SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) April 5, 2002
DIGITAL POWER CORPORATION
(Exact name of registrant as specified in its charter)
California 1-12711 94-1721931
---------- ------- ----------
(State or other (Commission File No.) (I.R.S. Employer
jurisdiction Identification No.)
of incorporation)
41920 Christy Street, Fremont, California 94538-3158
(Address of principal executive offices)
(510) 657-2635
(Registrant's telephone number, including area code)
ITEM 9. REGULATION FD DISCLOSURE
In connection with its filing with the Israeli Securities Authorities,
Telkoor Telecom, Ltd. included Digital Power Corporation's financial
statements for the years ended December 31, 2001, 2000 and 1999 which
included additional information than those financial statements filed with
the SEC and American Stock Exchange. Digital Power is providing the same
financial statements for the years ended July 31, 2001, 2000 and 1999 filed
with the Israeli Securities Authorities through this Form 8-K.
Exhibit No. Exhibit Description
----------- -------------------
99.2 Digital Power Corporation and Subsidiaries. Financial
statements for the years ended December 31, 2001, 2000,
and 1999
SIGNATURE
Pursuant to 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 hereunto duly authorized.
DIGITAL POWER CORPORATION,
a California Corporation
Dated: April 5, 2002 /s/ David Amitai
--------------------------
David Amitai
Chief Executive Officer
DIGITAL POWER CORPORATION
AND SUBSIDIARIES
Financial Statements
For the Years Ended
December 31, 2001, 2000 and 1999
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report.................................................F-1
Consolidated Balance Sheets - December 31, 2001 and 2000.....................F-2
Consolidated Statements of Operations - For the Years
Ended December 31, 2001, 2000 and 1999...................................F-3
Consolidated Statement of Stockholders' Equity - For the Years Ended
December 31, 2001, 2000 and 1999.........................................F-4
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 2001, 2000 and 1999.........................................F-5
Notes to Consolidated Financial Statements...................................F-7
Supplemental Information....................................................F-25
F-1
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Digital Power Corporation and Subsidiaries
Fremont, California
We have audited the accompanying consolidated balance sheets of Digital Power
Corporation and subsidiaries as of December 31, 2001 and 2000, and the related
statements of operations, stockholders' equity, and cash flows for each of the
years in the three year period ended December 31, 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America and International Standards on Auditing. Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Digital Power
Corporation and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
/S/ Hein + Associates LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
February 19, 2002
F-2
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2001 2000
------------------- -------------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1,242,900 $ 806,407
Accounts receivable - trade, net of allowance for doubtful accounts of
$370,000 and $231,419 at December 31, 2001 and 2000, respectively 2,203,664 3,256,082
Income tax refund receivable 72,388 179,200
Other receivables 91,971 90,454
Inventories, net 1,999,168 5,143,624
Prepaid expenses and deposits 47,534 213,699
Deferred income taxes - 334,037
-------------- ----------------
Total current assets 5,657,625 10,023,503
PROPERTY AND EQUIPMENT, net 820,318 1,094,733
EXCESS OF PURCHASE PRICE OVER NET ASSETS
ACQUIRED, net of accumulated amortization of $1,452,189 and $433,926
at December 31, 2001 and 2000, respectively - 1,018,263
OTHER ASSETS 35,116 28,551
---------------- ----------------
TOTAL ASSETS $ 6,513,059 $ 12,165,050
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 652,261 $ 400,000
Current portion of capital lease obligations 35,856 42,954
Accounts payable 1,590,830 1,949,182
Accrued liabilities 1,510,719 1,169,702
---------------- ----------------
Total current liabilities 3,789,666 3,561,838
CAPITAL LEASE OBLIGATIONS, less current portion 24,376 61,938
OTHER LONG TERM LIABILITIES 13,607 -
---------------- ----------------
Total liabilities 3,827,649 3,623,776
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (Notes 8 and 14) - -
STOCKHOLDERS' EQUITY:
Preferred stock issuable in series, no par value, 2,000,000 shares
authorized, no shares issued or outstanding at December 31, 2001
or 2000 - -
Common stock, no par value, 10,000,000 shares authorized, 4,510,680
and 3,260,680 shares issued and outstanding at December 31, 2001
and 2000, respectively 11,036,251 9,786,251
Additional paid in capital 733,256 733,256
Accumulated deficit (8,771,654) (1,730,934)
Accumulated other comprehensive loss (312,443) (247,299)
---------------- ----------------
Total stockholders' equity 2,685,410 8,541,274
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,513,059 $ 12,165,050
================ ================
/s/ David Amitai 3/30/02
---------------------------------------------------------------- ---------------------------------------------------
DAVID AMITAI, PRESIDENT AND CEO DATE
F-3
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
REVENUES $ 10,329,857 $ 17,882,730 $ 15,354,018
COST OF GOODS SOLD 11,939,985 13,223,441 11,277,170
---------------- ---------------- ----------------
Gross margin (loss) (1,610,128) 4,659,289 4,076,848
----------------- ---------------- ----------------
OPERATING EXPENSES:
Research and development 1,065,872 1,166,015 952,690
Marketing and selling 863,898 1,348,545 1,159,323
General and administrative 2,177,611 1,895,280 1,644,170
Impairment of goodwill 946,263 - -
---------------- ---------------- ----------------
Total operating expenses 5,053,644 4,409,840 3,756,183
---------------- ---------------- ----------------
INCOME (LOSS) FROM OPERATIONS (6,663,772) 249,449 320,665
---------------- ---------------- ----------------
OTHER INCOME (EXPENSE):
Interest income 12,829 29,920 30,935
Interest expense (63,461) (90,992) (178,343)
Other (expense) (4,364) - -
Gain (loss) on disposal of assets (23,069) 10,790 (16,830)
----------------- ---------------- ----------------
Other (expense) (78,065) (50,282) (164,238)
----------------- ---------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES (6,741,837) 199,167 156,427
INCOME TAX PROVISION 298,883 104,000 123,000
---------------- ---------------- ----------------
NET INCOME (LOSS) $ (7,040,720) $ 95,167 $ 33,427
================= ================ ================
Basic net income (loss) per share $ (2.07) $ 0.03 $ 0.01
================= ================ ================
Diluted net income (loss) per share $ (2.07) $ 0.03 $ 0.01
================= ================ ================
F-4
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
ACCUMULATED
COMMON STOCK ADDITIONAL NOTE OTHER TOTAL
----------------------- PAID-IN ESOP RECEIVABLE ACCUMULATED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL SHARES STOCKHOLDER DEFICIT (LOSS) EQUITY (LOSS)
---------- ----------- ---------- ---------- ----------- ------------- ----------- ------------ --------------
BALANCES,
January 1, 1999 2,771,435 $ 9,012,679 $ 514,304 $(184,919) $ $ (1,859,528) $ 36,234 $ 7,518,770
Contribution
to ESOP - - - 184,919 - - - 184,919
Note receivable
for common stock - - 52,200 - (52,200) - - -
Comprehensive loss: -
Net income - - - - - 33,427 - 33,427 $ 33,427
Foreign currency
translation
adjustment - - - - - - (84,909) (84,909) (84,909)
--------------
Total comprehensive
loss - - - - - - - - (51,482)
---------- ----------- ---------- ---------- ----------- ------------- ----------- ------------ ==============
BALANCES,
December31,1999 2,771,435 9,012,679 566,504 - (52,200) (1,826,101) (48,675) 7,652,207
Exercise of
stock options 484,245 754,197 (52,200) - 52,200 - - 754,197
Income tax
benefit related
to exercise of
stock options - - 101,397 - - - - 101,397
Stock granted
for services 5,000 19,375 - - - - - 19,375
Compensation cost
recognized upon
issuance of
warrants for
services - - 117,555 - - - - 117,555
Comprehensive loss:
Net income - - - - - 95,167 - 95,167 $ 95,167
Foreign currency
translation
adjustment - - - - - - (198,624) (198,624) (198,624)
--------------
Total comprehensive
loss - - - - - - - - $ (103,457)
---------- ----------- ---------- ---------- ----------- ------------- ----------- ------------ ==============
BALANCES,
December31,2000 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,
December31,2001 4,510,680 $11,036,251 $ 733,256 $ - $ - $(8,771,654) $ (312,443) $ 2,685,410
========== =========== ========== ========== =========== ============= =========== ============
F-5
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------------------------------
2001 2000 1999
------------------- ------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (7,040,720) $ 95,167 $ 33,427
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 450,752 475,987 500,691
(Gain) loss on disposal of assets 23,069 (10,790) 16,830
Deferred income taxes 334,037 16,755 8,813
Warranty expense (64,806) 55,000 (110,000)
Increase in provision for inventory obsolescence 2,714,941 - 30,000
Contribution to ESOP - - 184,919
Bad debt expense 158,130 23,504 35,547
Compensation cost recognized upon issuance of warrants - 117,555 -
Income tax benefit related to exercise of stock options - 101,397 -
Stock issued for services - 19,375 -
Impairment of goodwill 946,263 - -
Severance accrual 658,000 - -
Changes in operating assets and liabilities:
Accounts receivable 894,288 (466,506) 711,411
Income tax refund receivable 106,812 (108,212) 321,658
Other receivables (1,517) 9,421 3,167
Inventories 429,515 (612,363) 303,259
Prepaid expenses 166,164 (152,372) (6,062)
Other assets (6,565) (14,493) 26,733
Accounts payable (358,353) 753,013 (50,685)
Accrued liabilities (252,177) (98,939) (271,457)
Other long-term liabilities 13,607 (25,000) (10,043)
----------------- ----------------- -----------------
Net cash provided by (used in) operating activities
