SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: 0-1921
POWER DESIGNS, INC.
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(Name of Small Business Issuer as specified in its charter)
New York 11-1708714
- ---------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14 Commerce Drive, Danbury, CT 06810
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
(203) 748-7001
- --------------------------------------------------------------------------------
(Issuer's telephone number, Including Area Code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 __ No X
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
Yes __ No X
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 2,391,493 as of May 12 1997
Transitional Small Business Disclosure Format (Check one):
Yes __ No X
POWER DESIGNS, INC.
FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of
March 31, 1997 and 1996 ................................. 4
Condensed Consolidated Statement of Operations for
the three and nine months ended March 31, 1997
and 1996 ................................................ 5
Condensed Consolidated Statements of Changes
in Stockholders' Deficit for the three and nine
months ended March 31, 1997 ............................. 6
Condensed Consolidated Statement of Cash Flows for
the three and nine months ended March 31, 1997 and 1996.. 7
Notes to Condensed Consolidated Financial Statements .... 8
PART II - OTHER INFORMATION
Item 3. DEFAULTS UPON SENIOR SECURITIES ......................... 14
Item 6. EXHIBITS AND REPORTS ON FORM 8-K ........................ 14
Signatures .......................................................... 15
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3
POWER DESIGNS, INC.
Condensed Consolidated Balance Sheet
(Unaudited)
March 31, 1997 and 1996
1997 1996
---- ----
ASSETS
Current assets:
Accounts receivable $989,401 $21,876
Inventories 1,949,898 245,470
Prepaid expenses 15,740 3,582
----------- -----------
Total current assets 2,955,039 270,928
----------- -----------
Property and equipment, less accumulated
depreciation 644,276 5,886
----------- -----------
Other assets:
Investment in partnership 22,041 21,294
Security deposits 86,366 3,855
Goodwill 2,832,496 --
Financing fees and organizational costs 320,081 --
----------- -----------
3,260,984 25,149
----------- -----------
$6,860,299 $301,963
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Seller financing $2,550,000 $0
Cash overdraft 121,295 10,439
Accounts payable and accrued expenses 2,722,018 154,606
Current portion of long-term debt -- 572,250
Payables related to reorganization,
including accrued interest 134,124 59,375
----------- -----------
Total liabilities 5,527,437 796,670
----------- -----------
Long-term debt:
Notes payable - other -- 306,946
Notes payable - affiliates 5,294,351 --
----------- -----------
Total long term debt 5,294,351 306,946
----------- -----------
Stockholders' deficit
Preferred stock 264,854 --
Common stock 240 218
Additional paid in capital 827,732 784,754
Deficit (5,054,315) (1,586,625)
----------- -----------
Total stockholders' deficit (3,961,489) (801,653)
----------- -----------
$6,860,299 $301,963
=========== ===========
4
POWER DESIGNS, INC.
Condensed Consolidated Statement of Operations
(Unaudited)
For The Three and Nine Months Ended March 31, 1997 and 1996
PDIXF
3 months ended 3 months ended Power Acquisition 9 months ended 9 months ended
March 31, 1997 March 31, 1996 Designs, Inc. Corp. March 31, 1997 March 31, 1996
Net Sales $1,090,086 $108,471 $390,308 $2,029,512 $2,419,820 $426,564
Cost of Sales 1,080,010 68,337 358,777 1,798,432 2,157,208 268,476
----------- -------- --------- ----------- ----------- ---------
Gross profit 10,076 40,134 31,531 231,080 262,612 158,088
Selling, general and admin. expense 1,335,805 89,074 346,782 2,428,335 2,775,117 246,396
----------- -------- --------- ----------- ----------- ---------
Net loss before other income (expense) (1,325,729) (48,940) (315,250) (2,197,256) (2,512,505) (88,308)
----------- -------- --------- ----------- ----------- ---------
Other income (expense):
Investment income 1,820 -- 3,320 -- 3,320 8,231
Interest expense (259,042) (10,213) (71,778) (437,696) (509,475) (54,616)
----------- -------- --------- ----------- ----------- ---------
(257,222) (10,213) (68,458) (437,696) (506,155) (46,385)
----------- -------- --------- ----------- ----------- ---------
Net loss (1,582,951) ($59,153) (383,709) ($2,634,952) (3,018,661) ($134,693)
=========== ======== ========= =========== =========== =========
Net loss per share ($0.66) ($0.03) ($0.16) ($1.10) ($1.26) ($0.06)
=========== ======== ========= =========== =========== =========
5
POWER DESIGNS, INC.
