U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31,
2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
DIGITAL POWER CORPORATION
(Exact name of registrant as specified in its charter)
California 3679 94-1721931
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(State or other jurisdiction of (Primary Standard (I.R.S. Employer
Incorporation or organization) Industrial Classification Identification
Code) No.
41920 Christy Street, Fremont, California 94538-3158; 510-657-2635
(Address and telephone number of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
Title of Each Class
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None
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act, during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Revenues for the year ended December 31, 2003, were $7,369,000.
As of March 3, 2004, the aggregate market value of the voting common stock held
by non-affiliates was approximately $3,681,000 based on the closing price of
$1.31 per share.
As of March 3, 2004, the number of shares of common stock outstanding was
5,700,703.
Documents Incorporated by Reference. None.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
As used in this annual report, the terms "we," "us," "our," the "Company,"
"Digital" or "Digital Power" mean Digital Power Corporation and its subsidiaries
unless otherwise indicated.
With the exception of historical facts stated herein, the following
discussion may contain forward-looking statements regarding events and financial
trends, which may affect Digital Power's future operating results and financial
position. Such statements are subject to risks and uncertainties that could
cause Digital Power's actual results and financial position to differ materially
from those anticipated in such forward-looking statements. Factors that could
cause actual results to differ materially include, in addition to other factors
identified in this report, the fact that we have experienced losses from our
operations, that the power supply industry, in general, has experienced an
economic down turn and our dependence on our manufacturing subcontractors in
Mexico and China, all of which factors are set forth in more detail in the
sections entitled "Certain Considerations" and "Management's Discussion and
Analysis or Plan of Operation" herein. Readers of this report are cautioned not
to put undue reliance on "forward looking" statements which are, by their
nature, uncertain as reliable indicators of future performance. Digital Power
disclaims any intent or obligation to publicly update these "forward looking"
statements, whether as a result of new information, future events, or otherwise.
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
General
Digital Power designs, develops, manufactures, markets, and sells switching
power supplies to telecommunications, data communications, test and measurement
equipment, office and factory automation and instrumentation equipment
manufacturers. We are a California corporation originally formed in 1969. Our
corporate office, which contains our administrative, sales, and engineering
functions, is located in Fremont, California. In addition the Company has a
wholly-owned subsidiary located in Salisbury, England which designs,
manufactures and sells products for the European market place including power
conversion products for naval and military applications and DC/AC inverters for
the telecommunications industry under the label Gresham Power Electronics.
We primarily sell our switching power supplies to the telecommunications,
data communication, test and measurement equipment, office and factory
automation and instrumentation equipment manufacturers. Both in North America
and Europe, these industries have experienced reductions in sales that have
adversely affected our operations and financial condition. As a result, we
incurred an operating loss during the year ended December 31, 2003. Further,
prior to September 30, 2002, almost all of our manufacturing was conducted at a
16,000 square foot facility operated by our wholly owned subsidiary, Poder
Digital, S.A. de C.V., located in Guadalajara, Mexico. On September 30, 2002, we
sold Poder Digital to a third-party Mexican subcontractor. This sale was part of
our overall cost reduction strategy allowing us to reduce unit costs in Mexico
while shifting more production to China. Going forward, the Company has the
option of purchasing products from the Mexican subcontractor, who purchased
Poder Digital, at reduced unit prices, but with no related fixed expenses.
Alternatively if volumes are higher and longer lead times are acceptable by the
customer, products can be purchased from the Chinese subcontractor at even lower
prices. We purchase the raw material and ship to our third party Mexican
manufacturer who manufactures our products according to our specifications.
Power supplies are critical components of electronic equipment that supply,
convert, distribute, and regulate electrical power. The various subsystems
within electronic equipment require a steady supply of direct current (DC)
electrical power, usually at different voltage levels from the other subsystems
within the equipment. In addition, the electronic components and subsystems
require protection from the harmful surges and drops in electrical power that
commonly occur over power lines.
Power supplies satisfy these issues of allocation and protection by (i)
converting alternating current (AC) electricity into DC; (ii) by dividing a
single input voltage into distinct and isolated output voltages; and (iii) by
regulating and maintaining such output voltages within a narrow range of values.
Products which convert AC from a primary power source into DC are generally
referred to as "power supplies." Products which convert one level of DC voltage
into a higher or lower level of DC voltage are generally referred to as "DC/DC
converters." "Switching" power supplies are distinguished from "linear" power
supplies by the manner and efficiency with which the power supplies "steps down"
voltage levels. A linear power supply converts an unregulated DC voltage to a
lower regulated voltage by "throwing away" the difference between the two
voltages as heat. Consequently, the linear power supply is inherently
inefficient-typically only 45% efficient for a 5V output regulator. By contrast,
a switching power supply converts an unregulated DC voltage to a lower regulated
voltage by storing the difference in a magnetic field. When the magnetic field
grows to a pre-determined level, the unregulated DC is switched off and the
output power is provided by the energy stored in the magnetic field. When the
field is sufficiently depleted, the unregulated DC is switched on again to
deliver power to the output while the excess voltage is again stored in the
magnetic field. As a result, the switching power supply is more
efficient-typically 75% efficient for a 5V output regulator.
One of the great advantages of switching power supplies, in addition to the
high efficiency, is their high power density, or power-to-volume ratio. This
density is the result of the reduction in the size of the various components.
Our switching power supply products have a high power density making them
smaller than many of our competitors.
Another advantage of our power supply products is the flexibility of
design. We have designed the base model power supply products so that they can
be quickly and inexpensively modified and adapted to the specific power supply
needs of any OEM. This "flexibility" approach has allowed us to provide samples
of modified power supplies to OEM customers in only a few days after initial
consultation, an important capability given the emphasis placed by OEMs on "time
to market." This "flexibility" approach also results in very low non-recurring
engineering (NRE) expenses. Because of reduced NRE expenses, we do not generally
charge our OEM customers for NRE related to tailoring a power supply to a
customer's specific requirements. This gives us an advantage over our
competitors, many of whom do charge their customers for NRE expenses. Our
marketing strategy is to exploit this combination of high power density, design
flexibility, and short time-to-market to win an increasing share of the power
supply market.
In addition to the line of proprietary products offered, and in response to
requests from OEMs, we also provide "value-added services." The term
"value-added services" refers to our incorporation of an OEM's selected
electronic components, enclosures, and cable assemblies with our power supply
products to produce a power subassembly that is compatible with the OEM's own
equipment and specifically tailored to meet the OEM's needs. We purchase parts
and components that the OEM itself would otherwise attach to or integrate with
our power supply, and we provide the OEM with that integration and installation
service, thus saving the OEM time and money. We believe that this value-added
service is well-suited to those OEMs who wish to reduce their vendor base and
minimize their investment in manufacturing which leads to increased fixed costs.
Based on the value-added services, the OEMs do not need to build assembly
facilities to manufacture their own power subassemblies and thus are not
required to purchase individual parts from many vendors.
We made progress in penetrating the domestic military sector and, as a
result of our strategic collaboration with Telkoor Telecom, Ltd. we have been an
awarded an initial $1.6 million contract to provide sophisticated mil-spec power
supplies for a military avionics application. The majority of this revenue will
be recognized in 2004.
Telkoor Telecom Ltd.
On November 20, 2001, we completed a securities purchase agreement with
Telkoor Telecom. Under the securities purchase agreement, Telkoor Telecom
acquired (i) 1,250,000 shares of common stock (ii) a warrant to purchase an
additional 900,000 shares of common stock at $1.25 per share; and (iii) a
warrant to purchase an additional 1,000,000 shares of common stock at $1.50 per
share for the aggregate purchase price of $1,250,000. On April 3, 2003, we
issued 900,000 shares of Common stock in consideration of $600,000. As part of
the transaction Telkoor Telecom Ltd.'s warrant to purchase 900,000 shares was
cancelled. Telkoor Telecom's investment of 2,150,000 shares represents
approximately 40% of the outstanding shares as of December 31, 2003.
On January 12, 2004 we entered into a Securities Purchase Agreement with
Telkoor Telecom Ltd. to sell 290,023 shares of common stock for the aggregate
consideration of $250,000 at a price of $0.862 per share. Additionally, under
the Securities Purchase Agreement, Telkoor may purchase additional shares of
common stock for an aggregate consideration of $250,000 prior to or on June 30,
2004 at the price equal to the average closing price of Digital Power's common
stock of the twenty (20) trading days prior to election to purchase the
additional shares. Telkoor's warrant to purchase 1,000,000 shares expired on
December 31, 2003.
Telkoor Telecom is primarily engaged in developing, marketing and selling
power supplies and power systems for the telecommunication equipment industry.
Consistent with our total cost reduction efforts, and taking advantage of
Telkoor's strong engineering team, we have and will continue to engage Telkoor
to assist us in new product development. Further, during the year ended December
31, 2003, we made progress in penetrating the United States and European markets
with Telkoor Telecom's products. This effort generated sales of approximately
13.38% of our revenues for 2003. We intend to continue to sell Telkoor Telecom's
products in the future to supplement our line of products.
Digital Power Limited
Digital Power Limited, headquartered in Salisbury, England, designs,
manufactures, and distributes switching power supplies, uninterruptible power
supplies, and power conversion and distribution equipment frequency converters
for the commercial and military markets under the name Gresham Power
Electronics. Uninterruptible power supplies (UPS) are devices that are inserted
between a primary power source and the primary power input of the electronic
equipment to be protected for the purpose of eliminating the effects of
transient anomalies or temporary outages. A UPS consists of an inverter that is
powered by a battery that is kept trickle-charged by rectified AC from an
incoming power line. In the event of a power interruption, the battery takes
over without the loss of even a fraction of a cycle in the AC output of the UPS.
Frequency converters manufactured by Digital Power Ltd. are used to convert a
warship's generated 60 cycle electricity supply to 400 cycles. This 400 cycle
supply is used to power critical equipment such as the ship's gyro, compass and
weapons systems. Gresham also designs and manufactures Transformer Rectifiers
for Naval use. Typically these provide battery supported back-up for critical dc
systems such as machinery and communications. In addition higher power
rectifiers are used for helicopters on naval vessels. The Gresham Power
Electronics add diversity to our product line, provided greater access to the
United Kingdom and European markets, and strengthened our engineering and
technical resources. For the year ended December 31, 2003, Digital Power Limited
contributed approximately 53% to our gross revenues.