(828,560) 178,499 1,728,208
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (133,281) (176,068) (168,042)
Proceeds from sale of assets 5,876 26,121 6,146
----------------- ----------------- -----------------
Net cash (used in) investing activities (127,405) (149,947) (161,896)
----------------- ----------------- -----------------
F-6
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------------------------------
2001 2000 1999
------------------- ------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants $ - $ 754,197 $ -
Proceeds received (payments made) on notes payable 252,261 (540,000) (184,919)
Principal payments on capital lease obligations (44,659) (62,426) (72,537)
Principal payments on notes payable - - (1,266,846)
Investment from Telkoor Telecom, Ltd. 1,250,000 - -
---------------- ---------------- ----------------
Net cash provided (used in) by financing activities 1,457,602 151,771 (1,524,302)
---------------- ---------------- -----------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (65,144) (198,624) (84,909)
---------------- ---------------- ----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 436,493 (18,301) (42,899)
---------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS, beginning of period 806,407 824,708 867,607
---------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS, end of period $ 1,242,900 $ 806,407 $ 824,708
================ ================ ================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Interest $ 67,009 $ 131,650 $ 277,935
================ ================ ================
Income taxes $ 97,918 $ 180,000 $ 117,494
================ ================ ================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of equipment through capital leases $ - $ 42,846 $ 19,720
================ ================ ================
F-7
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS:
-------------------------------------
Digital Power Corporation ("DPC"), a California corporation, and its wholly
owned subsidiaries, Poder Digital, S.A. de C.V. ("PD"), located in
Guadalajara, Mexico, and Digital Power Limited ("DPL"), located in the
United Kingdom, are engaged in the design, manufacture and sale of
switching power supplies. DPC, PD, and DPL are collectively referred to as
the "Company".
2. SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------
Principles of Consolidation - The consolidated financial statements include
the accounts of DPC and its wholly owned subsidiaries, PD and DPL. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Statements of Cash Flows - For purposes of the statements of cash flows,
the Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market.
Property and Equipment - Property and equipment are stated at cost.
Depreciation of equipment and furniture is calculated using the
straight-line method over the estimated useful lives (ranging from 5 to 10
years) of the respective assets. Leasehold improvements are amortized over
the shorter of their estimated useful life or the term of the lease. The
cost of normal maintenance and repairs is charged to operations as
incurred. Material expenditures that increase the life of an asset are
capitalized and depreciated over the estimated remaining useful life of the
asset. The cost of fixed assets sold, or otherwise disposed of, and the
related accumulated depreciation or amortization are removed from the
accounts, and any resulting gains or losses are reflected in current
operations.
Excess of Purchase Price Over Net Assets Acquired - Excess of purchase
price over net assets acquired ("Goodwill") represents the purchase price
in excess of the fair value of the net assets of the acquired business and
was being amortized using the straight-line method over its estimated
useful life of ten years.
As a result of DPL's sustained losses during the year ended December 31,
2001, management has determined the value of the unamortized goodwill
related to the 1998 acquisition of DPL as impaired resulting in a charge of
$946,263.
Income Taxes - The Company accounts for income taxes under the liability
method which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included
in the financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
F-8
Revenue Recognition - Sales revenue is recognized when the products are
shipped to customers, including distributors. Customers receive a one or
two-year product warranty and certain sales to distributors are subject to
a limited right of return. At the same time sales revenue is recognized,
the Company provides a reserve for estimated warranty costs and a reserve
for estimated product returns.
Research and Development Costs - Research and development costs are charged
to operations in the period incurred.
Foreign Currency Translation - Gains and losses from the effects of
exchange rate fluctuations on transactions denominated in foreign
currencies are included in the results of operations. Assets and
liabilities of the Company's foreign subsidiaries are translated into U.S.
dollars at year-end exchange rates. Income and expense items are translated
at average exchange rates prevailing during the year. The resulting
translation adjustment is recorded as a component of accumulated other
comprehensive income (loss), a component of stockholders' equity.
Earnings Per Share - Basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity.
Use of Estimates - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
requires the Company's management to make estimates and assumptions that
affect the amounts reported in these consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
The Company's consolidated financial statements are based upon a number of
significant estimates, including the allowance for doubtful accounts,
technological obsolescence of inventories, the estimated useful lives
selected for property and equipment and goodwill, realizability of deferred
tax assets, allowance for sales returns, and warranty reserve. Due to the
uncertainties inherent in the estimation process, it is at least reasonably
possible that these estimates will be further revised in the near term and
such revisions could be material.
Impairment of Long-Lived Assets - In the event that facts and circumstances
indicate that the cost of long lived assets may be impaired, an evaluation
of recoverability would be performed. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down to
market value or discounted cash flow value is required.
Stock Based Compensation - The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB25) and related interpretations in accounting for its employee stock
options. In accordance with FASB Statement No. 123 "Accounting for
Stock-Based Compensation" (FASB123), the Company will disclose the impact
of adopting the fair value accounting of employee stock options.
Transactions in equity instruments with non-
F-9
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
employees for goods or services have been accounted for using the fair
value method as prescribed by FASB123.
Concentrations of Credit Risk - Credit risk represents the accounting loss
that would be recognized at the reporting date if counterparties failed
completely to perform as contracted. Concentrations of credit risk (whether
on or off balance sheet) that arise from financial instruments exist for
groups of customers or counterparties when they have similar economic
characteristics that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic or other
conditions described below.
The Company operates in one segment, manufacture and sale of power
supplies. Financial instruments that subject the Company to credit risk
consist of cash balances maintained in excess of federal depository
insurance limits and accounts receivable, which have no collateral or
security. See Note 14 for major customers.
Fair Value of Financial Instruments - The estimated fair values for
financial instruments under FASB Statement No. 107, Disclosures about Fair
Value of Financial Instruments, are determined at discrete points in time
based on relevant market information. These estimates involve uncertainties
and cannot be determined with precision. The estimated fair value of cash,
cash equivalents, accounts receivable and accounts payable approximates
their carry value due to their short-term nature. The estimated fair value
of long-term debt approximates its carrying value because it carries
interest rates which approximates market rates.
Comprehensive Income - The Company has adopted the Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (FASB130). FASB130 defines comprehensive
income as all changes in stockholders' equity exclusive of transactions
with owners, such as capital investments. Comprehensive income includes net
income or loss and changes in certain assets and liabilities that are
reported directly in equity, such as, translation adjustments on
investments in foreign subsidiaries.
Impact of Recently Issued Standards - In June 2001, the Financial
Accounting Standards Board ("FASB") issued Statements of Financial
Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and No.
142 "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires
all business combinations initiated after June 30, 2001 to be accounted for
under the purchase method. For all business combinations for which the date
of acquisition is after June 30, 2001, SFAS 141 also establishes specific
criteria for the recognition of intangible assets separately from goodwill
and requires unallocated negative goodwill to be written off immediately as
an extraordinary gain, rather than deferred and amortized. SFAS 142 changes
the accounting for goodwill and other intangible assets after an
acquisition. The most significant changes made by SFAS 142 are: 1) goodwill
and intangible assets with indefinite lives will no longer be amortized; 2)
goodwill and intangible assets with indefinite lives must be tested for
impairment at least annually; and 3) the amortization period for intangible
assets with finite lives will no longer be limited to forty years. The
Company does not believe that the adoption of these statements will have a
material effect on its financial position, results of operations, or cash
flows.
