(unaudited)
---------------------------------------------------
DPC DPL ELIMINATIONS TOTAL
---------- ---------- ------------ ----------
Revenues $ 3,373 $ 3,814 $ - $ 7,187
Intersegment revenues 629 - (629) -
---------- ---------- ------------ ----------
Total revenues $ 4,002 $ 3,814 $ (629) $ 7,187
========== ========== ============ ==========
Depreciation expenses $ 16 $ 48 $ - $ 64
========== ========== ============ ==========
Operating income (loss) $ (101) $ 28 $ - $ (73)
========== ========== ============ ==========
Financial expenses, net $ (87)
==========
Net loss $ (92) $ (68) $ - $ (160)
========== ========== ============ ==========
Expenditures for segment assets at
September 30, 2004 $ 19 $ 2 $ - $ 21
========== ========== ============ ==========
Identifiable assets at September 30,
2004 $ 2,140 $ 3,564 $ - $ 5,704
========== ========== ============ ==========
12
DIGITAL POWER CORPORATION
NOTE 7:- SEGMENTS, MAJOR CUSTOMERS AND GEOGRAPHICAL INFORMATION (Cont.)
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
========== ========== ============ ==========
THREE MONTHS ENDED SEPTEMBER 30, 2005
(unaudited)
---------------------------------------------------
DPC DPL ELIMINATIONS TOTAL
---------- ---------- ------------ ----------
Revenues $ 1,272 $ 1,697 $ - $ 2,969
Intersegment revenues 431 - (431) -
---------- ---------- ------------ ----------
Total revenues $ 1,703 $ 1,697 $ (431) $ 2,969
========== ========== ============ ==========
Depreciation expenses $ 5 $ 16 $ - $ 21
========== ========== ============ ==========
Operating income (loss) $ (10) $ 121 $ - $ 111
========== ========== ============ ==========
Financial income, net $ 1
==========
Net income (loss) $ (6) $ 118 $ - $ 112
========== ========== ============ ==========
Expenditures for segment assets at
September 30, 2004 $ 11 $ - $ - $ 11
========== ========== ============ ==========
Identifiable assets at September 30,
2004 $ 2,140 $ 3,564 $ - $ 5,704
========== ========== ============ ==========
13
DIGITAL POWER CORPORATION
NOTE 5:- SEGMENTS, MAJOR CUSTOMERS AND GEOGRAPHICAL INFORMATION (Cont.)
THREE MONTHS ENDED SEPTEMBER 30, 2005
(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
========== ========== ============ ==========
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 electronic equipment industry,
competition in the power supply industry, dependence on manufacturers in China
and other risks factors detailed in the Company's Form 10-KSB for the year ended
December 31, 2004. 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 the industrial,
telecommunication, data communication, medical and military industries. Revenues
are generated from sales to distributors, system integrators, OEMs 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 products 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 February 2005, the Company signed on a $250,000 convertible note ("the Note")
agreement with Telkoor Telecom Ltd.("Telkoor"), a major stockholder in the
company. In accordance with the aforementioned agreement, the Company is
obligated to repay Telkoor the amount of $250,000 on the 10th business day after
the release of its financial results for the year ended December 31, 2005. The
conversion price of the Note is $1.06, which was the quoted market price of the
Company's Common stock on the date the Note was approved and signed. In
accordance with the guidelines of APB No. 14, "Accounting for Convertible Debt
and Debt Issued with Stock Purchase Warrants", EITF Issue No. 98-5, "Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios" and EITF Issue No. 00-27, "Application of issue
No. 98-5 to Certain Convertible Instruments", the Company has determined the
date of approving and signing the agreement as the commitment date and since the
conversion price was equal to the market price of the company's Common stock at
that date, the Note had no beneficial conversion feature.
15
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005, COMPARED TO SEPTEMBER 30, 2004
REVENUES
Total revenues increased by 35.6% to $2,969,000 for the three months ended
September 30, 2005, from $2,190,000 for the three months ended September 30,
2004.
Revenues from the domestic operations of DPC increased 24.8% to $1,272,000 for
the third quarter ended September 30, 2005, from $1,019,000 for the third
quarter ended September 30, 2004. Revenues from the Company's European
operations of DPL increased 44.9% to $1,697,000 for the third quarter ended
September 30, 2005, from $1,171,000 for the third quarter ended September 30,
2004. The revenue increase in the third quarter of 2005 is mainly due to
increase in sales of military products and new products.
For the nine months ended September 30, 2005, revenues increased by 16.7% to
$7,187,000 from $6,158,000 from the nine months ended September 30, 2004.
Revenues attributed to the domestic operations of DPC for the nine months ended
September 30, 205, increased by 17.4% to $3,373,000 from $2,874,000 for the nine
months ended September 30, 2004. The increase in revenue from the domestic
operations of DPC is mainly due to higher sales of our new products and military
products. Revenues from the Company's European operations of DPL for the nine
months ended September 30, 2005 increased by 16.1% to $3,814,000 from $3,284,000
for the nine months ended September 30, 2004.