The Market
Geographically, we primarily serve the North American power electronics
market with individual AC/DC power supplies and DC/DC converters ranging from 50
watts to 600 watts of total output power. Digital Power Ltd. serves the United
Kingdom and the European marketplace with AC/DC power supplies, uninterruptible
power supplies, and frequency inverters. Both commercial and government
(Ministry of Defense) markets are served by Digital Power Ltd.
Customers
Our products are sold domestically and in North America through a network
of manufacturers' representatives and distributors. Our customers can generally
be grouped into three broad industries, consisting of the telecommunication,
data communication and measurement equipment manufacturers. We have a current
base of approximately 150 active customers, some of which are sold through our
distributors.
Gresham Power's products are sold primarily in the UK and to a lesser
extent in Europe. The Company has been particularly successful in securing an
export market in Spain for its defense products. In the UK our main customers
include the UK Ministry of Defense, BAE Systems, Bacock Defense and Marshalls
plc. In Mainland Europe we sell directly to IZAR in Spain and Emerson in Sweden.
We sell power supplies through European distributors with our greatest strength
in Germany and Scandinavia.
Strategy
Our strategy is to be the supplier of choice to OEMs requiring high-quality
power solutions where size, rapid modification, and time-to-market are critical
to business success. Target market segments include telecommunications, data
communication, test and measurement equipment manufacturers. While many of these
segment would be characterized as computer-related, we do not participate in the
personal computer (PC) power supply market because of the low margins arising
out of the high volume and extremely competitive nature of that market
We intend to continue our sales primarily to existing customers while
simultaneously targeting sales to new customers. We believe that our
"flexibility" concept allows customers a more effective choice between our
products and products offered by other power supply competitors. Our
"flexibility" series is designed around a standardized power platform, but
allows the customer to specify output voltages tailored to its exact
requirements within specific parameters. Furthermore, OEMs are seeking power
supplies with greater power density and higher efficiency. Digital Power's
strategy in responding to this demand has been to offer increasingly smaller
power supply units or packages. OEMs have typically had to settle for a standard
power supply product with output voltages and other features predetermined by
the manufacturer. Alternatively, if the OEM's product required a different set
of power supply parameters, the OEM was forced to design this modification
in-house, or pay a power supply manufacturer for a custom product. Since
custom-designed power supplies are development-intensive and require a great
deal of time to design, develop, and manufacture, typically only OEMs with
significant volume requirements could economically justify the expense and delay
associated with their production. Furthermore, since virtually every power
conversion product intended for use in commercial applications requires certain
independent safety agency testing at considerable expense, such as by
Underwriters Laboratories, an additional barrier is presented to the smaller
OEM. By offering OEM customers a new choice with Digital Power's "flexibility"
series, we believe we have an advantage over our competitors.
Product Strategy and Products
We have ten series of base designs from which thousands of individual
models can be produced. Each series has its own printed circuit board (PCB)
layout that is common to all models within the series regardless of the number
of output voltages (typically one to four) or the rating of the individual
output voltages. A broad range of output ratings, from 2.0 volts to 48 volts,
can be produced by simply changing the power transformer construction and a
small number of output components. Designers of electronic systems can determine
their total power requirements only after they have designed the system's
electronic circuitry and selected the components to be used in the system.
Because the designer has a finite amount of space for the system and may be
under competitive pressure to further reduce its size, a burden is placed on the
power supply manufacturer to maximize the power density of the power supply. A
typical power supply consists of a PCB, electronic components, a power
transformer and other electromagnetic components, and a sheet metal chassis. The
larger components are typically installed on the PCB by means of
pin-through-hole assembly where the components are inserted into pre-drilled
holes and soldered to electrical circuits on the PCB. Other components can be
attached to the PCB by surface mount interconnection technology (SMT) which
allows for a reduction in board size because the holes are eliminated and
components can be placed on both sides of the board. Our US100 series is an
example of a product using this manufacturing technology.
Digital Power's "flexibility" concept applies to all of our US, UP/SP, DP
and UPF product series. A common printed circuit board is shared by each model
in a particular family, resulting in a reduction in parts inventory while
allowing for rapid modifiability into thousands of output combinations. The
following is a description of our primary products.
Four of our new product offerings resulting from our strategic relationship
with Telkoor are the eF175, eF306, CPCI AC-3U-200 and CPCI AC-6U-400. The last
two products address the CompactPCI market place. The eF175 is a power factor
corrected switching power supply, offering the smallest footprint in the
industry at 5" x 3.3" x 1.5". Also with the industry's smallest footprint is the
eF306, which delivers up to 300 watts in a form factor of 6.8" x 3.8" x 1.4".
The new 1.8KW Strongbox(R) is a single output front end with I2C databus.
It features 3 x 600 watt cassettes. The Strongbox is available in 24V, and 48V
outputs with active power factor correction.
The US50 series of power supplies consists of compact, economical, high
efficiency, open frame switchers that deliver up to 50 watts of continuous
power, or 60 watts of peak power, from one to four outputs. The 90-264 VAC
universal input allows them to be used worldwide without jumper selection.
Flexibility options include power good signal, an isolated V4 output, and UL544
(2nd Ed.) safety approval. All US50 series units are also available in 24VDC, or
48VDC inputs. This optional DC input unit (DP50 series) maintains the same
pin-out, size, and mounting as the US50 series.
The US70 series of power supplies is similar to the US50 series, a compact,
economical, highly efficient, open frame switcher that delivers up to 65 watts
with a 70 watt peak. This unit is offered with one to four outputs, a universal
input rated from 90 to 264 VAC and is only slightly larger than the US50 series.
The US70 series is differentiated from competitive offerings by virtue of its
smaller size, providing up to four outputs while competitors typically are
limited to three outputs. Flexibility options include cover, power good signal,
an isolated V4 output, and UL544 (2nd Ed.) medical safety approval. The DP70 is
the same as the US70 except the input is 48 volts DC. We also offer 24VDC input
on this series where the model series changes to a DM. This type of product is
ideal for low profile systems, with the power supply measuring 3.2" x 5" x 1.5".
The US100/DP100 was the industry's smallest 100 watt switcher when
originally introduced. Measuring only 5" x 3.3" x 1.5", this series delivers up
to 100 watts of continuous power, or 120 watt peak power, from one to four
outputs. The 90-264VAC universal input allows them to be used worldwide. This
product is ideal in applications where OEMs have upgraded their systems,
requiring an additional 30-40 watts of output power but being unable to
accommodate a larger unit. The US100 fits in the same form factor and does not
require any tooling or mechanical changes by the OEM. Flexibility options
include a cover and adjustable post regulators on V3 and/or V4 outputs and
UL2601-1 (2nd Ed.) medical safety approval. Fully customized models are also
available. All US100 series units are also available with 12VDC, 24VDC, or 48
VDC inputs. This optional DC input unit (DP100) maintains the same pin-out,
size, and mounting as the US100 series.
The US250 series consists of economical, high efficiency, open frame
switchers that deliver up to 250 watts of continuous power, or 300 watts of peak
power, from one to four outputs. The 115/230VAC auto-selectable input allows
them to be used worldwide. Flexibility options include cover, power fail/power
good signal, enable/inhibit, and an isolated V3 output. All US250 series units
are also available with 12VDC, 24VDC, or 48VDC inputs. This optional DC input
unit (DP250) maintains the same pin-out, size, and mounting as the US250 series.
The UP300 series consists of economical, high efficiency, open frame
switchers that deliver up to 300 watts of continuous, or 325 watts of peak
power, from one or two outputs. The 115/230VAC auto-selectable input allows them
to be used worldwide. On-board EMI filtering is a standard feature. Flexibility
options include a cover, power fail/power good signal, and an isolated 2nd
output. This product can be used in network switching systems or other
electronic systems where a lot of single output current, such as 5, 12, 24, or
48 volt current might be required.
The UPF150/DP150 series is an open-frame switcher that delivers up to 150
watts of continuous power from one to four outputs. In response to market
condition for more functionality, the UPF 150 has both power factor correction
and a Class B EMI filter as standard features. All UPF150 series units are
available with 24VDC, or 48VDC inputs. This optional DC input unit (DP150)
maintains the same pin-out, size, and mounting as the UPF150 series.
The UPF 300 watts delivers up to 300 watts from one or two outputs and also
includes power factor correction and measures 8" x 4.5" x 2".
Gresham Products
Gresham designs and manufactures a wide range of products for Naval
applications. These include:
Static Frequency Converters - typically converts Ship's supply from 50/60Hz
to 400Hz for gyros and weapons systems. Power range is from 1kVA to 35kVA.
DC Systems - converts main Ship's supply to 24VDC. These systems normally
supported by battery back up provide the vessel's emergency DC supplies for
machinery, communications and other essential services.
Transformer Rectifiers 28V to 400A. Ratings of 10 and 15kVA provide dc
power to enable the ship to start and service helicopters. Gresham's TRUs are in
service with a number of Navies including the Royal Navy and are designated by
Westland Helicopters in support of Super Lynx.
Inverters - 1kVA to 3.6 kVA typically convert DC to 440V 3phase 60 Hz for
communications and emergency services.
Circuit breaker monitoring and controls - modular system of controls for
main circuit breakers based upon digital circuitry. Modules available include
over current, short circuit, low voltage, over and under frequency and an
indicator module. Many are used in submarine service.
Intelligent switchmode DC/DC power supplies in support of inboard submarine
sonar.
Filter boxes for secure communications
Navigation and signal panels - for the control and dimming of ship's
external navigation lights.
Gresham also manufactures a range of commercial inverters of its own design
for telecoms applications. Rated at 250VA, 500VA and 1kVA these convert either
24V or 48V DC to AC.
In addition to Digital Power and Telkoor products, Gresham distributes a
wide range of commercial Uninterruptible power supplies. Power ratings range
from 500VA to 6kVA in a modular configurable range. The Company also provides
turnkey high power solutions for major business users. Typically configured with
generators for the support of substantial institutional systems, power ratings
can extend to 300kVA."