F-10
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2001, the FASB also approved for issuance SFAS 143 "Asset
Retirement Obligations." SFAS 143 establishes accounting requirements for
retirement obligations associated with tangible long-lived assets,
including (1) the timing of the liability recognition, (2) initial
measurement of the liability, (3) allocation of asset retirement cost to
expense, (4) subsequent measurement of the liability and (5) financial
statement disclosures. SFAS 143 requires that an asset retirement cost
should be capitalized as part of the cost of the related long-lived asset
and subsequently allocated to expense using a systematic and rational
method. The Company will adopt the statement effective no later than
January 1, 2003, as required. The transition adjustment resulting from the
adoption of SFAS 143 will be reported as a cumulative effect of a change in
accounting principle. At this time, the Company cannot reasonably estimate
the effect of the adoption of this statement on its financial position,
results of operations, or cash flows
In October 2001, the FASB also approved SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 replaces SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The new accounting model for long-lived assets
to be disposed of by sale applies to all long-lived assets, including
discontinued operations, and replaces the provisions of APB Opinion No. 30,
"Reporting Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business," for the disposal of segments of a business.
Statement 144 requires that those long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or in discontinued operations. Therefore,
discontinued operations will no longer be measured at net realizable value
or include amounts for operating losses that have not yet occurred.
Statement 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from
the ongoing operations of the entity in a disposal transaction. The
provisions of Statement 144 are effective for financial statements issued
for fiscal years beginning after December 15, 2001 and, generally, are to
be applied prospectively. At this time, the Company cannot estimate the
effect of this statement on its financial position, results of operations,
or cash flows.
3. BASIS OF PRESENTATION:
The Company incurred a net loss of $7,040,720 and used cash in operations
of $828,560 during the year ended December 31, 2001. The Company had net
income of $95,167 and cash provided by operations of $178,499 during the
year ended December 31, 2000. The Company had working capital of $1,867,959
and $6,461,665 at December 31, 2001 and 2000, respectively. The increase in
the net loss and substantial decrease of working capital is due in part to
certain non-cash expenses, including an increase in the inventory allowance
for obsolescence of $2,715,000, an impairment of goodwill by $946,000, a
severance accrual of $658,000 for employees in Poder, increase in the
allowance for bad debt of $158,000 and the valuation taken against the
deferred tax asset of $350,000.
The Company's management has addressed the decrease in cash and working
capital through the execution of the Securities Purchase Agreement in which
the Company received $1,250,000 in cash and developed a strategic alliance
with Telkoor Telecom, Ltd (Telkoor). The Company's management team is
currently comprised of officers' of Telkoor and if needed, Telkoor has
committed to lend the Company and/or make further investments in the
Company to sustain it operations. See note 11 for additional terms of the
Telkoor investment.
F-11
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In management's opinion, these proceeds combined with revenue from sales
and Telkoor's continued commitment to protect its investment will provide
sufficient cash flow to pay the Company's obligations as they come due for
at least the next year.
4. INVENTORIES:
-----------
DECEMBER 31,
-------------------------------------------
2001 2000
------------------- --------------------
Raw materials $ 3,831,093 $ 4,329,160
Work-in-process 985,924 1,011,966
Finished goods 146,861 459,030
---------------- ----------------
4,963,878 5,800,156
Allowance for obsolescence (2,964,710) (656,532)
---------------- ----------------
$ 1,999,168 $ 5,143,624
================ ================
During the year ended December 31, 2001, the Company increased the
allowance for obsolescence and excess inventories by approximately
$2,715,000 which was a result of the cancellation of purchase orders by
customers, excess inventory levels, lack of sales orders and delays in
delivery of products by two customers. The additional provision for
obsolete and excess inventory is included in the cost of sales.
5. PROPERTY AND EQUIPMENT:
----------------------
DECEMBER 31,
---------------------------------------
2001 2000
------------------ ------------------
Machinery and equipment $ 1,503,030 $ 1,441,203
Office equipment and furniture 875,726 873,429
Leasehold improvements 525,846 539,777
Transportation equipment 81,089 103,839
---------------- ----------------
2,985,691 2,958,248
Accumulated depreciation
and amortization (2,165,373) (1,863,515)
---------------- ----------------
$ 820,318 $ 1,094,733
================ ================
Depreciation expense related to property and equipment for the year ended
December 31, 2001, 2000, and 1999 was $378,571, $331,987, and $343,882,
respectively.
F-12
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. ACCRUED LIABILITIES:
-------------------
DECEMBER 31,
-------------------------------------
2001 2000
------------------ ----------------
Accrued payroll and benefits $ 167,129 $ 147,115
Accrued commissions and royalties 120,567 126,786
Accrued warranty and product
return expense 201,094 324,602
Income taxes payable 190,175 308,627
Severance accrual for PD employees 508,000 -
Other 323,754 262,572
----------------- ----------------
$ 1,510,719 $ 1,169,702
================= ================
During the year ended December 31, 2001, the Company recorded an estimated
severance liability related to its Mexican subsidiary of $658,000. There
was no accrual recorded as of December 31, 2000. The severance accrual is a
result of depressed sales of the Company's products in the United States,
which has resulted in excess capacity of the workforce at its Guadalajara,
Mexico facility. In addition, the Company is considering moving a portion
of its manufacturing to China which would increase the excess capacity at
PD. The liability was reduced in September 2001 by $150,000 for the payment
of severance as a result of a reduction of PD employees.
7. NOTES PAYABLE:
-------------
At December 31, 2001 and 2000, DPC has a line of credit of $750,000 and
$3,000,000, respectively, pursuant to a promissory note agreement. As of
December 31, 2000, the line of credit provided borrowings up to 80% of
eligible accounts receivable, plus 20% of inventory or $500,000, whichever
was less, not to exceed a total of $3,000,000. During the year ended
December 31, 2001, the line of credit was adjusted to only provide
borrowings up to 80% of eligible accounts receivable. Borrowing under this
line of credit bears interest based upon an index equal to the lender's
prime rate (totaling 6.75% and 9.50% at December 31, 2001 and 2000,
respectively), interest only, payable monthly with outstanding principal
due on demand. If no demand is made, the outstanding principal and unpaid
accrued interest is due April 15, 2002. At December 31, 2001 and 2000, the
outstanding principal balance was $652,261 and $400,000, respectively.
Under the terms of the agreement, the Company is required to maintain
certain ratios and be in compliance with other covenants. At December 31,
2001 and 2000, the Company was in compliance with all covenants.
At December 31, 2001 and 2000, DPL has a (pound)500,000 bank overdraft
facility pursuant to a loan agreement. Borrowing under this line of credit
bears interest at 2% per annum over the Bank's Base rate (totaling 6.5% and
8.5% at December 31, 2001 and 2000, respectively), interest only, payable
monthly with outstanding principal due on demand. If no demand is made, the
outstanding principal and accrued interest is due March 31, 2002. In the
event of the loan being used, the loan would be collateralized by
substantially all of the DPL's assets. At December 31, 2001 and 2000, no
principal or accrued interest was outstanding.
F-13
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8.CAPITAL LEASE OBLIGATIONS:
-------------------------
The Company leases certain equipment and vehicles under agreements
classified as capital leases. The net book value of assets under capital
leases as of December 31, 2001 and 2000 was $59,229 and $106,329,
respectively. Depreciation expense of $39,545, $52,147, and $48,702 was
recognized for the years ended December 31, 2001, 2000, and 1999,
respectively.
The future minimum lease payments as of December 31, 2001, are as follows:
YEARS ENDING
DECEMBER 31, AMOUNT
---------------------------------- ---------------------
2002 $ 45,736
2003 31,183
-----------------
Total future minimum lease payments 76,919
Less amount representing interest (16,687)
-----------------
Present value of net minimum lease
payments 60,232
Less current portion (35,856)
-----------------
$ 24,376
9. PREFERRED STOCK:
---------------
As of December 31, 2001 and 2000, the preferred stock has one series
authorized, 500,000 shares of Series A cumulative redeemable convertible
preferred stock ("Series A"), and an additional 1,500,000 shares of
preferred stock has been authorized, but the rights, preferences,
privileges and restrictions on these shares has not been determined. DPC's
Board of Directors is authorized to create new series of preferred stock
and fix the number of shares as well as the rights, preferences, privileges
and restrictions granted to or imposed upon any series of preferred stock.