Condensed Consolidated Statement of Changes in Stockholders' Deficit
(Unaudited)
For The Three and Nine Months Ended March 31, 1997
Shares Shares
Preferred Common Additional
Stock Stock Preferred Common Paid-in
Outstanding Outstanding Stock Stock Capital Deficit Total
----------- ----------- ----- ----- ------- ------- -----
Balance, June 30, 1995 0 2,176,259 $0 $218 $784,754 ($1,451,932) ($666,960)
Net loss -- -- -- -- -- (75,540) (75,540)
Balance, December 31,1995 -- 2,176,259 -- 218 784,754 (1,527,472) (742,500)
Net loss -- -- -- -- -- (59,153) (59,153)
------- --------- -------- ---- -------- ----------- -----------
Balance, March 31, 1996 0 2,176,259 $0 $218 $784,754 ($1,586,625) ($801,653)
======= ========= ======== ==== ======== =========== ===========
Balance, June 30, 1996 0 2,391,493 $ 0 $240 $820,732 ($2,025,464) ($1,204,492)
Dividends accrued -- -- -- -- -- (4,826) (4,826)
Stock issuance 316,689 -- 264,854 -- 7,000 -- 271,854
Net loss -- -- -- -- -- (1,435,710) (1,435,710)
Balance, December 31, 1996 316,689 2,391,493 264,854 240 827,732 (3,466,000) (2,373,174)
Dividends accrued -- -- -- -- -- (5,364) (5,364)
Net loss -- -- -- -- -- (1,582,951 (1,582,951)
------- --------- -------- ---- -------- ----------- -----------
Balance, March 31, 1997 316,689 2,391,493 $264,854 $240 $827,732 ($5,054,315) ($3,961,489)
======= ========= ======== ==== ======== =========== ===========
6
POWER DESIGNS, INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
For The Three and Nine Months Ended March 31, 1997 and 1996
3 months ended 3 months ended 9 months ended 9 months ended
March 31, 1997 March 31, 1996 March 31, 1997 March 31, 1996
Cash flows from operating activities:
Net loss ($1,582,951) ($59,153) ($3,018,661) ($134,693)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 148,956 246 223,209 246
(Increase) decrease in:
Accounts receivable 110,914 (4,484) (374,005) (9,097)
Inventories (680,340) (9,242) (824,183) (43,963)
Prepaid Expenses (10,169) 371 (15,740) 141
Other assets (186,106) -- (281,270) --
Increase (decrease) in:
Accounts payable and accrued expenses 1,267,331 (39,369) 2,060,074 (18,529)
Payable related to reorganization (9,485) -- (127,531) (185,590)
----------- --------- ----------- ---------
Cash flows used in operating activities (941,850) (111,631) (2,358,107) (391,485)
----------- --------- ----------- ---------
Cash flows used in investing activities:
Purchase of property and equipment (144,066) -- (180,853) --
----------- --------- ----------- ---------
Cash flows from (used in) financing activities:
Advances from affiliates 1,181,365 -- 3,603,325 (34,391)
Acquisition of Penril net assets* (200,000) -- (1,936,558) --
Cash received from long term financing 97,044 495,178 422,484
Cash received from stock issuance net of
declared dividends (5,366) -- 261,660 --
----------- --------- ----------- ---------
Cash flows provided by financing activities 975,999 97,044 2,423,605 388,093
----------- --------- ----------- ---------
Net increase (decrease) in cash (109,917) (14,587) (115,355) (3,392)
Cash (overdraft), beginning of period (11,378) 4,148 (5,940) (7,047)
----------- --------- ----------- ---------
Cash (overdraft), end of period ($121,295) ($10,439) ($121,295) ($10,439)
=========== ========= =========== =========
* In addition the company received $2,750,000 in seller financing to purchase
assets and assume liabilities from Penril (see Note 2).
7
POWER DESIGNS, INC.
---------------
Notes To the Condensed Consolidated Financial Statements
For the Three and Nine Months Ended March 31, 1997 and 1996
Note 1 - Basis of Presentation:
The condensed consolidated financial statements included herein have been
prepared by Power Designs, Inc. (the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although management
of the Company believes that the disclosures are adequate to make the
information presented not misleading. These condensed consolidated financial
statements should be read in conjunction with the notes thereto. In the opinion
of the management of the Company, the condensed consolidated financial
statements include all adjustments, consisting of only normal recurring
adjustments, necessary to fairly present the results for the interim periods to
which these financial statements relate.