Manufacturing Strategy
Consistent with our product flexibility strategy, we aim to maintain a high
degree of flexibility in our manufacturing strategy through the use of
strategically focused contract manufactures. It is our belief that strategically
focused contract manufacturers will meet our near term cost, delivery and
quality goals while providing synergistic concepts. In addition, we believe
these relationships will eventually give us access to new markets and cross
licensing arrangements that may be beneficial. The competitive nature of the
power supply industry has also placed continual downward pressure on selling
prices. In order to achieve our low cost manufacturing goals with labor
intensive product, we also plan on continually increasing our supply base
through the use of contract manufacturers in the Far East. At present we have
two principle sources in the Far East: Winco Power Technology and
Fortron/Source.
On September 30, 2002, the Company sold its Mexican subsidiary, Poder
Digital, S.A. de C.V. to a contract manufacturer located in Guadalajara, Mexico,
in consideration of $20,000. As a result of this transaction the Company
recorded a capital gain of $280,463. Subsequent to this transaction, the Company
and the purchaser signed a subcontractor agreement.
In addition, we have contract manufacturing relationships with
Fortron/Source Corp. and with Winco Power Technology to manufacture our products
at facilities located in China on a turnkey basis. Purchases from Fortron/Source
and Winco are made pursuant to purchase orders. For the year ended December 31,
2003, Digital Power purchased approximately 32% of its power supplies
requirements through Fortron/Source Corp. and Winco Power Technology. Our
products are meeting the certification standards according to independent safety
agency requirements.
Digital Power Limited Manufacturing
Digital Power Limited operates from a 25,000 sq. ft leased facility located
in Salisbury U.K. The equipment designed and manufactured in Salisbury is
different from the power supplies produced in Mexico and China. Full assembly,
test and quality assurance takes place in house.
Sales and service support staff for the European network of distributors
for Digital Power products are located within the building together with other
functions such as Engineering and Administration.
Sales, Marketing and Customers
Digital Power markets its products through a network of independent
manufacturer's representatives. Each representative organization is responsible
for managing sales in a particular geographic territory. Generally, the
representative has exclusive access to all potential customers in the assigned
territory and is compensated by commissions at 5% of net sales after the product
is shipped, received, and paid for by the customer. Typically, either we or the
representative organization may terminate the agreement with 30 day's written
notice.
In certain territories, we have entered into agreements with distributors
who buy and resell our products. For the fiscal years ended December 31, 2003
and 2002, domestic distributor sales accounted for 38.60% and 29.54%,
respectively, of our total sales. Over this same period, one distributor
accounted for 17.90%, and 13.87%, respectively, of total sales. In general, the
agreements with distributors are subject to annual renewal and may be terminated
upon 90 days' written notice. Although these agreements may be terminated by
either party, in the event a distributor decides to terminate its agreement with
us, we believe that we would be able to continue the sale of our products
through direct sales to the customers of the distributor. Further, distributors
are eligible to return up to 25% of their previous six-months purchases as a
stock rotation. In such an event the distributor is required to place offsetting
new orders equal to the value of the returned products. For the past three
years, stock rotations have not exceeded one percent of total sales.
Our promotional efforts to date have included product data sheets, trade
shows and Internet Web sites. Our future promotional activities will likely
include space advertising in industry-specific publications, application notes
and enhancements to our existing Web sites.
Our products are warranted to be free of defects for approximately twelve
months from date of shipment. As of December 31, 2003 and 2002, our warranty
reserve was $111,000 and $107,000, respectively. No significant warranty returns
were experienced in either 2003 or 2002.
Competition
The merchant power supply manufacturing industry is highly fragmented and
characterized by intense competition. Our competition includes hundreds of
companies located throughout the world, some of whom have advantages over us in
terms of labor and component costs, and some of who may offer products
comparable in quality to ours. Many of our competitors, including Power One,
Artesyn Technologies, Inc., ASTEC America, Lambda Electronics, and Meanwell
Power Supplies have substantially greater fiscal and marketing resources and
geographic presence than we do. If we are successful in increasing our revenues,
competitors may notice and increase competition for our customers. We also face
competition from current and prospective customers who may decide to design and
manufacture internally the power supplies needed for their products.
Furthermore, certain larger OEMs tend to contract only with larger power supply
manufacturers. This factor could become more problematic to us if consolidation
trends in the electronics industry continue and some of the OEMs to whom we sell
our products are acquired by larger OEMs. To remain competitive, management
believes that we must continue to compete favorably on the basis of value by
providing reliable manufacturing, offering customer service and design
engineering services, continuously improving quality and reliability levels, and
offering flexible and reliable delivery schedules. We believe we have a
competitive position with our targeted customers who need a high-quality,
compact product which can be readily modified to meet the customer's unique
requirements. However, there can be no assurance that we will continue to
compete successfully in the power supply market.
Engineering and Product Development
Our engineering and product development efforts are primarily directed
toward modification of our standard power supply to provide a broad array of
individual models. Improvements are constantly sought in power density,
modifiability, and efficiency, while we attempt to anticipate changing market
demands for increased functionality, such as PFC and improved EMI filtering.
Historically, the Company has utilized consultants and contract engineering
for the majority of its new product developments, supported by the internal
engineering staff for product engineering. The Company intends to continue this
strategy for research and development. Further, as a result of the strategic
relationship with Telkoor Telecom, the Company engaged Telkoor's Telecom
engineering team in Israel, to assist it in new product development. If Digital
Power identifies a potential new product for development, it will cooperate with
Telkoor Telecom to design and develop the product.
Employees
As of December 31, 2003, we had 41 employees located in the United States
and the United Kingdom. We believe that our employee relations are good.
Foreign Currency Fluctuations
Gresham Power conducts its financial operation using the United Kingdom
pound sterling. Therefore, we are subject to monetary fluctuations between the
U.S. dollar and United Kingdom pound sterling. For the years ended December 31,
2003 and 2002 we experienced foreign currency translation adjustments of
$146,000 and $160,000 respectively.
Raw Materials
The raw materials for power supplies principally consist of electronic
components. These materials are available from a variety of sources and we are
not dependent on any one supplier. We generally purchase components based on
orders received or forecast to minimize our risk of unusable inventory. To the
extent necessary we may order materials prior to orders to obtain shorter lead
times and achieve quantity discounts following a risk assessment.
Intellectual Property
We rely upon a combination of trade secrets, industry expertise,
confidential procedures and contractual provisions to protect our intellectual
property. We believe that because our products are continually updated and
revised, obtaining patents would be costly and not beneficial.
We applied for trademark protection for the mark "DP Digital Power -
Powering our technologies." There is no assurance that the USPTO will grant this
trademark.
ITEM 2. DESCRIPTION OF PROPERTY.
Our headquarters are located in approximately 9,500 square feet of leased
office, research and development space in Fremont, California. For the year
ended December 31, 2003 until October 15, 2003, we paid $8,550 per month for
rent. On October 15, 2003, we amended our lease agreement. Our revised payment
of rent is as follows: October 1, 2003 to September 30, 2005, $8,550 per month;
October 1, 2005 to September 30, 2006, $9,025 per month; and October 1, 2006 to
September 30, 2007, $9,500 per month. During 2002, we issued to the landlord
warrants to purchase 10,000 shares of Common Stock at an exercise price of $1.00
per shares expiring in September 2013.
Gresham Power leases approximately 25,000 square feet for its location in
Salisbury, England. Gresham Power pays rent of approximately $10,000 per month,
and the lease expires on September 26, 2008. We believe that our existing
facilities are adequate for the foreseeable future and have no plans to expand
them.
ITEM 3. LEGAL PROCEEDINGS.
On April 2, 2003, a claim was filed against the Company by Tek-Tron
Enterprises Inc. in the state court of Pennsylvania, specifically, the Court of
Common Pleas of Bucks County, as Case No. 0302116-24-1. Tek-Tron Enterprises,
Inc is seeking damages of approximately $300,000. This case is a complaint for
breaking of contract and conversion of parts and infrastructure owned by
Tek-Tron Enterprises, Inc. located in the Company's former subsidiary, Poder
Digital S.A's, Mexico manufacturing plant. The Company is currently in
settlement negotiations with Tek-Tron Enterprises Inc. and has accrued $102,000
in expenses related to the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Comparative Market Prices
Our common stock is listed and traded on the American Stock Exchange
("AMEX") under the symbol DPW. The following tables set forth the high and low
closing sale prices, as reported by AMEX, for our common stock for the prior two
fiscal years.
Quarter Ended High Low
------------- ---- ---
12/31/2003 $ 0.99 $0.69
9/30/2003 1.05 0.71
6/30/2003 1.02 0.55
3/31/2003 0.65 0.51
12/31/2002 $ 0.86 $0.38
9/30/2002 0.72 0.40
6/30/2002 0.78 0.56
3/31/2002 1.34 0.65
(b) Holders
As of March 3, 2004, there were 5,700,703 shares of our common stock
outstanding, held by approximately 95 registered holders, not including holders
whose shares of common stock are held in street name.
(c) Dividends
We have not declared or paid any cash dividends since our inception and we
do not intend to pay any cash dividends in the foreseeable future. The
declaration of dividends in the future, if any, will be at the discretion of the
Board of Directors and will depend upon our earnings, capital requirements, and
financial position.
(d) Recent Sales of Unregistered Securities
On January 12, 2004, the Company sold 290,023 shares of common stock for
$0.862 per share to Telkoor Telecom Ltd. Under the terms of the stock purchase
agreement, Telkoor may invest an additional $250,000 on or before June 30, 2004.
The purchase price per share for the additional investment is the average
closing price of the Company's common stock twenty (20) trading days prior to
notice of intent to invest. There was no broker or placement agent in this
transaction.
The sales and issuance of common stock was made by us in reliance upon the
exemptions from registration provided under Section 4(2) and 4(6) of the
Securities Act of 1933, as amended, and Rule 506 of Regulation D, promulgated by
the SEC under federal securities laws and comparable exemptions for sales to
"accredited" investors under state securities laws. The offers and sales were
made to accredited investors as defined in Rule 501(a) under the Securities Act,
no general solicitation was made by us or any person acting on our behalf; the
securities sold were subject to transfer restrictions, and the certificates for
those shares contained an appropriate legend stating that they had not been
registered under the Securities Act and may not be offered or sold absent
registration or pursuant to an exemption there from.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
General
We are engaged in the business of designing, developing, manufacturing,
marketing and selling switching power supplies to telecommunications, data
communication , test and measurement equipment, office and factory automation
and instrumentation equipment manufacturers. Revenues are generated from sales
to distributors, OEMs in the telecommunication, data communication, test and
measurements equipment, office and factory automation and instrumentation
equipment manufacturers in North America, Europe, and the United Kingdom.