As of December 31, 2001 and 2000, there were no shares issued or
outstanding.
10. NOTE RECEIVABLE - STOCKHOLDER:
-----------------------------
At December 31, 1999, the Company had a note receivable in the amount of
$52,000 due from a former employee received in consideration for the
exercise of stock options. The note had an interest rate of 5% and was paid
in full in February 2000.
11. COMMON STOCK:
------------
In September 2001, the Company executed a securities purchase agreement
with Telkoor Telecom, Ltd. (Telkoor) for cash proceeds of $1,250,000 in
exchange for the purchase of 1,250,000 shares of common stock and the
issuance of 900,000 warrants to purchase common stock at an exercise price
of $1.25 per share and an additional 1,000,000 warrants to purchase common
stock at an exercise price of $1.50 per share. The warrants vest
immediately and expire during the year ended December 31, 2003. In
addition, the Company's Board of Directors will appoint a number of
individuals recommended by Telkoor necessary to constitute a majority of
the Board and the then current president and CEO, Robert Smith, resigned as
president with an individual selected by Telkoor appointed to the position
of president and CEO.
F-14
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK OPTIONS AND WARRANTS:
--------------------------
Stock Options - In May 1996, the Company adopted the 1996 Stock Option Plan
covering 513,000 shares. Under the plan, the Company can issue either
incentive or non-statutory stock options. The price of the options granted
pursuant to the plan will not be less than 100% of the fair market value of
the shares on the date of grant. The compensation committee of the Board of
Directors will decide the vesting period of the options, if any, and no
option will be exercisable after ten years from the date granted.
In February 1998, the Company adopted the 1998 Stock Option Plan covering
240,000 shares of common stock. Under the plan, the Company can issue
either incentive or non-qualified stock options. The exercise price of the
options granted pursuant to the plan will not be less than 100% of the
quoted market value of the shares on the grant date. The compensation
committee of the Board of Directors will determine the vesting period of
the options, if any, and no options will be exercisable after ten years
from the date of grant.
During the year ended December 31, 1999, the Company granted options for
the purchase of 11,900 shares of the Company's common stock under the 1998
Stock Option Plan to certain employees. The exercise prices of the options
range from $1.5625 to $1.8750 per share, which was equal to the quoted
market value on the date of grant. The options vest over 5 years at 25% per
year starting in the second year.
In April 2000, the Company adopted the 2000 Stock Option Plan covering
500,000 shares of common stock. Under the plan, the Company can issue
either incentive or non-qualified stock options. The exercise price of the
options granted pursuant to the plan will not be less than 100% of the
quoted market value of the shares on the grant date. The compensation
committee of the Board of Directors will determine the vesting period of
the options, if any, and no options will be exercisable after ten years
from the date of grant.
During the years ended December 31, 2001, 2000, and 1999, the Company
issued in each year non-qualified options for the purchase of 100,000
shares of the Company's common stock to Mr. Robert Smith who was the
president of the Company until his resignation on November 13, 2001, in
accordance with his employment agreement. The exercise prices of $1.63,
$1.56, and $1.88 per share were equal to the quoted market value on the
date of grant for the year ended 2001, 2000, and 1999, respectively. Such
options vested immediately and expire beginning in 2009.
During the year ended December 31, 2001, the Company granted options for
the purchase of 200,000 shares of the Company's common stock to David
Amitai, CEO and President, and 200,000 shares of the Company's common stock
to Ben Zion Diamant, Chairman of the Board. The exercise price of $0.70 per
share was equal to the quoted market value on the date of grant. Such
options vest over 2 years at 50% per year starting in the second year.
During each of the years ended December 31, 2001, 2000, and 1999, the
Company granted non-qualified options under the 1998 plan & 2000 plan for
the purchase of 30,000 shares of the Company's common stock to outside
directors. The exercise prices range from $0.70 to $2.38 per share were
equal to the quoted value on the date of grant. The options vest after one
year and begin expiring in 2009.
F-15
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2001, the Company granted options for
the purchase of 136,000 shares of the Company's common stock under the 2000
Stock Option Plan to certain employees. The exercise prices range from
$0.70 to $1.18 per share were equal to the quoted market value on the date
of grant. The options vest over 4 or 5 years at 25% per year starting in
the second year.
During the year ended December 31, 2000, the Company granted options for
the purchase of 117,500 shares of the Company's common stock under the 1996
Stock Option Plan to certain employees. The exercise price of $2.38 per
share was equal to the quoted market value on the date of grant. The
options vest over 5 years at 25% per year starting in the second year.
During the year ended December 31, 2000, the Company granted options for
the purchase of 57,500 shares of the Company's common stock under the 1998
Stock Option Plan to certain employees. The exercise price of $2.38 per
share was equal to the quoted market value on the date of grant. The
options vest over 5 years at 25% per year starting in the second year.
During the year ended December 31, 2000, the Company granted options for
the purchase of 53,000 shares of the Company's common stock under the 2000
Stock Option Plan to certain employees. The exercise price of the options
ranges from $2.38 to $3.88 per share were equal to the quoted market value
on the date of grant. The options vest over 5 years at 25% per year
starting in the second year.
During the year ended December 31, 1999, the Company granted options for
the purchase of 70,000 shares of the Company's common stock under the 1996
Stock Options Plan to certain employees. The exercise prices range from
$1.69 to $2.00 per share, which was equal to the fair market value on the
date of grant. The options vest over 5 years at 25% per year starting in
the second year.
The following table sets forth activity for all options:
WEIGHTED
NUMBER OF AVERAGE EXERCISE
SHARES PRICE PER SHARE
------------------- -------------------
OUTSTANDING, January 1, 1999 1,065,930 $ 2.19
Granted 211,900 1.90
Forfeited (194,200) 2.42
----------------- ------------------
OUTSTANDING, December 31, 1999 1,083,630 2.09
Granted 366,000 2.16
Forfeited (26,665) 3.31
Exercised (484,245) 1.56
----------------- ------------------
OUTSTANDING, December 31, 2000 938,720 2.39
Granted 691,000 0.90
Forfeited (86,625) 2.10
----------------- ------------------
OUTSTANDING, December 31, 2001 1,543,095 1.74
================ ==================
F-16
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2001, options to purchase 40,000 shares, with a weighted
average exercise price of $6.06, were exercisable at prices ranging from
$6.00 to $6.25 per share. These options have a weighted average contractual
life of 6.25 years.
At December 31, 2001, options to purchase 729,296 shares, respectively,
were exercisable with exercise prices ranging from $1.56 to $3.88 per
share, a weighted average exercise price of $2.05, and a weighted average
remaining contractual life of 7.45 years. The remaining unvested options of
773,799 have exercise prices ranging from $.70 to $1.18, a weighted average
contractual life of 9.76 years, and are exercisable as follows:
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
YEAR ENDING DECEMBER 31, SHARES
------------------------ --------------------- ---------------------
2002 122,337 $ 1.77
2003 330,962 1.17
2004 279,000 1.02
2005 31,500 0.81
2006 10,000 0.70
---------------- ----------------
773,799 $ 1.19
================ ================
If not previously exercised the outstanding options will expire as follows:
NUMBER OF WEIGHTED AVERAGE
YEAR ENDING DECEMBER 31, SHARES EXERCISE PRICE
------------------------ --------------------- ---------------------
2003 30,500 $ 1.80
2006 78,250 1.80
2007 105,500 2.31
2008 317,845 2.78
2009 100,000 1.95
2010 245,000 2.39
2011 666,000 0.87
---------------- ----------------
1,543,095 $ 1.74
================ ================
Warrants -In December 1996, in connection with the initial public offering,
the Company granted warrants for the purchase of 150,000 shares of the
Company's common stock. The exercise prices of the warrants range from
$4.80 to $5.00 per share. The warrants vested immediately and expired in
2001.
During March 1997, the Company granted warrants for the purchase of 15,000
shares of the Company's common stock in connection with investor related
services provided to the Company. The warrants have an exercise price of
$6.75 per share, vested immediately and expire in 2002.