The results of operations for the three and nine months ended March 31, 1997 are
not necessarily indicative of the results to be expected for the full year.
The consolidated statements of operations for the periods ended March 31, 1997
include the operations of PDIXF Acquisition Corporation (see Note 2) for the
period October 11, 1996 through March 31, 1997.
Note 2 - Significant Events:
On October 11, 1996, a wholly owned subsidiary of the Company, PDIXF Acquisition
Corporation ("PAC"), acquired (the "Acquisition"), for approximately $4.4
million, assets of Technipower, Inc. and Constant Power, Inc., two divisions of
Penril Datacomm Networks, Inc. ("Penril"), encompassing three product lines.
Additionally, the Company repaid loans, notes payable and obligations to
creditors totaling approximately $1,490,000 that existed as of October 11, 1996.
The Company also incurred approximately $260,000 in costs (financing and
organizational) related to the Acquisition.
8
The following provided funding for the Acquisition (totaling approximately
$6,180,000):
316,743 shares of preferred stock convertible to
common stock at a conversion rate to be
determined at a future date $ 265,000
Warrants convertible into 416,749 shares of
common stock at 87.5 cents per share 7,000
Subordinate debt from six individuals and a
limited partnership 1,087,000
Note payable to Inverness Corporation
("Inverness") (Due April 1, 1998) 2,290,000
Seller financing (Note due December 31, 1996) 2,750,000
----------
Total sources 6,399,000
Less: cash deposited into PAC for working capital ( 219,000)
----------
$6,180,000
==========
The Company defaulted on the $2,750,000 note (the "Penril Indebtedness")
secured by the majority of the Company's assets, due to Penril at December 31,
1996. As a result of the default, the Company was in breach of its asset
purchase agreement with Penril (the "Asset Purchase Agreement") executed
pursuant to the Acquisition. As of this date, the Company and Penril have
entered into the Forbearance Agreement (as defined below) providing for an
extension of time for repayment of the Penril Indebtedness. The Forbearance
Agreement required the Company to make payments totaling $200,000 prior to March
31, 1997, and thereafter to make payments in accordance with the following
schedule:
April 7, 1997 $50,000
April 14, 1997 $500,000
April 21, 1997 $50,000
April 28, 1997 $50,000
April 30, 1997 $450,000
May 5, 1997 $50,000
May 12, 1997 $50,000
May 19, 1997 $50,000
May 30, 1997 $300,000
July 31, 1997 $1,000,000
9
Penril subsequently agreed to permit the Company to make payments of $100,000,
$50,000, $75,000 and $75,000 on May 30, 1997, June 4, 1997, June 10, 1997 and
June 20, 1997, respectively, in lieu of the $300,000 payment due on May 30,
1997. As of June 10, 1997, the Company was current on its obligations under the
terms of the Forbearance Agreement, as modified.
The Company is seeking to raise equity financing to provide the funds needed to
repay the balance of the Penril Indebtedness. The Company is simultaneously
working to arrange necessary bridge financing. As of June 10, 1997, the Company
had raised $1,953,500 of bridge financing through a private offering (the
"Offering") of units ("Units"), each Unit consisting of (i) one 10% subordinated
promissory note in the principal amount of $100,000 (the principal balance and
accrued interest of which are due and payable on the earlier of 12 months after
the closing of the Offering or upon the closing of any financing which provides
the Company with a minimum of $5,000,000 of gross proceeds) and (ii) one
five-year warrant ("Warrant") to purchase 40,000 shares of common stock, par
value $.0001 per share ("Common Stock"), of the Company at an initial exercise
price per share equal to $.25 (subject to adjustment upon the occurrence of
certain events and without giving effect to a contemplated reverse stock split
which will adjust the Warrants included in each Unit); provided, however, that
in no event shall the Warrants be exercisable, after adjustment, for less than
10,000 shares of Common Stock or at an exercise price per share greater than
$1.00. The Units were offered at a price of $100,000 per Unit.