During the year ended December 31, 2003, we continued to experience a slow
down in customer orders in both the United States and Europe due to the
softening in the telecomm and networking markets, which we serve. In addition,
where the Company has been successful in designed-in products, sales have been
slower than anticipated. We have continued our promotional efforts to increase
sales to existing and new customers, and have continued new product
developments. Until revenues increase to a sufficient amount to offset our
expenses, we anticipate that we will continue to experience net losses for the
near future. We believe that our cash will be sufficient to fund those losses.
Results of Operations
The table below sets forth certain statements of operations data as a
percentage of revenues for the years ended December 31, 2003 and 2002:
Years Ended December 31,
------------------------
2003 2002
---- ----
Revenues 100.00% 100.00%
Cost of Revenues 72.93 71.91
----- -----
Gross profit 27.07 28.09
Engineering and product development 7.57 8.54
Sales and marketing 14.93 11.56
General and administrative 19.03 13.99
Total operating expenses 41.53 34.09
----- -----
Operating loss (14.46) (6.00)
Capital Gain from disposal of a subsidiary - 3.19
Financial income and other income 0.34 0.07
Loss before tax benefit (14.12) (2.74)
Tax benefit 1.05 6.04
---- ----
Net income (loss) (13.07)% 3.30%
====== ====
The following discussion and analysis should be read in connection with the
consolidated financial statements and the notes thereto and other financial
information included elsewhere in this report. We prepared the financial
statements in accordance with generally accepted accounting principles which
require management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Year Ended December 31, 2003, Compared to Year Ended December 31, 2002
Revenues
For the year ended December 31, 2003, revenues decreased by 16.02% to
$7,369,000 from $8,775,000 for the year ended December 31, 2002.
Revenues from the domestic operation of DPC decreased 21.41% to $3,417,000
for the year ended December 31, 2003, from $4,348,000 for the year ended
December 31, 2002. Revenues from the Company's European operations of DPL
decreased 10.73% to $3,952,000 for the year ended December 31, 2003, from
$4,427,000 for the year ended December 31, 2002.
The decrease in revenues for the year ended December 31, 2003 from December
2002 is due to continued softness in the Company's markets. In addition, where
the Company has been successful in designed-in products, sales have been slower
than anticipated. The Company is focusing on enhanced sales efforts in order to
increase our revenues.
Gross Margins
Gross margins were 27.07% for the year ended December 31, 2003, compared to
28.09% for the year ended December 31, 2002. The decrease in our gross margins
can be primarily attributed to fixed cost, decrease in revenue and one time
inventory write-offs in the total amount of $46,000 related to DPL.
Engineering and Product Development
Engineering and product development expenses were 7.57% of revenues for the
year ended December 31, 2003, compared to 8.54% for the year ended December 31,
2002. Actual dollar expenditures were decreased by $191,000 from 2003 to 2002.
The decrease in engineering and product development expenses was mainly due to
reduced salary expenses. The Company is not expecting to materially decrease
engineering expenses in the near future.
Selling and Marketing
Selling and marketing expenses were 14.93% of revenues for the year ended
December 31, 2003, compared to 11.56% for the year ended December 31, 2002.
Actual dollar expenditures were increase by $86,000 from 2003 to 2002. The
increase in sales and marketing was primarily due to the hiring of sales person
and travel expenses in DPL as part of our efforts to increase sales.
General and Administrative
General and administrative expenses were 19.03% of revenues for the year
ended December 31, 2003, compared to 13.99% for the year ended December 31,
2002. The increase of $174,000 in general and administrative expenses from 2002
to 2003 is mainly due to additional accrued litigation expenses of $102,000 and
increase in allowance for bad debts of $72,000.
Capital Gain from the Disposal of Poder Digital
The Company had a one time capital gain for the year ended December 31,
2002, of $280,000 resulting from the disposal of Poder Digital.
Financial Income and Other Expenses
Interest income, net of interest expense, was $25,000 for the year ended
December 31, 2003, compared to an income of $6,000 for the year ended December
31, 2002. The increase in the interest income from 2002 to 2003 is from the
Company's United Kingdom's operations of DPL.
Loss before Tax benefit
For the year ended December 31, 2003, we had a loss before tax benefit of
$1,040,000 compared to a loss of $240,000 for the year ended December 31, 2002.
The loss increase is mainly due to the decrease in revenues in the year ended
December 31, 2003 and one time capital gain of $280,000 recorded in the year
ended December 31, 2002 as a result of the disposal of the Mexican subsidiary,
Poder Digital, S.A. de C.V.
Tax Benefit
For the year ended December 31, 2003, the Company had a tax benefit of
$77,000 compared to a tax benefit of $530,000 for the year ended December 31,
2002. The tax benefit for the year 2003 is from the UK operations. The tax
benefit for the year 2002 was comprised of a tax refund of $649,000, for the
Company's US operations, offset by a tax expense of $119,0000 for the UK
operations, which was profitable for the year ended December 31, 2002.
The $649,000 tax refund resulted from a tax law change. Prior to this
change, US tax payers had the option of carrying forward net operating losses
(NOL's) to reduce future income tax payment, or carrying back those losses to
prior profitable years (up to a maximum of two years) and file for a refund of
taxes paid. The tax law change increased the carryback period to five years for
NOL's incurred in 2001 and 2002, which allowed the Company to claim additional
refunds for taxes paid in 1996 and 1997.
The Company has actually received $649,000 of this refund during the year
ended December 31, 2003. As of December 31, 2003, the Company has available tax
carryforward of approximately $4,500,000.
Net Loss and Net Income
Net loss for the year ended December 31, 2003, was $963,000 compared to a
net income of $290,000 for the year ended December 31, 2002. The net loss can be
attributed mainly due to the decrease in revenue.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States require management to make
estimates and assumptions that affect the reported assets, liabilities, sales
and expenses in the accompanying financial statements. Critical accounting
policies are those that require the most subjective and complex judgments, often
employing the use of estimates about the effect of matters that are inherently
uncertain. The following are considered our most critical accounting policies
that, under different conditions or using different assumption or estimates,
could show materially different results on our financial condition and results
of operations.
Revenue Recognition
The Company's revenue recognition policy for product revenues is that
revenue is recognized when the risks and rewards of ownership pass, which is
primarily upon delivery of goods to customers (see Note 2i to the Consolidated
Financial Statements).
Inventory Obsolescence Accruals
The Company writes down its inventory for estimated obsolescence or
unmarketable inventory to the estimated net realizable value based upon
assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.
Deferred Income Taxes
Significant management judgment is required in determining the provision
for income taxes, deferred tax assets and any valuation allowance recorded
against net deferred tax assets. Due to uncertainties related to the Company's
ability to utilize some portion of the deferred tax assets, a valuation
allowance of approximately $1,765,000 has been recorded as of December 31, 2003.
Other Accrued Liabilities
The Company also maintains other accrued liabilities. These accruals are
based on a variety of factors including past experience and various actuarial
assumptions and, in many cases, require estimates of events not yet reported to
the Company. If future experience differs from these estimates, operating
results in future periods would be impacted.
Liquidity and Capital Resources
On December 31, 2003, we had cash, cash equivalents and restricted cash of
$1,346,000 and working capital of $2,686,000. This compares to $1,216,000 and
working capital of $2,832,000 at December 31, 2002. The decrease in working
capital was mainly due to a decrease in our trade receivable resulting from our
decrease in revenues.
Net cash used in operating activities was $197,000 for the year ended
December 31, 2003, compared to cash provided by operating activities of $516,000
for the year ended December 31, 2002.
Net cash provided by investing activities was $262,000 for the year ended
December 31, 2003, compared to cash used in investing activities of $699,000 for
the year ended December 31, 2002. Net cash provided by financing activities was
$331,000 for the year ended December 31, 2003, compared to net cash used in
financing activities of $423,000 for the year ended December 31, 2002.
The Company has available a line of credit with Silicon Valley Bank
("SVB"). The Company can borrow up to $1,200,000 against eligible account
receivable and other financial covenants. According to this covenant the
available line of credit for utilization as of December 31, 2003 is $353,000.
The rate for this line of credit would be at Silicon Valley Bank's prime rate
plus 1.75% (currently 5.75%). As of December 31, 2003, the Company has not
utilized its line of credit.
The Company's subsidiary has a $534,000 line of credit with Lloyds TSB
Bank. Borrowing under this line of credit bears interest of 1.75% per annum over
the bank's base rate (totaling 5.5% at December 31, 2003). Interest only, is
payable monthly with outstanding principal due on demand. If no demand is made,
the outstanding principal and accrued interest is due on March 31, 2004.
We do not believe that our sales are seasonal. Further, we do not believe
that inflation will adversely affect our operations.
The Company believes it has adequate resources at this time to continue its
promotional efforts to increase sales in the electronic industry market.
However, if the Company does not meet those goals, it may have to raise money
through debts or equity, which may dilute shareholder's equity.
Management
There is currently a dispute between certain shareholders and managers of
Telkoor Telecom, which is subject to litigation in Israel. Two of the members of
our Board of Director are involved in this dispute. Although, the Company does
not believe the dispute has effected the day-to-day operations of the Company,
it may have an adverse impact on certain decision making in the future.
RISK FACTORS
In addition to the other information presented in this report, the
following should be considered carefully in evaluating us and our business. This
report contains various forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from the results
discussed in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed below and elsewhere
in this report.
We experienced an operating loss during the year ended December 31, 2003, and
anticipate that losses will continue in the near future.
For the year ended December 31, 2003, we incurred an operating loss of
$1,091,000. Although we have actively taken steps to reduce our costs, we will
incur losses until we increase revenues through the sale of current products and
new products under development.
We are dependent on a limited number of customers.
Traditionally, we have relied on a limited number of customers for growth
in sales. It cannot be assured that we will be able to retain current customers,
and the loss of any major OEM customer may have an adverse effect on our
revenues.
We are dependant on Telecommunication and other electronic equipment industries.