In January 1998, the Company issued warrants to purchase 30,000 shares of
the Company's common stock in connection with investor related services
provided to the Company. The warrants have an exercise price of $7.00 per
share, vested immediately and expired in 2001.
F-17
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 2000, the Company issued warrants to purchase 60,000 shares of
common stock at $3.88 per share to an investor relations firm for services
provided. Compensation expense of $117,555 was recognized upon issuance of
the warrants. The warrants are immediately exercisable and expired in
October 2001.
See footnote 11 for additional warrants issued during the year ended
December 31, 2001.
The following sets forth the activity for all warrants:
NUMBER OF AVERAGE EXERCISE
SHARES PRICE PER SHARE
------------------- -------------------
OUTSTANDING, January 1, 1999 838,090 $ 5.09
Expired (643,090) 5.00
---------------- --------------
OUTSTANDING, December 31, 1999 195,000 5.38
Granted 60,000 3.88
---------------- --------------
OUTSTANDING, December 31, 2000 255,000 5.03
Granted 1,900,000 1.43
Expired (240,000) 4.92
---------------- ----------------
OUTSTANDING, December 31, 2001 1,915,000 $ 1.42
================ ================
As stated in Note 2, the Company has not adopted the fair value accounting
prescribed by FASB123 for employees. Had compensation cost for stock
options or warrants issued to employees been determined based on the fair
value at grant date for awards in 2001, 2000, and 1999, consistent with the
provisions of FASB123, the Company's net income (loss) and net income
(loss) per share would have been reduced to the proforma amounts indicated
below:
2001 2000 1999
--------------------- -------------------- --------------------
Net loss $ (7,413,887) $ (158,079) $ (320,445)
================ ================ ================
Net loss per common share:
Basic and diluted $ (2.18) $ (0.05) $ (0.12)
================ ================ ================
The fair value of each option or warrant was estimated on the date of grant
using the Black-Scholes option pricing model using the following
assumptions for grants in 2001, 2000, and 1999: average risk-free interest
rates ranging from 4.23% to 5.6%, expected life of five years for 2001 and
2000 and an expected life of two years for 1999, dividend yield of 0%; and
expected volatility ranging from 55.0% to 125.9%. The weighted-average fair
value of the options on the grant date for the years ended December 31,
2001, 2000, and 1999 was $0.70, $0.94, and $2.09 per share, respectively.
F-18
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. NET INCOME (LOSS) PER COMMON SHARE:
----------------------------------
The following represents the calculation of net income (loss) per common
share:
2001 2000 1999
----------------- ----------------- ----------------
BASIC
Net income (loss) applicable to common shareholders $ (7,040,720) $ 95,167 $ 33,427
================= ================ ===============
Weighted average number of common shares 3,407,930 2,939,034 2,771,435
================= ================ ===============
Basic earnings (loss) per share $ (2.07) $ 0.03 $ 0.01
================= ================ ===============
DILUTED
Net income (loss) applicable to common shareholders $ (7,040,720) $ 95,167 $ 33,427
================= ================ ===============
Weighted average number of common shares 3,407,930 2,939,034 2,771,435
Common stock equivalent shares representing shares
issuable upon exercise of stock options Anti-dilutive 336,349 61,447
Weighted average number of shares used in calculation of
diluted earnings per share 3,407,930 3,275,383 2,832,882
----------------- ---------------- ---------------
Diluted earnings (loss) per share $ (2.07) $ 0.03 $ 0.01
================= ================ ===============
14. COMMITMENTS:
-----------
LEASES - The Company leases its office space in California, a manufacturing
facility in Guadalajara, Mexico, and the facility and certain equipment in
the UK under operating leases. The total future minimum lease payments, as
of December 31, 2001, are as follows:
YEARS ENDING DECEMBER 31,
-------------------------
2002 $ 327,440
2003 287,760
2004 304,312
2006 310,012
2006 132,362
----------------
$ 1,361,886
================
Lease payments on the manufacturing facility in Mexico are to be made in
Mexican Pesos. Lease payments on the facility and equipment in the UK are
to be made in GB pound-sterling. The above schedule was prepared using the
conversion rates in effect at December 31, 2001. Changes in the conversion
rate will have an impact on the Company's required minimum payments and its
operating results.
F-19
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rent expense was $350,152, $172,560, and $253,530 for the years ended
December 31, 2001, 2000, and 1999, respectively.
Termination Of Employment Agreement/Entering Consulting Agreement - The
Company entered into a Termination of Employment Agreement/Entering
Consulting Agreement on November 13, 2001 with Robert O. Smith. This
Consulting Agreement will continue in effect for a period of three (3)
years unless terminated or extended upon mutual agreement. Under the terms
of the agreement, Mr. Smith agrees to assist the Company in managing its
power supply business and related projects. The agreement requires payment
of $l00,000 per annum, at the end of each calendar year or pro rated by
month. At December 31, 2001, the Company has $15,000 accrued under this
agreement. Mr. Smith is entitled to receive options to acquire l00,000
shares of Digital Power's common stock on an annual basis beginning on
January l, 2002 pursuant to Digital Power's stock option plan at an
exercise price of $3.00 per share. Mr. Smith has the opportunity to sell to
Telkoor Telecom, Ltd up to 50% of the common stock held by him, but under
no circumstances more than 5% of the issued and outstanding common stock of
the Company on a fully diluted basis as of the date of the sale.
15. MAJOR CUSTOMERS:
---------------
The Company frequently sells large quantities of inventory to its
customers. For the year ended December 31, 2001, two customers accounted
for 36% of the Company's net sales. For the year ended December 31, 2000
and 1999, three customers accounted for 29% of the Company's net sales and
two customers accounted for 11% of the Company's net sales, respectively.
Of the Company's consolidated revenues for the year ended December 31,
2001, 63% of revenues were earned from customers in the United States, 30%
from customers in the United Kingdom, and 7% for the rest of the world.
Consolidated revenues for the year ended December 31, 2000 were earned 70%
from customers in the United States, 21% from customers in the United
Kingdom, and 9% for the rest of the world. Consolidated revenues for the
year ended December 31, 1999 were earned 59% from customers in the United
States, 29% from customers in the United Kingdom, and 12% for the rest of
the world
For the year ended December 31, 2001, 2000, and 1999, DPL contributed 37%,
29%, and 42%, respectively, of the Company's revenues. No one customer of
DPL contributed greater than 10% of the Company's consolidated revenues for
the years ended December 31, 2001, 2000, and 1999.
16. EMPLOYEE BENEFIT PLANS:
----------------------
401(K) PROFIT SHARING PLAN - The Company has a 401(k) profit sharing plan
(the "Plan") covering substantially all employees of DPC. Eligible
employees may make voluntary contributions to the Plan, which are matched
by the Company at a rate of $.25 for each $1.00 contributed, up to a
maximum of six percent of eligible compensation. The Company can also make
discretionary contributions. The Company made matching contributions to the
Plan of $12,238, $12,665, and $11,400 for years ended December 31, 2001,
2000, and 1999, respectively.
F-20
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's subsidiary DPL, has a group personal pension plan covering
substantially all of its employees. Eligible employees may make voluntary
contributions to the plan. The Company will contribute 7% of the employees'
basic annual salary to the plan. Contributions are charged to operations as
incurred. The Company made contributions totaling $55,334, $66,908, and
$71,400 to the plan for the years ended December 31, 2001, 2000, and 1999,
respectively.
EMPLOYEE STOCK OWNERSHIP PLAN - The Company also has an employee stock
ownership plan (the "ESOP") covering substantially all employees of DPC.
The Company can make discretionary contributions of cash or company stock
(as defined in the ESOP plan document) up to deductible limits prescribed
by the Internal Revenue Code.
Effective June 13, 1996, the ESOP obtained a $500,000, loan guaranteed by
the Company for the purpose of acquiring common stock of the Company from
existing stockholders. The loan bore interest at 8.5% per annum and
required monthly payments of principal and interest of $8,852 through June
2000. Immediately upon funding of the loan, the ESOP purchased
approximately 167,504 shares of the Company's common stock from existing
stockholders. The Company was required to contribute amounts to the plan to
sufficiently cover the debt payments. Contributions to the plan in 1999
were $184,919.