Note 3 - Subsequent Events:
During the quarter ended March 31, 1997, the Company made an election to
reallocate the $4,430,000 purchase price paid to Penril pursuant to the
Acquisition among the assets stated on its opening balance sheet. The October
11, 1996 carrying value of work in process and finished goods inventories have
been reduced by $619,090 and $329,682, respectively, while goodwill has been
increased by the same amounts. This $948,772 realignment in asset values,
created by the technological volatility in the product market, more closely
approximates management's estimation of the market value of its inventories, as
well as the value of goodwill purchased on the date of acquisition.
Intangible assets are stated at cost and are amortized using the straight-line
method over their estimated useful lives. During the quarter ended March 31,
1997, the Company made an election to reduce the estimated useful life of
goodwill from 40 years to 15 years. It is management's estimation that this
useful life more closely approximates the duration of this asset's benefit. With
respect to this asset, year-to-date amortization expense through March 31, 1997
is shown at $89,276, rather than the $33,479 which would result from a 40 year
useful life.
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations.
Current Developments
On October 11, 1996, the Company, through PAC, completed the Acquisition
pursuant to the Asset Purchase Agreement. Under the Asset Purchase Agreement,
10
the Company acquired assets of Penril related to the manufacture of three
product lines (the "Business").
Total consideration to Penril consisted of $1,586,085 in cash, a
$2,750,000 note issued to Penril by PAC representing the Penril Indebtedness, a
royalty equity equal to 2% of the Business' gross sales during the period from
July 1, 1997 through June 30, 2001, and various assumed liabilities valued at
approximately $632,600. The Penril Indebtedness bears annual interest of 2%
above prime rate, and was originally due December 31, 1996. The principal amount
of the Penril Indebtedness was not repaid when due, thereby placing the Company
in default. On March 10, 1997 the Company and Penril executed the Forbearance
Agreement, which is described in further detail below at Part II - Item 3
"Defaults Upon Senior Securities."
As discussed in more detail in "Liquidity and Capital Resources" below,
funds for the Acquisition were obtained through additional financing.
In addition, in early 1995, the Company's shareholders approved a
resolution calling for the reincorporation of the Company under Delaware law, by
merging the Company into a Delaware corporation also named Power Designs, Inc.
The merger remains unexecuted pending approval by the New York State Department
of State, Division of Corporations.
Liquidity and Capital Resources.
On October 11, 1996, the Company obtained outside financing totaling
approximately $6.2 million in connection with the Acquisition. The financing
consisted of three primary components: a private placement of debt and equity
securities for $1,087,000 to six individuals and a limited partnership; a note
payable to Inverness Corporation in the amount of $2,290,000; and a note payable
to Penril of $2.75 million representing the Penril Indebtedness, originally due
on December 31, 1996. The Company defaulted on the Penril Indebtedness and
thereafter entered into the Forbearance Agreement pursuant to which it is
repaying the Penril Indebtedness. See Part II - Item 3, "Defaults Upon Senior
Securities."
In addition, when the Company emerged from bankruptcy in June 1994 it
entered into a plan of reorganization that required payments to pre-bankruptcy
creditors of approximately $59,000 per year through fiscal 1997 and $49,000 from
then through fiscal 2000. The Company is continuing to make these payments.
Because of the completed Acquisition, the Company hopes to be able to
supply a greater percentage of its working capital needs through operating cash
flow during the 1997 fiscal year. Nevertheless, the Company has also undertaken
the Offering, pursuant to which the Company had raised $1,953,500 as of June 10,
1997.
The remaining capital necessary for operating purposes and capital
investment is anticipated to be supplied by financings secured by the Company's
receivables and additional loans and equity financings.
The Company currently has a deficit in shareholders' equity, meaning that
amounts owned to its creditors, including, without limitation, Inverness and
Penril, exceed the value of its assets. As of the end of the reporting period,
the Company has no plans beyond the above to remedy the deficit in shareholders'
equity.
11
Results of Operations.
Results for the first nine months of fiscal 1997 reflect the Acquisition,
and therefore represent a substantial change from the figures for the same
period in 1996. Accordingly, a period-to-period comparison of the historical
results of operations and financial condition of the Company is not meaningful.
Further, a period-to-period comparison of the pro forma results of operations
and financial condition of the Company is not meaningful.
First nine months of fiscal 1997 versus first nine months of fiscal 1996.
Net sales exceeded $1 million for the quarter ended March 31, a figure
almost equaling the $1.2 million recorded for the prior two quarters combined.
The nine-month total thus came to $2.4 million, as compared with $426,564 for
the same period in 1996.