Substantially all of our existing customers are in the telecommunication
and other electronic equipment industries and they manufacture products that are
subject to rapid technological change, obsolescence, and large fluctuations in
demand. These industries are further characterized by intense competition. The
OEMs serving these markets are pressured for increased product performance and
lower product prices. OEMs, in turn, make similar demands on their suppliers,
such as us, for increased product performance and lower prices. The
telecommunication industry is inherently volatile. Recently, certain segments of
the telecommunication and other electronic industries have experienced a
significant softening in product demand. Such lower demand may affect our
customers, in which case the demand for our products may decline, and our growth
could be adversely affected.
We are dependent on the performance of our three subcontract manufacturers.
Since we do not own our manufacturing facilities, we must rely on our
subcontractor's abilities to purchase components, staff their operation,
maintain high volume and high quality processes, and remain financially solvent.
Conditions in Israel may limit our ability to receive and sell products. This
could decrease our revenues.
Telkoor's principal offices, research and development and manufacturing
facilities are located in Israel. Political, economic and military conditions in
Israel directly affect our operations. We could be adversely affected by any
major hostilities involving Israel, the interruption or curtailment of trade
between Israel and its trading partners, a significant increase in inflation, or
a significant downturn in the economic or financial condition of Israel.
Restrictive laws or policies directed towards Israel or Israeli businesses could
adversely affect us.
We are dependant upon key personnel.
Our performance is substantially dependent on the performance of its
executive officers and key personnel, and on our ability to retain and motivate
such personnel. The loss of any of our key personnel could have a material
adverse effect on our business, financial condition and operating results.
We are dependant on suppliers.
We rely on, and will continue to rely on, outside parties to manufacture
parts, components and equipment. We cannot assure you that these suppliers will
be able to meet our needs in a satisfactory and timely manner or that we will be
able to obtain additional suppliers when and if necessary. A significant price
increase, a quality control problem, an interruption in supply or other
difficulties with third party manufacturers could have a material and adverse
effect on our ability to successfully provide our products. Further, the failure
of third parties to deliver the products, components, necessary parts or
equipment on schedule, or the failure of third parties to perform at expected
levels, could delay our delivery of power supply products.
Our products are not protected by patents.
Our products are not subject to any U.S. or foreign patents. We believe
that because our products are continually updated and revised, obtaining patents
would be costly and not beneficial. Therefore, we cannot guarantee that other
competitors or former employees will make use of and develop proprietary
information on which we rely.
Our common stock price is volatile.
Our common stock is listed on the American Stock Exchange and is thinly
traded. In the past, our trading price has fluctuated widely, depending on many
factors that may have little to do with our operations or business prospects.
Further, the exercise of outstanding options and warrants may adversely affect
our stock price and your percentage of ownership. As of December 31, 2003, the
Company has employees options to purchase 972,460 shares of common stock, with a
weighted average exercise price of $1.19 exercisable at prices ranging from
$0.48 to $2.375 per share and consultants and service providers options to
purchase 220,000 shares of common stock, with a weighted average exercise price
of $2.818 exercisable at prices ranging from $1.00 to $3.00 were outstanding. In
addition, we have 40,000 warrants to purchase shares of common stock at an
exercise price of $1.00. The exercise of these options and warrants may have an
adverse effect on the price of our common stock and will dilute existing
shareholder percentage ownership in the Company.
Substantial Ownership by Telkoor Telecom
As of December 31, 2003, Telkoor Telecom owns approximately 40% of the
outstanding shares of common stock of the Company. On January 12, 2004, Telkoor
Telecom purchased an additional 290,023 shares of common stock which increased
Telkoor Telecom ownership to approximately 43% of the outstanding shares of
common stock. Also, Telkoor Telecom may purchase additional shares of common
stock for an aggregate consideration of $250,000 prior to or on June 30, 2004 at
the price equal to the average closing price of Digital Power's common stock of
the twenty trading days prior to election to purchase the additional shares.
Telkoor Telecom ownership makes it difficult for other shareholders to propose
changes or change the Board of Directors. Currently, certain shareholders and
managers of Telkoor Telecom are in a dispute. This dispute may divert limited
resources of the Company from its business. See "management" section above.
Intellectual Property
While Digital Power Corp. owns the intellectual property rights on its
legacy products (the US, UP and UPF Series), Telkoor Telecom designed and
developed the newer products (the CPCI, Strongbox, and eF Series) at its expense
and owns the intellectual property rights. Further, all of these new products
sold by Digital Power to date were manufactured by Telkoor Telecom in Israel and
shipped to Digital Power at a transfer price which allowed for some gross
margins to be earned by Telkoor. This exposes Digital Power to potentially lower
gross margins on these products. Digital Power and Telkoor Telecom plan to enter
into an agreement to manufacture these products in a lower cost environment
allowing for improved gross margins. However, no assurances can be given that
such an agreement will be formalized, which could result in continued lower
margins.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements of the Company, including the notes thereto and
report of the independent auditors thereon, are attached hereto as exhibits as
page numbers F-1 through F-24.
DIGITAL POWER CORPORATION AND ITS SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003
IN U.S. DOLLARS
INDEX
Page
----------------
Report of Independent Auditors 2
Consolidated Balance Sheet 3 - 4
Consolidated Statements of Operations 5
Statements of Changes in Shareholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8 - 24
- - - - - - - -
F-1
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
DIGITAL POWER CORPORATION
We have audited the accompanying consolidated balance sheet of Digital
Power Corporation ("the Company") and its subsidiaries as of December 31, 2003
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the two years in the period ended December 31,
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 31, 2003 and the consolidated
results of their operations and cash flows for the two years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States.
s/ KOST FORER GABBAY & KASIERER
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
March 9, 2004 A Member of Ernst & Young Global
F-2
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands
December 31,
2003
------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,050
Restricted cash 296
Trade receivables, net of allowance for doubtful accounts
of $107 at December 31, 2003 1,625
Prepaid expenses and other current assets 136
Inventories (Note 3) 1,693
------------
Total current assets 4,800
------------
LEASE DEPOSITS 18
------------
PROPERTY AND EQUIPMENT, NET (Note 4) 318
------------
Total assets $ 5,136
============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share data
December 31,
2003
------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable $ 1,074
Other current liabilities (Note 6) 1,040
------------
Total current liabilities 2,114
------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)
SHAREHOLDERS' EQUITY (Note 8):
Series A redeemable, convertible Preferred shares no par value:
500,000 shares authorized, 0 shares issued and outstanding as
of December 31, 2003
Preferred shares, no par value: 1,500,000 shares authorized, 0
shares issued and outstanding as of December 31, 2003
Common shares, no par value: 10,000,000 shares authorized;
5,410,680 shares issued and outstanding as of December 31, 2003 11,036
Additional paid-in capital 1,437
Accumulated deficit (9,445)
Accumulated other comprehensive loss (6)
------------
Total shareholders' equity 3,022
------------
Total liabilities and shareholders' equity $ 5,136
============
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------------------------------------------------------------------------------------
U.S. dollars in thousands, except share data and per share data
Year ended December 31,
---------------------------------
2003 2002
-------------- ---------------
Revenues (Note 12) $ 7,369 $ 8,775
Cost of revenues (Note 10) 5,374 6,310
-------------- ---------------
Gross profit 1,995 2,465
-------------- ---------------
Operating expenses:
Engineering and product development 558 749
Selling and marketing 1,100 1,014
General and administrative 1,402 1,228
-------------- ---------------
Total operating expenses 3,060 2,991
-------------- ---------------
Operating loss (1,065) (526)
Capital gain from disposal of a subsidiary (Note 1b) - 280
Financial income, net 25 6
-------------- ---------------
Loss before tax benefit (1,040) (240)
Tax benefit (Note 9) 77 530
-------------- ---------------
Net income (loss) $ (963) $ 290
============== ===============
Basic earnings (loss) per share $ (0.19) $ 0.06
============== ===============
Diluted net earnings (loss) per share $ (0.19) $ 0.06
============== ===============
Weighted average Number of shares used in computing basic net earnings
(loss) per share 5,185,680 4,510,680
============== ===============
Weighted average number of shares used in computing diluted net earnings
(loss) per share 5,185,680 4,545,982
============== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. dollars in thousands, except share data
Accumulated
Common shares Additional other Total other Total
------------------ paid-in Accumulated comprehensive comprehensive shareholders'
Number Amount capital deficit Loss income(loss) equity
--------- ------- ---------- ----------- ------------- ------------- ---------------
Balance as of January 1, 2002 4,510,680 $11,036 $ 733 $ (8,772) $ (312) $ 2,685
Stock compensation related
to warrants issued to bank
for financing transaction - - 20 - - 20
Stock compensation related
to options granted to
consultants and service
providers - - 84 - - 84
Comprehensive income:
Net income - - - 290 - $ 290 290
Foreign currency translation
adjustments - - - - 160 160 160
-----------------
Total comprehensive loss $ 450
--------- ------- ---------- ----------- ------------- ================= -----------
Balance as of December 31, 2002 4,510,680 11,036 837 (8,482) (152) 3,239
Issuance of Common shares, net 900,000 - 600 - - 600
Comprehensive loss:
Net loss - - - (963) - $ (963) (963)
Foreign currency translation
adjustments - - - - 146 146 146
-----------------
Total other comprehensive loss - - - - - $ (817) -
--------- ------- ---------- ----------- ------------- ================= -----------
Balance as of December 31, 2003 5,410,680 $11,036 $ 1,437 $ (9,445) $ (6) $ 3,022
========= ======= ============ ========== ============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Year ended December 31,
------------------------------------
2003 2002
----------------- -----------------
Cash flows from operating activities:
Net income (loss) $ (963) $ 290
Adjustments required to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation 131 298
Capital gain from disposal of a subsidiary - (280)
Compensation related to options granted to consultants and service providers - 90
Decrease (increase) in deferred income taxes 649 (649)
Decrease in trade receivables 437 358
Decrease in prepaid expenses and other current assets 2 40
Decrease (increase) in inventories (179) 634
Increase (decrease) in long-term loan and lease deposits (2) 6
Decrease in accounts payables (316) (242)
Increase (decrease) in other current liabilities 44 (15)
Other - (14)
----------------- -----------------
Net cash provided by (used in) operating activities (197) 516
----------------- -----------------
Cash flows from investing activities:
Increase (decrease) in restricted cash 304 (600)
Purchase of property and equipment (67) (37)
Proceeds from disposal of a subsidiary - (12)
Investment in long term loan 25 (50)
----------------- -----------------
Net cash provided by (used in) investing activities 262 (699)
----------------- -----------------
Cash flows from financing activities:
Proceeds from short term bank credit - 250
Payments made on short-term bank credit (250) (652)
Principal payments on capital lease obligations (19) (21)
Issuance of shares pursuant to an investment by Telkoor Telecom Ltd. 600 -
----------------- -----------------
Net cash provided by (used in) financing activities 331 (423)
----------------- -----------------
Effect of exchange rate changes on cash and cash equivalents 38 (21)
----------------- -----------------
Increase (decrease) in cash and cash equivalents 434 (627)
Cash and cash equivalents at the beginning of the year 616 1,243
----------------- -----------------
Cash and cash equivalents at the end of the year $ 1,050 $ 616
================= =================
Supplemental disclosure of cash flows activities:
Cash paid during the year for interest $ 9 $ 26
================= =================
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
NOTE 1:- GENERAL
a. Digital Power Corporation ("the Company" or "DPC") was
incorporated in 1969, under the General Corporation Law of the
state of California. The Company has a wholly-owned subsidiary,
Digital Power Limited ("DPL"), located in the United Kingdom. The
Company and its subsidiary are currently engaged in the design,
develop, manufacture, market and sale of switching power supplies
and converters. The Company has two reportable geographic
segments - North America (sales through DPC) and Europe (sales
through DPL).