17. INCOME TAXES:
------------
Income tax expense (benefit)is comprised of the following:
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------------------------------
2001 2000 1999
----------------- ----------------- -----------------
Current
Federal $ - $ 60,000 $ (28,000)
State 800 21,000 1,000
Foreign (36,506) 23,000 143,000
----------------- ----------------- -----------------
(35,706) 104,000 116,000
----------------- ----------------- -----------------
Deferred
Federal 299,995 - 2,000
State 50,528 - 5,000
Foreign (15,934) - -
----------------- ----------------- -----------------
334,589 - 7,000
----------------- ----------------- -----------------
$ 298,883 $ 104,000 $ 123,000
================= ================= =================
F-21
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net deferred tax asset and liability recognized are
as follows:
DECEMBER 31,
--------------------------------------------
2001 2000
-------------------- ---------------------
Current deferred tax assets (liabilities):
Accounts receivable, principally due to allowance for
doubtful accounts $ 148,518 $ 92,723
Compensated absences, principally due to accrual for
financial reporting purposes 21,422 30,317
Accrued commissions 28,326 2,267
Accrued payroll 10,035 -
Accrued severance 203,911 -
Inventory reserve 1,190,035 204,714
Warranty reserve 64,764 100,350
Stock rotation liability 20,070 20,070
UNICAP 28,546 16,104
Accrued liabilities 66,065 -
Other (272) (16,758)
-------------------- ---------------------
1,781,420 449,787
Valuation allowance (1,781,420) (115,750)
-------------------- ---------------------
Net current deferred tax asset $ - $ 334,037
==================== =====================
Long-term deferred tax assets (liabilities):
Net operating loss carryforwards $ 1,935,548 $ 36,300
UNICAP credit carryforward 74,167 -
Goodwill 505,188 127,290
Depreciation 56,618 24,142
-------------------- ---------------------
2,571,521 187,732
Valuation allowance (2,571,521) (187,732)
-------------------- ---------------------
Net long-term deferred tax liability $ - $ -
==================== =====================
Total income tax expense differed from the amounts computed by applying the
U.S. federal statutory tax rates to pre-tax income as follows:
For the Years Ended
DECEMBER 31
-----------------------------------------------------
2001 2000 1999
---------------- --------------- ---------------
Total expense computed by applying the U.S. statutory rate
(34.0%) 34.0% 34.0%
Permanent differences (0.1) 5.1 2.3
State income taxes 0.2 10.9 3.8
Tax effect resulting from foreign activities 8.0 (101.0) 41.5
Change in valuation allowance (5.3) 105.2 0.0
Change in beginning deferred asset 35.6 0.0 0.0
Other 0.0 0.3 0.0
---------------- --------------- ---------------
4.4% 54.5% 81.6%
================ =============== ===============
F-22
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company will continue to assess the realizability of the deferred tax
assets in future periods. The valuation allowance increased by $4,049,459
during the year ended December 31, 2001. During March 2001, the Company
fully valued the deferred tax asset recorded at December 31, 2000 of
$350,523 due to the uncertainty of the Company's ability to recognize the
benefit of the deferred tax asset in the future. The valuation allowance
increased by $212,559 during the year ended December 31, 2000.
At December 31, 2001, the Company has net operating loss carryforwards for
Federal tax purposes of approximately $3,599,674 which begin to expire in
the year 2020. The Company has California net operating loss carryforwards
as of December 31, 2001 of $1,854,876 which expire through 2011. As a
result of certain non-qualified stock options, which have been exercised,
the tax benefit from the utilization of the net operating loss carryforward
will be charged to additional-paid in capital when, and if, the losses are
utilized. The net operating loss may be subject to Internal Revenue Code
Section 382 limitations.
No provision has been made for U.S. Federal and state income taxes or
foreign taxes that may result from future remittance of the undistributed
earnings of foreign subsidiaries because it is expected that such earnings
will be reinvested overseas indefinitely. Determination of the amount of
any unrecognized deferred income tax liability on these unremitted earnings
is not practicable.
F-23
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. SEGMENT REPORTING:
-----------------
The Company has identified its segments based upon its geographic
operations. These segments are represented by each of the Company's
individual legal entities: DPC, PD and DPL. Segment operations are measured
consistent with accounting policies used in these consolidated financial
statements. Segment information is as follows:
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 $ 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
================== ================= ================= ================== ==================
F-24
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
-------------------
DPC PD DPL Eliminations Totals
------------------ ----------------- ----------------- ------------------ ------------------
Revenues $ 12,721,567 $ 15,302 $ 5,145,861 $ - $ 17,882,730
================== ================= ================= ================== ==================
Intersegment Revenues
$ - $ 3,026,933 $ 483,394 $ (3,510,327) $ -
================== ================= ================= ================== ==================
Interest Income $ 63,010 $ 1,742 $ 5,711 $ (40,543) $ 29,920
================== ================= ================= ================== ==================
Interest Expense $ 79,997 $ 2,021 $ 49,517 $ (40,543) $ 90,992
================== ================= ================= ================== ==================
Depreciation and
Amortization $ 303,890 $ 54,346 $ 117,751 $ - $ 475,987
================== ================= ================= ================== ==================
Income Tax Expense
$ 80,000 $ - $ 24,000 $ - $ 104,000
================== ================= ================= ================== ==================
Net Income $ (525,919) $ 179,333 $ 441,753 $ - $ 95,167
================== ================= ================= ================== ==================
Expenditures for
Segment Assets $ 133,972 $ 19,517 $ 65,425 $ - $ 218,914
================== ================= ================= ================== ==================
Segment Assets $ 10,674,886 $ 180,624 $ 2,631,015 $ (1,321,475) $ 12,165,050
================== ================= ================= ================== ==================
December 31, 1999
-------------------
DPC PD DPL Eliminations Totals
------------------ ----------------- ----------------- ------------------ ------------------
Revenues $ 9,085,554 $ 19,989 $ 6,428,475 $ - $ 15,354,018
================== ================= ================= ================== ==================
Intersegment Revenues
$ - $ 2,150,000 $ 221,138 $ (2,371,138) $ -
================== ================= ================= ================== ==================
Interest Income $ 128,106 $ 3,806 $ 12,936 $ (113,913) $ 30,935
================== ================= ================= ================== ==================
Interest Expense $ 130,173 $ 7,098 $ 154,985 $ (113,913) $ 178,343
================== ================= ================= ================== ==================
Depreciation and
Amortization $ 161,490 $ 49,357 $ 289,844 $ - $ 500,691
================== ================= ================= ================== ==================
Income Tax Expense $ (20,000) $ - $ 143,000 $ - $ 123,000
================== ================= ================= ================== ==================
Net Income $ (67,081) $ (70,437) $ 170,945 $ - $ 33,427
================== ================= ================= ================== ==================
Expenditures for
Segment Assets $ 42,282 $ 51,686 $ 93,794 $ - $ 187,762
================== ================= ================= ================== ==================
Segment Assets $ 9,251,925 $ 829,095 $ 4,924,991 $ (3,845,178) $ 11,160,833
================== ================= ================= ================== ==================
F-25
SUPPLEMENTAL INFORMATION
F-26
INDEPENDENT AUDITOR'S REPORT
ON SUPPLEMENTAL INFORMATION
PAGE
----
Independent Auditor's Report on Supplemental Information....................F-27
Schedule 1 - Balance Sheets, Digital Power Corporation - Parent
Company Only, Equity Basis - December 31, 2001 and 2000....................F-28
Schedule 2 - Statements of Operations, Digital Power Corporation -
Parent Company Only, Equity Basis - For the Years Ended