Nevertheless, gross profit decreased from $40,134 for the third quarter of
1996 to $10,076 for the current quarter, keeping 1997's year-to-date gross
profits to $262,612 -- an increase of only 66% over 1996's $158,088, despite the
sales increases. Cumulative net loss for 1997 rose to $3.0 million, of which the
third quarter accounted for $1.5 million. Selling, general and administrative
expenses remain high in relation to cumulative net sales, but nevertheless
reflect the Company's expected cost levels for the nine-month period.
Furthermore, the interim statements reflect the Company's assumption in the
Acquisition of accounts payable and other liabilities totaling over $1.4
million, $2.5 million of the $2.75 million Penril Indebtedness, and an increase
in trade payables and accrued liabilities of $1.6 million. These
acquisition-related costs, in combination with the cumulative net loss, have
thus increased stockholders' deficit to approximately $3.9 million from
$801,653.
As disclosed above at "Current Developments," the Company has conducted
the Offering. Simultaneously, the Company is planning an equity financing, which
it is hoped will provide the necessary funds for payment of liabilities and for
capital needs.
Statements in this "Management's Discussion and Analysis of Financial
Operations" and elsewhere in this document as well as statements made in press
releases and oral statements that may be made by the Company or by officers,
directors or employees of the Company acting on the Company's behalf that are
not statements of historical or current fact constitute "forward- looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that could cause the actual results of the
Company to be materially different from the historical results or from any
future results expressed or implied by such forward-looking statements. In
addition to statements which explicitly describe such risks and uncertainties,
readers are urged to consider statements labeled with the terms "believes",
"belief", "expects", "intends", "anticipates" or "plans" to be uncertain and
forward-looking. The forward-looking statements contained herein are also
subject generally to other risks and uncertainties that are described from time
to time in the Company's reports and registration statements filed with the
Securities and Exchange Commission.
12
Statements regarding future effects of the Acquisition, the future
adequacy of the Company's working capital, its ability to raise capital through
debt or equity offerings and its ability to maintain or improve its present cash
flow, are examples of such forward looking statements. Such forward looking
statements are not guarantees of future performance. There remain substantial
risks that the Company will be unable to obtain adequate financing to improve
its performance and achieve its business goals.
13
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
On December 31, 1996 the principal amount of the Penril Indebtedness
described at Part I, Item 2 above was not paid in full, thereby placing the
Company in default. On March 10, 1997 the Company and Penril executed a
forbearance agreement, which required the Company to make payments of $50,000
per week totaling $200,000 prior to March 31, 1997, a payment of $500,000 on or
before April 14, 1997, and a balloon payment equal to the remainder due on or
before May 31, 1997. All payments required under such forbearance agreement
prior to April 29, 1997 were made in full.
On April 29, 1997, the Company and Penril entered into a modification
agreement (together with the above-referenced forbearance agreement, the
"Forbearance Agreement"), which created a new payment schedule for the remainder
of the Penril Indebtedness. The Forbearance Agreement requires the Company to
pay Penril $450,000 on April 30, 1997, $50,000 on each of May 5, May 12, and May
19, 1997, $300,000 on May 30, 1997, and the remainder of the Penril Indebtedness
due on July 31, 1997.
Penril subsequently agreed to permit the Company to make payments of
$100,000, $50,000, $75,000 and $75,000 on May 30, 1997, June 4, 1997, June 10,
1997 and June 20, 1997, respectively, in lieu of the $300,000 payment due on May
30, 1997. As of June 10, 1997, the Company was current on its obligations under
the terms of the Forbearance Agreement, as modified.
The Company anticipates that it will be able to make all remaining
required payments under the Forbearance Agreement. However, there can be no
assurances that the Company will, in fact, able to make such payments, and there
remains some risk of the Company's failure to do so.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) The Company filed a report on Form 8-K, dated January 10, 1997,
reporting the default described at Item 3 above. The Company filed a further
report on Form 8-K, dated March 21, 1997, detailing the forbearance agreement
executed by the Company and Penril also described at Item 3 above. Additionally,
the Company filed a Form 8-K, dated April 16, 1997, reporting the appointment of
Fred G. Basso as the Company's President.
14
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.
Date: June 17, 1997 POWER DESIGNS, INC.
Danbury, CT (Registrant)
By: /s/ Fred G. Basso
-----------------------------
Fred G. Basso, President
By: /s/ Anthony F. Intino II
-----------------------------
Anthony F. Intino II,
Chief Financial Officer
(Chief Accounting Officer)
15