b. On September 30, 2002, the Company sold its wholly-owned Mexican
subsidiary, Poder Digital, S.A. de C.V. ("PD"), in consideration
of $ 20. Upon the transfer of all risk and title to the
purchaser, the Company recorded a capital gain of $ 280.
Historically, the Company manufactured its products through PD.
As PD is part of a larger cash-flow-generating group, and on its
own is not a component of an entity, the terms describes in
Statement of Financial Accounting Standard No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144") for reporting in discontinued operations of PD have not
been met. The results of operations of PD for the nine months
ended September 30, 2002, were included in the Company's
statements of operations for the year ended December 31, 2002.
The disposal of PD on September 30, 2002, allowed the Company to
expand its use of subcontractors in the Far East manufacturing of
its power supplies.
c. The Company depends on three major subcontractors for producing
its products. If these manufacturers become unable or unwilling
to continue to manufacture the Company's products in required
volumes on a timely basis, any resulting manufacturing delays
could result in the loss of sales, which could adversely affect
operating results and cash position.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States ("US GAAP").
a. Use of estimates:
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
F-8
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
b. Financial statements in U.S. dollars:
The revenues of the Company are generated in U.S. dollars
("dollar"). In addition, the Company's cash flow transactions and
costs are incurred in dollars. Company's management believes that
the dollar is the primary currency of the economic environment in
which the Company operates. Thus, the functional and reporting
currency of the Company is the dollar.
Accordingly, monetary accounts maintained in currencies other
than the dollar are remeasured into U.S. dollars in accordance
with Statement of Financial Accounting Standard No. 52 "Foreign
Currency Translation" ("SFAS No. 52"). All transactions gains and
losses of the remeasurement of monetary balance sheet items are
reflected in the statements of operations as financial income or
expenses, as appropriate.
The financial statements of DPL whose functional currency has
been determined to be its local currency have been translated
into U.S. dollars. All balance sheet accounts have been
translated using the exchange rates in effect at the balance
sheet date. Statement of operations amounts have been translated
using the average exchange rate for the period. The resulting
translation adjustments are reported as a component of
accumulated other comprehensive loss in shareholders' equity.
c. Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. Intercompany
transactions and balances have been eliminated upon
consolidation.
d. Cash Equivalents:
Cash equivalents are short-term highly liquid investments that
are readily convertible to cash with original maturities of three
months or less.
e. Restricted cash:
Restricted cash is invested in a deposit, which matures within
less than three months and is used to secure a letter of credit
issued by the Company's bank.
f. Inventories:
Inventories are stated at the lower of cost or market value.
Inventory write-offs are provided to cover risks arising from
slow-moving items or technological obsolescence.
F-9
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Cost is determined as follows: Raw materials, parts and supplies
- using the "first-in, first-out" method. Work-in-progress -
represents the cost of manufacturing with the addition of
indirect manufacturing costs.
Finished products - on the basis of direct manufacturing costs
with the addition of indirect manufacturing costs.
The Company periodically assesses its inventories valuation in
accordance with slow moving items, revenue forecasts and
technological obsolescence. When inventories on hand exceed the
foreseeable demand or become obsolete, the value of excess
inventory, which at the time of the review was not expected to be
sold, is written off.
During 2003, the Company recorded inventories write-offs in a
total amount of $46.
g. Property and equipment:
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is calculated by the straight-line
method over the estimated useful lives, at the following annual
rates:
Computers, software and related
equipment 20 - 33
Office furniture and equipment 10 - 20
Leasehold improvements Over the term of the lease
Motor vehicles 20 - 33
h. Impairment of long-lived assets
The Company and its subsidiary long-lived assets are reviewed for
impairment in accordance with Statement of Financial Accounting
Standard No. 144, "Accounting for the Impairment or Disposal of
Long- Lived Assets" ("SFAS No. 144"), whenever events or changes
in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an
asset to the future undiscounted cash flows expected to be
generated by the assets. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount of fair value less costs to
sell.
As of December 31, 2003, no impairment losses have been
identified.
F-10
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
i. Revenue recognition:
The Company and its subsidiary generate their revenues from the
sale of their products. The Company and its subsidiary sell their
products through direct and indirect sales force. The sales
through indirect sales force also considered as sales to end
users.
Revenues from products are recognized in accordance with Staff
Accounting Bulletin No. 104 "Revenue Recognition in Financial
Statements" ("SAB No. 104"), when the following criteria are met:
persuasive evidence of an arrangement exists, delivery has
occurred, the seller's price to the buyer is fixed or
determinable, no further obligation exists and collectibility is
reasonably assured.
During 2003, the Emerging Issues Task Force issued EITF Issue No.
00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF
00-21"). The provisions of EITF 00-21 applied to revenue
arrangements entered into in fiscal periods beginning after June
15, 2003. This consensus addresses certain aspects of accounting
by a vendor for arrangements under which it will perform multiple
revenue-generating activities, specifically, how to determine
whether an arrangement involving multiple deliverables contains
more than one unit of accounting as such term is defined in Issue
No. 00-21. The adoption of EITF 00-21 did not have a material
impact upon the Company's financial position, cash flow or
results of operations.
Revenue from certain arrangements may include multiple elements
within a single contract. The Company's accounting policy
complies with the revenue determination requirements set forth in
EITF 00-21, relating to the separation of multiple deliverables
into individual accounting units with determinable fair values.
Generally, the Company does not grant right of return. Certain
distributors are allowed, in the sixth month after the initial
stock purchase, to rotate stock that has not been sold for other
products. This may be repeated each sixth month thereafter for
eighteen months, at no more than 25% of distributors previous six
months purchases. Revenues subject to certain stock rotation are
deferred until the products are sold to the end customer or until
the rotation rights expire.
j. Engineering and product development:
Engineering and product development are charged to the statement
of operations as incurred.
F-11
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
k. Income taxes:
The Company and its subsidiary account for income taxes in
accordance with Statement of Financial Accounting Standard No.
109, "Accounting for Income Taxes" ("SFAS No. 109"). This
Statement prescribes the use of the liability method whereby
deferred tax assets and liability account balances are determined
based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse. The Company and its subsidiary provide a
valuation allowance, if necessary, to reduce deferred tax assets
to their estimated realizable value.
l. Warranty accrual:
The Company provides a warranty at no extra charge for
approximately twelve months. A provision is recorded for probable
costs in connection with warranties, based on the Company's
experience. The prevision is calculated as 1.5% of the Company's
revenues.
m. Accounting for stock-based compensation:
The Company has elected to follow Accounting Principles Board
Statement No. 25, "Accounting for Stock Options Issued to
Employees" ("APB No. 25") and FASB Interpretation No. 44
"Accounting for Certain Transactions Involving Stock
Compensation" ("FIN No. 44") in accounting for its employee stock
option plans. Under APB No. 25, when the exercise price of an
employee stock option is equivalent to or above the market price
of the underlying stock on the date of grant, no compensation
expense is recognized.
The Company adopted the disclosure provisions of Financial
Accounting Standards Board Statement No. 148, "Accounting for
Stock-Based Compensation - transition and disclosure" ("SFAS No.
148"), which amended certain provisions of SFAS 123 to provide
alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for
stock-based employee compensation, effective as of the beginning
of the fiscal year. The Company continues to apply the provisions
of APB No. 25, in accounting for stock-based compensation.
Pro forma information regarding the Company's net income (loss)
and net earnings (loss) per share is required by SFAS No. 123 and
has been determined as if the Company had accounted for its
employee stock options under the fair value method prescribed by
SFAS No. 123.
The fair value for options granted in 2002 and 2003 is amortized
over their vesting period and estimated at the date of grant
using a Black-Scholes options pricing model with the following
weighted average assumptions:
F-12
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
2003 2002
-------------- ---------------
Dividend yield 0% 0%
Expected volatility 72% 33.8%
Risk-free interest 1% 1.5%
Expected life of up to 4 years 4 years
Pro forma information under SFAS No. 123, is as follows:
Year ended December 31,
----------------------------------
2003 2002
-------------- ---------------
Net income (loss) available to Ordinary shares - as reported $ 290
$ (963)
Add - stock-based employee compensation - intrinsic value - -
Deduct - stock-based employee compensation -fair value 89 607
-------------- ---------------
Pro forma:
Net income (loss) $ (1,052) $ (317)
============== ===============
Earning per share:
Basic and diluted net loss, as reported $ (0.19) $ (0.06)
============== ===============
Pro forma basic and diluted net loss $ (0.20) $ (0.07)
============== ===============
The Company applies SFAS No. 123 and Emerging Issues Task Force
("EITF") No. 96-18 "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services" ("EITF 96-18"), with respect to
options and warrants issued to non-employees. SFAS No. 123
requires the use of option valuation models to measure the fair
value of the options and warrants at the date of grant.
n. Fair value of financial instruments:
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
The carrying amounts of cash and cash equivalents, restricted
cash, trade receivables, accounts payables and other current
liabilities approximate their fair value due to the short-term
maturity of such instruments.
o. Basic and diluted net earnings (loss) per share:
Basic net earnings (loss) per share is computed based on the
weighted average number of Common shares outstanding during each
year. Diluted net earnings per share is computed based on the
weighted average number of Common shares outstanding during each
year, plus dilutive potential Common shares considered
outstanding during the year, in accordance with Statement of
Financial Accounting Standard No. 128, "Earnings per Share"
("SFAS No. 128").