December 31, 2001, 2000 and 1999 ..........................................F-29
Schedule 3 -Statements of Cash Flows, Digital Power Corporation -
Parent Company Only, Equity Basis - For the Years Ended
December 31, 2001, 2000 and 1999...........................................F-30
Supplemental Schedules of Consolidated Company Expenses
Schedule 4 - Consolidated details of Cost of Goods Sold -
For the Years Ended December 31, 2001, 2000 and 1999..............F-32
Schedule 5 - Consolidated details of Marketing and Selling -
For the Years Ended December 31, 2001, 2000 and 1999..............F-34
Schedule 6 -Consolidated details of General and Administrative -
For the Years Ended December 31, 2001, 2000 and 1999..............F-35
Schedule 7 -Consolidated details of Intercompany Income -
For the Years Ended December 31, 2001, 2000 and 1999..............F-36
F-27
INDEPENDENT AUDITOR'S REPORT
ON SUPPLEMENTAL INFORMATION
To the Stockholders and Board of Directors
Digital Power Corporation and Subsidiaries
Fremont, California
Our report on our audits of the basic financial statements of Digital Power
Corporation and subsidiaries for the years ended December 31, 2001 and 2000
appears on page F-2. The audits were conducted for the purpose of forming an
opinion on the basic financial statements taken as a whole. The supplemental
information contained in Schedules 1 through 7 is presented for the purposes of
additional analysis for the Company's majority shareholder, Telkoor Telecom Ltd,
for their filing under the Israeli Securities Regulations (preparation of Annual
Financial Statements), of 1933 and are not a required part of the basic
financial statements. Such information has been subjected to the auditing
standards generally accepted in the United States of America and International
Auditing Standards as applied in the audit of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
/S/ Hein + Associates LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
February 19, 2002
F-28
DIGITAL POWER CORPORATION
(PARENT COMPANY ONLY - EQUITY BASIS)
SCHEDULE 1
BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2001 2000
---------------------- ------------------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1,059,790 $ 483,513
Accounts receivable - trade, net of allowance for doubtful
accounts of $370,000 and $231,000 at December 31, 2001 and
2000, respectively 998,746 1,843,122
Income tax refund receivable - 179,200
Inventories, net 1,204,634 3,896,705
Prepaid expenses and deposits 43,591 208,275
Deferred income taxes - 350,523
---------------- ----------------
Total current assets 3,306,761 6,961,338
PROPERTY AND EQUIPMENT, net 216,225 260,731
INVESTMENT IN AND ADVANCES TO PODER DIGITAL (1) 65,249 190,317
INVESTMENT IN AND ADVANCES TO DIGITAL POWER LIMITED (2) 1,347,121 3,617,294
OTHER ASSETS 17,910 17,910
---------------- ----------------
$ 4,953,266 $ 11,047,590
================ ================
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable 652,261 400,000
Accounts payable 1,112,217 1,462,944
Accrued liabilities 503,378 643,372
---------------- ----------------
Total liabilities 2,267,856 2,506,316
---------------- ----------------
STOCKHOLDERS' EQUITY:
Preferred stock issuable in series, no par value, 2,000,000
shares authorized, no shares issued or outstanding at
December 31, 2001 or 2000 - -
Common stock, no par value, 10,000,000 shares authorized,
4,510,680 and 3,260,680 shares issued and outstanding for
December 31, 2001 and 2000, respectively 11,036,251 9,786,251
Additional paid in capital 733,256 733,256
Accumulated deficit (8,771,654) (1,730,934)
Accumulated other comprehensive loss (312,443) (247,299)
---------------- ----------------
Total stockholders' equity 2,685,410 8,541,274
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,953,266 $ 11,047,590
================ ================
(1) Investment in Poder Digital includes capital stock and additional paid in capital of $1,016,175 at December 31, 2001 and 2000.
In addition, the investment includes incompany advances (liabilities) of $1,289,642 and ($702,178), retained earnings (deficit)
of ($2,240,568) and ($109,718) and other comprehensive loss related to the translation adjustment of $0 and ($13,962) at
December 31, 2001 and 2000, respectively.
(2) Investment in Digital Power Limited includes capital stock and additional paid in capital of $1,119,051 at December 31, 2001
and 2000. In addition, the investment includes incompany accounts receivable of $309,822 and $184,543, a long-term interest
bearing note receivable of $1,160,647 and $2,251,589, retained earnings (deficit) of ($929,956) and $295,448 and other
comprehensive loss related to the translation adjustments of ($312,443) and ($233,337) at December 31, 2001 and 2000,
respectively.
/s/ David Amitai 3/30/02
---------------------------------------------------------------- --------------------------------------------------------
DAVID AMITAI, PRESIDENT AND CEO DATE
F-29
DIGITAL POWER CORPORATION
(PARENT COMPANY ONLY - EQUITY BASIS)
SCHEDULE 2
STATEMENTS OF OPERATION
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------------------------
2001 2000 1999
----------------- ----------------- -----------------
REVENUES $ 6,475,533 $ 12,721,567 $ 9,085,554
COST OF GOODS SOLD 7,155,132 10,043,846 7,313,704
---------------- ---------------- ----------------
Gross margin (loss) (679,599) 2,677,721 1,771,850
---------------- ---------------- ----------------
OPERATING EXPENSES:
Research and development 825,787 928,348 674,566
Marketing and selling 407,445 638,573 347,589
General and administrative 1,364,380 1,105,805 834,709
---------------- ---------------- ----------------
Total operating expenses 2,597,612 2,672,726 1,856,864
---------------- ---------------- ----------------
INCOME (LOSS) FROM OPERATIONS (3,277,211) 4,995 (85,014)
---------------- ---------------- ----------------
OTHER INCOME (EXPENSE):
Interest income 24,350 63,010 128,106
Interest expense (56,874) (79,997) (130,173)
Gain (loss) on disposal of assets (24,208) - -
---------------- ---------------- ----------------
Other (expense) (56,732) (16,987) (2,067)
---------------- ---------------- ----------------
INCOME (LOSS) BEFORE INTEREST IN SUBSIDARIES AND INCOME TAXES
(3,333,943) (11,992) (87,081)
INCOME TAX PROVISION (BENEFIT) 350,523 80,000 (20,000)
---------------- ---------------- ----------------
INCOME (LOSS) BEFORE EQUITY IN EARNINGS OF SUBSIDARIES (3,684,466) (91,992) (67,081)
EQUITY IN EARNINGS OF PODER DIGITAL (2,130,850) 179,333 (70,437)
EQUITY IN EARNINGS OF DIGITAL POWER LIMITED (1,225,404) 7,826 170,945
---------------- ---------------- ----------------
NET INCOME (LOSS) $ (7,040,720) $ 95,167 $ 33,427
================ ================ ================
F-30
DIGITAL POWER CORPORATION
(PARENT COMPANY ONLY - EQUITY BASIS)
SCHEDULE 3
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------------------------------
2001 2000 1999
----------------- ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (7,040,720) $ 95,167 $ 33,427
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Equity in earnings of Poder Digital S.A de C.V 2,130,850 (179,333) 70,437
Equity in earnings of Digital Power Limited 1,225,404 (7,826) (170,945)
Depreciation and amortization 124,555 159,890 161,490
(Gain) loss on disposal of assets 24,208 - -
Deferred income taxes 350,523 (22) 8,499
Warranty expense (88,655) 55,000 (110,000)
Increase in provision for inventory obsolescence and
excess 2,454,710 - 30,000
Contribution to ESOP - - 184,919
Bad debt expense 139,000 21,000 (75,000)
Compensation cost recognized upon issuance of warrants
- 117,555 -
Income tax benefit related to exercise of stock options
- 101,397 -
Stock issued for services 19,375 -
Changes in operating assets and liabilities:
Accounts receivable 705,376 (485,733) 383,265
Income tax refund receivable 179,200 (108,212) 321,658
Inventories 237,361 (949,613) 241,206
Prepaid expenses 164,683 (151,585) 17,945
Net change in subsidiaries receivable (payable) (1,026,157) 314,614 (83,459)
Other assets - (8,835) 2,408
Accounts payable (350,703) 721,422 275,701
Accrued liabilities (51,362) 55,899 (464,165)
Other long-term liabilities - (25,000) (10,043)
---------------- ---------------- ----------------
Net cash provided by (used in) operating activities
(821,727) (254,840) 817,343
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (104,257) (133,972) (42,282)
---------------- ---------------- ----------------
Net cash (used in) investing activities (104,257) (133,972) (42,282)
---------------- ---------------- ----------------
F-31
DIGITAL POWER CORPORATION
(PARENT COMPANY ONLY - EQUITY BASIS)
SCHEDULE 3
STATEMENT OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------------------------------