GROSS MARGINS
Gross margins were 28.6% for the three months ended September 30, 2005, compared
to 23.8% for the three months ended September 30, 2004. The increase in gross
margins can be primarily attributed to the increase use of lower cost contract
manufacturers in the Far East. Gross margins were 29.2% for the nine months
ended September 30, 2005 compared to 24.1% for the nine months ended September
30, 2004. The increase in gross margins can be primarily attributed to increase
use of lower cost contract manufacturers in the Far East.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were 5.1% of revenues for the three
months ended September 30, 2005, and 7.2% for the three months ended September
30, 2004. In absolute dollars, the engineering expenses remained at
approximately the same level. Engineering and product development expenses were
5.2% of revenues for the nine months ended September 30, 2005, compared to 7.3%
of revenues for the nine months ended September 30, 2004.
16
SELLING AND MARKETING
Selling and marketing expenses were 10.7% of revenues for the three months ended
September 30, 2005, compared to 14.8% for the three months ended September 30,
2004. In absolute dollars, the selling and marketing expenditures remained at
approximately the same level. Selling and marketing expenses were 13.9% of
revenues for the nine months ended September 30, 2005, compared to 15.4% for the
nine months ended September 30, 2004. In absolute dollars, the selling and
marketing expenditures increased by $52,000. The increase in selling and
marketing were primarily due to new hires, and travel expenses as part of our
efforts to increase sales.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were 9.0% of revenues for the three months
ended September 30, 2005, compared to 11.7% for the three months ended September
30, 2004. General and administrative expenses were 11.1% of revenues for the
nine months ended September 30, 2005, compared to 13.2% for the nine months
ended September 30, 2004. In absolute dollars, the general and administrative
expenditures remained at approximately the same level.
FINANCIAL INCOME (EXPENSES), NET
Financial income net was $1,000 for the three months ended September 30, 2005,
compared to financial expense net of $7,000 for the three months ended September
30, 2004. Financial expense was $87,000 for the nine months ended September 30,
2005, compare to financial expense of $5,000 for the nine months ended September
30, 2004. Financial expense resulted mainly from the exchange rate fluctuation.
NET PROFIT (LOSS)
For the three months ended September 30, 2005, the Company had net profit of
$112,000 compared to a net loss of $230,000 for the three months ended September
2004. The net profit is mainly due to the increase in revenues and increase in
gross margin. Net loss for the nine months ended September 30, 2005 decrease to
$160,000 compared to $733,000 for the nine months ended September 30, 2004. The
net loss decrease is mainly due to increase in sales and increase in gross
margin.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2005, the Company had cash, and cash equivalents $1,147,000 and
working capital of $2,252,000. This compares with cash and cash equivalents of
$1,249,000 and working capital of $2,785,000 at September 30, 2004. The decrease
in working capital is mainly due to operating losses.
Cash used in operating activities for the Company totaled $329,000 for the nine
months ended September 30, 2005, compared to cash used in operating activities
of $601,000 for the nine months ended September 30, 2004. Cash used in investing
activities was $71,000 for the nine months ended September 30, 2005, compared to
$46,000 cash provided for the nine months ended September 30, 2004.
17
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 30, 2005, the Company 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.
AMEX LISTING
On May 3, 2005, the Company received a written notice from the American Stock
Exchange ("the AMEX"), advising that the Company was not in compliance with the
AMEX's listing requirements. In order to maintain its AMEX listing the Company
submitted on June 3, 2005 a recovery plan which was accepted by AMEX and the
Company will be able to continue its listing during the plan period, subject to
AMEX's periodic reviews. If the Company is not in compliance with the listing
standards at the end of such 18 months period or fails the periodic reviews, the
AMEX will initiate delisting proceedings.
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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 2, 2003, a claim was filed against the Company by Tek-Tron Enterprises
Inc. ("Tek-Tron"). In April 2004, the Company signed a settlement agreement with
Tek-Tron according to which the Company paid $90,000 returned certain disputed
inventory for a full release. The settlement agreement allowed Tek-Tron to seek
arbitration limited to the sum of $50,000 on case the parties do not agree on a
resolution regarding the returned inventory. Tek-Tron initiated arbitration
against the Company for $50,000 plus legal fees. The arbitration hearing was
held on May 2, 2005, and Tek-Tron was awarded $5,000 in damages and no legal
fees. Tek-Tron filed an appeal of the arbitration, and in response, the Company
filed a petition to enforce the settlement agreed. On October 31, 2005, the
Company have been notified that Tek-Tron would be withdrawing its arbitration
appeal, and dismissing this matter formally and finally. We are waiting receipt
of the official dismissal paper.
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
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 16, 2005 August 16, 2005 Financial Results for Second Quarter
July 14, 2005 July 14, 2005
July 6, 2005 July 6, 2005 Amex approval Digital Power's recovery plan
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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)
/s/ Jonathan Wax
Date: 11/15/2005 -------------------------------------------
Jonathan Wax
Chief Executive Officer
(Principal Executive Officer)
/s/ Leo Yen
Date: 11/15/2005 -------------------------------------------
Leo Yen
Chief Financial Officer
(Principal Financial Officer)
20