F-13
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The total number of shares related to the outstanding options and
warrants excluded from the calculations of diluted net earnings
(loss) per share because these securities are anti-dilutive was
1,232,460, and 3,110,255 for the years ended December 31, 2003
and 2002, respectively.
p. Concentrations of credit risks:
Financial instruments that potentially subject the Company and
its subsidiary to concentrations of credit risk consist
principally of cash and cash equivalents, restricted cash, trade
receivables and lease deposits.
Cash and cash equivalents and restricted cash are invested in
banks in the U.S. and in U.K. Such deposits in the United States
may be in excess of insured limits and are not insured in other
jurisdictions. Management believes that the financial
institutions that hold the Company's and its subsidiary's
investments are financially sound and, accordingly, minimal
credit risk exists with respect to these investments.
Trade receivables of the Company and its subsidiary are mainly
derived from sales to customers located primarily in the U.S and
in Europe. The Company performs ongoing credit evaluations of its
customers and to date has not experienced any material losses. An
allowance for doubtful accounts is determined with respect to
those amounts that the Company and its subsidiary have determined
to be doubtful of collection.
The Company and its subsidiary have no off-balance-sheet
concentration of credit risk such as foreign exchange contracts,
option contracts or other foreign hedging arrangements.
NOTE 3:- INVENTORIES
December 31,
2003
-----------------
Raw materials, parts and supplies $ 1,086
Work in progress 158
Finished products 449
-----------------
$ 1,693
=================
F-14
NOTE 4:- PROPERTY AND EQUIPMENT, NET
Cost:
Computers, software and related equipment $ 631
Office furniture and equipment 524
Leasehold improvements 382
Motor vehicles 80
-----------------
1,617
-----------------
Accumulated depreciation
Computers, software and related equipment 545
Office furniture and equipment 486
Leasehold improvements 198
Motor vehicles 70
-----------------
1,299
-----------------
Depreciated cost $ 318
=================
As for charges see Note 7(b)(2)
NOTE 5:- SHORT TERM BANK CREDIT
a. The Company has a line of credit from Silicon Valley Bank
("SVB"). The Company can borrow up to $ 1,200 at SVB's prime rate
plus 1.75% (totaling 5.75% at December 31, 2003). In order to
utilize the line of credit, the Company is required to maintain
certain ratios and be in compliance with other covenants (see
also Note 8(e)). The interest on the loan is payable on a monthly
basis. The maturity date of the line of credit is May 29, 2004.
As of December 31, 2003, the Company did not utilize its line of
credit.
If the Company exercises its line of credit, the Company must in
return grant the bank a continuing security interest in all
presently existing and later acquired collateral to secure all
obligations and performance of its duties towards the bank.
b. The Company's subsidiary has a $ 534 line of credit with Lloyds
TSB Bank. Borrowing under this line of credit bears interest of
1.75% per annum over the bank's base rate (totaling 5.5% at
December 31, 2003). Interest is payable on a monthly basis with
outstanding principal due on demand. If no demand is made, the
outstanding principal and accrued interest is due on March 31,
2004. At December 2003, no principal or accrued interest was
outstanding. As of December 31, 2003, the subsidiary did not
utilize its line of credit. (See also Note 7(b)(1))
F-15
NOTE 6:- OTHER CURRENT LIABILITIES
December 31,
2003
-----------------------
Accrued payroll and payroll taxes $ 81
Warranty accrual 111
Government authorities 13
Accrued commissions 47
Advances from customers 387
Accrued expenses and other 401
-----------------------
$ 1,040
=======================
NOTE 7:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Lease commitments:
The Company and its subsidiary rent their facilities and vehicles
under various operating lease agreements, which expire on various
dates, the latest of which is in 2008. Future rental commitments
under non-cancelable are as follows:
Year ended
December 31,
------------
2004 $ 246
2005 247
2006 253
2007 172
2008 143
----------------
$ 1,061
================
Total rent expenses for the years ended December 31, 2003 and
2002, were approximately $244 and $282, respectively.
b. Charges and guarantees:
1. The Company's subsidiary has an unlimited floating charge on
all its property and assets as a security for a line of
credit from a bank.
2. The Company's subsidiary has obtained bank guarantees of $97
to secure up front payments received by the subsidiary's
customers and as a security for future lease payments.
F-16
NOTE 7:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
c. Litigation:
On April 2, 2003, a claim was filed against the Company by
Tek-Tron Enterprises Inc. in state court of Pennsylvania,
specifically, the Court of Common Pleas of Bucks County, at Case
No. 0302116-24-1. Tek-Tron Enterprises Inc. is seeking damages of
approximately $ 300,000. This case is a complaint for breaking of
contract and conversion of parts and infrastructure owned by
Tek-Tron Enterprises Inc. located in the Company's former
subsidiary, Poder Digital S.A.'s, Mexico manufacturing plant. The
Company is currently in settlement negotiations with Tek-Tron
Enterprises Inc. and has accrued $102,000 in expenses related to
the lawsuit.
NOTE 8:- SHAREHOLDERS' EQUITY
a. Preferred shares:
The Preferred stock has one series authorized, 500,000 shares of
Series A cumulative redeemable convertible preferred shares
("Series A"), and an additional 1,500,000 shares of preferred
shares has been authorized, but the rights, preferences,
privileges and restrictions on these shares have not been
determined. DPC's Board of Directors is authorized to create a
new series of preferred shares and fix the number of shares as
well as the rights, preferences, privileges and restrictions
granted to or imposed upon any series of preferred shares. As of
December 31, 2003, there were no shares issued or outstanding.
b. Common shares:
Common shares confer upon the holders the right to receive notice
to participate and vote in the General Meeting of Shareholders of
the Company, the right to receive dividends, if and when
declared, and the right to participate in a distribution of
surplus of assets upon liquidation of the Company.
In September 2001, the Company executed a securities purchase
agreement with Telkoor Telecom, Ltd. ("Telkoor") for cash
proceeds of $ 1,250, in exchange for the purchase of 1,250 Common
Shares; issuance of 900,000 warrants to purchase common shares at
an exercise price of $ 1.25 per share, and an additional
1,000,000 warrants to purchase Common Shares at an exercise price
of $ 1.50 per share. The warrants vested immediately. On March
31, 2003, the Company entered into an agreement to sell 900,000
shares of Common Stock to Telkoor Telecom Ltd. in consideration
for $ 600, net. As part of the transaction, Telkoor Telecom
Ltd.'s warrant to purchase 900,000 common shares was cancelled
(see also Note 13).
c. Stock Option Plans:
1. Under the Company's stock option plans (the "plan") options
may be granted to employees, officers, consultants, service
providers and directors of the Company or its subsidiary.
F-17
NOTE 8:- SHAREHOLDERS' EQUITY (Cont.)
2. As of December 31, 2003, the company has authorized by
several Incentive Share Option Plans, the grant of options
to employees, officers, consultants, service providers and
directors of the Company of up to 1,972,000 of the Company's
Common shares. As of December 31, 2003, an aggregate of
428,523 of the Company's options are still available for
future grant.
3. The options granted generally become fully exercisable after
four years and expire no later than 10 years from the
approval date of the option plan under terms of grant. Any
options which are forfeited or cancelled before expiration
become available for future grants.
A summary of the Company's employees share option activity,
(except options to consultants and service providers) and
related information is as follows:
Year ended December 31,
-------------------------------------------------
2003 2002
------------------------ ------------------------
Amount Weighted Amount Weighted
average average
of exercise of exercise
options price options price
----------- ----------- ----------- ------------
$ $
----------- ------------
Outstanding at the beginning of the year 1,190,255 1.38 1,543,095 1.74
Granted 65,000 0.78 70,000 0.58
Exercised - - - -
Forfeited (282,795) 1.88 (422,840) 1.58
----------- -----------
Outstanding at the end of the year 972,460 1.19 1,190,255 1.38
=========== =========== =========== ============
Exercisable options at the end of the year 860,460 1.38 771,255 1.65
=========== =========== =========== ============
All options granted during the two years in the period ended
December 31, 2003 were at an exercise price that is equal to
the fair value of the stock at the grant date.
The options outstanding as of December 31, 2003, have been
classified by exercise price, as follows:
Options Weighted Options Weighted
outstanding average Weighted exercisable average
of as remaining average as of exercise price
Exercise December 31, contractual exercise December 31, of options
price 2003 life price 2003 exercisable
----------------- ---------------- ---------------- -------------- ----------------- ----------------
$ Years $ $
----------------- ---------------- -------------- ----------------
0.48-0.55 60,000 9.67 0.54 32,500 0.55
0.70-1.02 410,000 8.95 0.71 410,000 0.69
1.5625-1.8125 133,535 5.85 1.65 131,035 1.66
2-2.375 368,925 4.57 2.28 286,925 2.27
---------------- -----------------
972,460 1. 19 860,460 1.38
================ ============== ================= ================
F-18
NOTE 8:- SHAREHOLDERS' EQUITY (Cont.)
d. Warrants and options issued to service providers and consultants:
1. The Company's outstanding options to consultants and service
providers as of December 31, 2003, are as follows:
Options for Exercise
Common price per Options Exercisable
Issuance date shares share exercisable through
------------- ----------- --------- ----------- -----------
January 2002 100,000 $ 3 100,000 *) -
=========== ========= =========== ===========
August 2002 10,000 $ 1 10,000 *) -
=========== ========= =========== ===========
November 2002 10,000 $ 1 10,000 *) -
=========== ========= =========== ===========
January 2003 100,000 $ 3 100,000 *) -
=========== ========= =========== ===========
* 10 years from the date of grant.
During 2003, none of the options were exercised.