2001 2000 1999
----------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants - 754,197 -
Proceeds received (payments made) on notes payable 252,261 (540,000) (650,000)
Principal payments on capital lease obligations - - (6,094)
Principal payments on notes payable - - (184,919)
Investment from Telkoor Telecom, Ltd. 1,250,000 - -
---------------- ---------------- ----------------
Net cash provided by financing activities 1,502,261 214,197 (841,013)
---------------- ---------------- ----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 576,277 (174,615) (65,952)
CASH AND CASH EQUIVALENTS, beginning of period 483,513 658,128 724,080
---------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS, end of period $ 1,059,790 $ 483,513 $ 658,128
================ ================ ================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Interest $ 56,874 $ 81,637 $ 120,129
================ ================ ================
Income taxes $ - $ 180,000 $ -
================ ================ ================
F-32
DIGITAL POWER CORPORATION
SUPPLEMENTAL SCHEDULES OF CONSOLIDATED COMPANY EXPENSES
SCHEDULE 4 - COST OF GOODS SOLD:
-------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2001
DPC DPL PD Eliminations Consolidated
------------------ ------------------ ---------------- ----------------- ------------------
Materials consumed $ 5,593,586 $ 3,241,585 $ - $ - $ 8,835,171
Labor 1,397,591 508,023 2,966,709 (1,384,298) 3,488,025
Contracted labor 64 54,705 - - 54,769
Depreciation 37,365 - 49,708 - 87,073
Other manufacturing costs 464,737 - 944 - 465,681
Changes in finished goods and
work-in-process (338,211) (652,523) - - (990,734)
------------------ ------------------ ---------------- ---------------- -----------------
$ 7,155,132 $ 3,151,790 $ 3,017,361 $ (1,384,298) $ 11,939,985
================== ================== ================ ================ =================
FOR THE YEAR ENDED DECEMBER 31, 2000
DPC DPL PD Eliminations Consolidated
------------------ ------------------ ---------------- ----------------- ------------------
Materials consumed $ 5,651,520 $ 3,796,660 $ - $ (483,394) $ 8,964,786
Labor 3,669,294 637,879 2,554,990 (3,026,933) 3,835,230
Contracted labor 20,718 91,592 - - 112,310
Depreciation 47,967 - 58,613 - 106,580
Other manufacturing costs 368,271 (916,138) 248,748 - (299,119)
Changes in finished goods and
work-in-process 286,076 217,578 - - 503,654
------------------ ------------------ ---------------- ----------------- ------------------
$ 10,043,846 $ 3,827,571 $ 2,862,351 $ (3,510,327) $ 13,223,441
================== ================== ================ ================= ==================
F-33
DIGITAL POWER CORPORATION
SUPPLEMENTAL SCHEDULES OF CONSOLIDATED COMPANY EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1999
DPC DPL PD Eliminations Consolidated
------------------ ------------------ ---------------- ----------------- ------------------
Materials consumed $ 4,221,683 $ 4,067,212 $ - $ (221,138) $ 8,067,757
Labor 2,746,727 639,557 1,919,654 (2,150,004) 3,155,934
Contracted labor 4,618 133,765 - - 138,383
Depreciation 48,447 - 39,283 - 87,730
Other manufacturing costs 169,458 (759,845) 278,193 - (312,194)
Changes in finished goods and
work-in-process 122,771 16,789 - - 139,560
------------------ ------------------ ---------------- ----------------- ------------------
$ 7,313,704 $ 4,097,478 $ 2,237,134 $ (2,371,142) $ 11,277,170
================== ================== =============== ================= ==================
F-34
DIGITAL POWER CORPORATION
SUPPLEMENTAL SCHEDULES OF CONSOLIDATED COMPANY EXPENSES
SCHEDULE 5 - MARKETING & SELLING EXPENSES:
-----------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2001
DPC DPL PD Eliminations Consolidated
------------------ ------------------ ---------------- ----------------- ------------------
Labor $ 123,405 $ 202,857 $ - $ - $ 326,262
Commissions 166,292 67,770 - - 234,062
Advertising 7,175 82,279 - - 89,454
Depreciation 16,192 30,001 - - 46,193
Other costs 94,381 73,546 - - 167,927
------------------ ------------------ ---------------- ----------------- ------------------
$ 407,445 $ 456,453 $ - $ - $ 863,898
================== ================== ================ ================= ==================
FOR THE YEAR ENDED DECEMBER 31, 2000
DPC DPL PD Eliminations Consolidated
------------------ ------------------ ---------------- ----------------- ------------------
Labor $ 128,417 $ 281,477 $ - $ - $ 409,894
Commissions 343,444 52,856 - - 396,300
Advertising 13,704 115,435 - - 129,139
Depreciation 20,786 25,000 - - 45,786
Other costs 132,222 235,204 - - 367,426
------------------ ------------------ ---------------- ----------------- ------------------
$ 638,573 $ 709,972 $ - $ - $ 1,348,545
================== ================== ================ ================= ==================
FOR THE YEAR ENDED DECEMBER 31, 1999
DPC DPL PD Eliminations Consolidated
------------------ ------------------ ---------------- ----------------- ------------------
Labor $ 94,263 $ 361,209 $ - $ - $ 455,472
Commissions 189,645 68,600 - - 258,245
Advertising - 102,958 - - 102,958
Depreciation 20,994 - - - 20,994
Other costs 42,687 278,967 - - 321,654
------------------ ------------------ ---------------- ----------------- ------------------
$ 347,589 $ 811,734 $ - $ - $ 1,159,323
================== ================== ================ =============== ==================
F-35
DIGITAL POWER CORPORATION
SUPPLEMENTAL SCHEDULES OF CONSOLIDATED COMPANY EXPENSES
SCHEDULE 6 - GENERAL & ADMINISTRATIVE EXPENSES:
----------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2001
DPC DPL PD Eliminations Consolidated
------------------ ------------------ ---------------- ----------------- ------------------
Labor $ 339,821 $ 296,742 $ - $ - $ 636,563
Depreciation and amortization
105,631 134,487 15,000 - 255,118
Bad debt 158,131 2,980 - - 161,111
Impairment of goodwill - 946,263 - - 946,263
Investor relations 202,274 - - - 202,274
Other material items 630,524 265,492 - 26,529 922,545
------------------ ------------------ ---------------- ----------------- ------------------
$ 1,436,381 $ 1,645,964 $ 15,000 $ 26,529 $ 3,123,874
================== ================== ================ ================= ==================
FOR THE YEAR ENDED DECEMBER 31, 2000
DPC DPL PD Eliminations Consolidated
------------------ ------------------ ---------------- ----------------- ------------------
Labor $ 523,740 $ 221,549 $ - $ - $ 745,289
Depreciation and amortization
187,170 487,054 35,357 - 709,581
Bad debt 24,504 424 - - 24,928
Investor relations 150,438 - - - 150,438
Other material items 219,953 335,017 - (289,926) 265,044
------------------ ------------------ ---------------- ----------------- ------------------
$ 1,105,805 $ 1,044,044 $ 35,357 $ (289,926) $ 1,895,280
================== ================== ================ ================= ==================
F-36
DIGITAL POWER CORPORATION
SUPPLEMENTAL SCHEDULES OF CONSOLIDATED COMPANY EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1999
DPC DPL PD Eliminations Consolidated
------------------ ------------------ ---------------- ----------------- ------------------
Labor $ 344,785 $ 244,401 $ - $ - $ 589,186
Depreciation and amortization
43,602 299,915 - - 343,517
Bad debt (75,453) (5,520) - - (80,973)
Investor relations 72,155 - - - 72,155
Other material items 449,620 270,665 - - 720,285
------------------ ------------------ ---------------- ----------------- ------------------
$ 834,709 $ 809,461 $ - $ - $ 1,644,170
================== ================== ================ ================= ==================
SCHEDULE 7 -CONSOLIDATED DETAILS OF INTERCOMPANY INCOME
-------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2001
DPC DPL PD Eliminations Consolidated
------------------ ------------------ ---------------- ----------------- ------------------
Interest earned on Note Receivable
from Digital Power Limited $ 24,350 $ (24,350) $ -
Royalty income from Digital Power
Limited 87,130 (87,130) -
Management services from Digital
Power Limited $ 56,870 (56,879) -
FOR THE YEAR ENDED DECEMBER 31, 2000
DPC DPL PD Eliminations Consolidated
------------------ ------------------ ---------------- ----------------- ------------------
Interest earned on Note Receivable
from Digital Power Limited $ 40,543 $ (40,543) $ -
Royalty income from Digital Power
Limited 87,130 (87,130) -
Management services from Digital
Power Limited $ 56,870 (56,879) -
FOR THE YEAR ENDED DECEMBER 31, 1999
DPC DPL PD Eliminations Consolidated
------------------ ------------------ ---------------- ----------------- ------------------
Interest earned on Note Receivable
from Digital Power Limited $ 113,913 $ (113,913) $ -