2. During 2002, the Company had accounted for its options to
consultants and service providers under the fair value
method of SFAS No. 123, and Emerging Issues Task Force No.
96-18 and 00-18 "Accounting Recognition for Certain
Transactions Involving Equity Instruments Granted to Other
Than Employees" ("EITF 00-18"). The fair value for these
options was estimated using a Black-Scholes option-pricing
model with the following weighted-average assumptions:
risk-free interest rates of 1.5%, dividend yields of 0%,
volatility factors of the expected market price of the
Company's Commons shares ranging from 55.0% to 91.5%, and a
contractual life of the options of 10 years.
3. The Company recorded compensation expenses of $ 0 and $ 84
during 2003 and 2002, respectively, related to the
consultants and service providers' options.
e. Warrants issued for financing transaction:
In connection with the line of credit received in May 2002, the
Company issued to Silicon Valley Bank, a warrant to purchase up
to 40,000 shares of Common Stock. These options vested
immediately. The exercise price of the warrants is $1.
The Company recorded a compensation expense in the amount of $20,
which was amortized ratably over a period of one year. This
transaction was accounted for in accordance with Accounting
Principals Board Opinion No. 14, "Accounting for Convertible Debt
and Debt Issued with Stock Purchase Warrants" ("APB No. 14").
The fair value for these warrants was determined using a
Black-Scholes pricing model assuming a risk-free interest rate of
1.5%, dividend yields of 0%, a volatility factor of the expected
market price of the Company's Common shares of 90.7% and
contractual life of the warrants of 10 years.
F-19
NOTE 8:- SHAREHOLDERS' EQUITY (Cont.)
As of December 31, 2003, the bank did not exercise its warrant.
f. Employee Stock Ownership Plan:
The Company has an Employee Stock Ownership Plan ("ESOP")
covering eligible employees. The ESOP provides for the Employee
Stock Ownership Trust ("ESOT") to distribute shares of the
Company's Common stock as retirement benefits to the
participants. The Company did not distribute shares ever since
1998. As of December 31, 2003, the outstanding Common shares held
by the ESOT are 167,504.
g. Dividends:
In the event that cash dividends are declared in the future, such
dividends will be paid in US dollars. The Company does not intend
to pay cash dividends in the foreseeable future.
NOTE 9:- TAXES ON INCOME
a. Taxes on income is comprised as follows:
Year ended December 31,
----------------------------------
2003 2002
------------- --------------
Current taxes $ 77 $ (119)
Deferred tax benefit - 649
------------- --------------
$ 77 $ 530
============= ==============
Domestic $ - $ 649
Foreign 77 (119)
------------- --------------
$ 77 $ 530
============= ==============
b. Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's
deferred tax liabilities and assets are as follows:
F-20
NOTE 9:- TAXES ON INCOME (Cont.)
December 31,
-----------------------------
2003 2002
------------- ------------
Operating loss carryforword $ 1,575 $ 2,112
Reserves and allowances 190 109
------------- ------------
Net deferred tax asset before valuation allowance 1,765 2,221
Valuation allowance (1,765) (1,572)
------------- ------------
Net deferred tax asset $ - $ 649
============= ============
Domestic $ - $ 649
Foreign - -
------------- ------------
$ - $ 649
============= ============
As of December 31, 2002, the Company recorded a deferred tax
asset of $649 relating to the Company's carryback losses of 2001
and 2002. A valuation allowance was recorded due to the
uncertainty of the tax asset's future realization. As of December
31, 2003, the Company and its subsidiary provided a valuation
allowance of $ 1,765, in respect of deferred tax assets resulting
from short-term temporary differences and depreciation charged in
advance of a capital allowance taken and from carryforward
losses. During the fiscal year 2003, the Company increased the
tax valuation by $ 193.
Management currently believes that since the Company and its
subsidiary have a history of losses it is more likely than not
that the deferred tax assets regarding the remainder of the loss
carryforwards and other temporary differences will not be
realized in the foreseeable future.
c. Net operating losses carryforwards:
As of December 31, 2003 the Company had approximately $4,500 in
federal net operating loss carryforwards for income tax purposes,
which can be carried forward and offset against taxable income
for 20 years and expire in 2022 - 2024.
Utilization of U.S. net operating losses may be subject to
substantial annual limitation, due to the "change in ownership"
provisions of the Internal Revenue Code of 1986 and similar state
provisions. The annual limitation may result in the expiration of
net operating losses before utilization.
d. The main reconciling items between the statutory tax rate of the
Company and the effective tax rate are the non-recognition of tax
benefits resulted from the Company's accumulated net operating
losses carryforward due to the uncertainty of the realization of
such tax benefits.
F-21
NOTE 9:- TAXES ON INCOME (Cont.)
e. Net loss before tax benefit consists of the following:
Year ended December 31,
---------------------------------
2003 2002
--------------- --------------
Domestic (U.S.) $ (603) $ (498)
Foreign (U.K.) (437) 258
--------------- --------------
$ (1,040) $ (240)
=============== ==============
NOTE 10:- RELATED PARTY TRANSACTIONS
The balances with and the results of operations from transactions
with Telkoor, a related party, were as follows:
December 31,
2003
---------------
Balance:
Trade payables (1) $ 160
===============
Year ended December 31,
---------------------------------
2003 2002
--------------- --------------
Cost of revenues (1) $ 972 $ 406
=============== ==============
(1) Transactions with Telkoor derive mainly from purchase of
power supplies from Telkoor.
NOTE 11:- SEGMENTS CUSTOMERS AND GEOGRAPHICAL INFORMATION
The Company has two reportable geographic segments, see Note 1a
for a brief description of the Company's business. The data is
presented in accordance with Statement of Financial Accounting
Standard No.131, "Disclosure About Segments of an Enterprise and
Related Information ("SFAS No. 131").
The following data presents the revenues expenditures and other
operating data of the Company's geographic operating segments:
F-22
NOTE 11:- SEGMENTS CUSTOMERS AND GEOGRAPHICAL INFORMATION (Cont.)
Year ended December 31, 2003
------------------------------------------------------------------------
DPC DPL Eliminations Total
---------------- --------------- --------------- ---------------
Revenues $ 3,417 $ 3,952 $ - $ 7,369
Intersegment revenues 677 - (677) -
---------------- --------------- --------------- ---------------
Total revenues $ 4,094 $ 3,952 $ (677) $ 7,369
================ =============== =============== ===============
Depreciation expense $ 37 $ 94 $ - $ 131
================ =============== =============== ===============
Operating loss $ (782) $ (283) $ - $ (1,065)
================ =============== =============== ===============
Financial income, net $ 25
===============
Loss before tax benefit $ (1,040)
===============
Tax benefit $ - $ 77 $ - $ 77
================ =============== =============== ===============
Net loss $ (799) $ (164) $ - $ (963)
================ =============== =============== ===============
Expenditures for segment assets as
of December 31, 2003 $ 15 $ 52 $ - $ 67
================ =============== =============== ===============
Identifiable assets as of December
31, 2003 $ 2,054 $ 3,082 $ - $ 5,136
================ =============== =============== ===============
F-23
NOTE 12:- SEGMENTS CUSTOMERS AND GEOGRAPHICAL INFORMATION (Cont.)
Year ended December 31, 2002
------------------------------------------------------------------------
DPC DPL Eliminations Total
---------------- --------------- --------------- ---------------
Revenues $ 4,348 $ 4,427 $ - $ 8,775
Intersegment revenues 383 - (383) -
---------------- --------------- --------------- ---------------
Total revenues $ 4,731 $ 4,427 $ (383) $ 8,775
================ =============== =============== ===============
Depreciation expense $ 184 $ 114 $ - $ 298
================ =============== =============== ===============
Operating income (loss) $ (761) $ 235 $ - $ (526)
================ =============== =============== ===============
Capital gain from disposal of a
subsidiary $ 280 $ - $ - $ 280
================ =============== =============== ===============
Financial income, net $ 6
===============
Loss before tax benefit (taxes on
income) $ (240)
===============
Tax benefit (taxes on income) $ 649 $ (119) $ - $ 530
================ =============== =============== ===============
Net income $ 151 $ 139 $ - $ 290
================ =============== =============== ===============
Expenditures for segment assets as
of December 31, 2002 $ 13 $ 24 $ - $ 37
================ =============== =============== ===============
Identifiable assets as of December
31, 2002 $ 2,292 $ 2,898 $ - $ 5,190
================ =============== =============== ===============
NOTE 13:- SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to balance sheet date, the Company issued 290,023
shares of Common stock to Telkoor Telecom Ltd. in consideration
of $ 250.
Additionally, under the abovementioned agreement, Telkoor may
purchase additional shares of Common stock for an aggregate
consideration of $ 250 prior to or on June 30, 2004, as
determined in the agreement. Consequently to the above-mentioned
agreement with Telkoor from 2003, the 1,000,000 warrants to
purchase Common shares from 2001 expired.
- - - - - - - - -
F-24
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 8A. CONTROLS AND PROCEDURES.
We carried out an evaluation, under the supervision and with the
participation of the our management, including our Chief Executive Officer and
Chief Financial Officer, about the effectiveness of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures as of the end of the period covered by this
Form 10-KSB are effective in timely alerting them to material information
required to be included in this Form 10-KSB.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS
Our current directors are Messrs. Ben-Zion Diamant, David Amitai, Yeheskel
Manea, Youval Menipaz and Amos Kohn. Mr. Mark Thum also served as a director
during fiscal year 2003 and resigned in March 2004.
Mr. Ben-Zion Diamant, age 54, has been the Chairman of the Board of the
Company since November 2001. He has also been Chairman of the Board of Telkoor
Telecom Ltd. since 1994. From 1992-1994, Mr. Diamant was a partner and business
development manager of Phascom. From 1989 to 1992, Mr. Diamant was a partner and
manager of Rotel Communication. He earned his BA in Political Science from
Bar-Ilan University.
Mr. David Amitai, age 61, has been a Director of the Company since 2001.
From November 2003 to March 2004 he was our Executive CEO. He had served as
President & CEO of the Company from November 2001 to November 2003. Mr. Amitai
also serves as President & CEO of Telkoor Telecom Ltd. and its subsidiary,
Telkoor Power Supplies, since 1994. Mr. Amitai was the founder and General
Manager of Tadiran's Microelectronics Division from 1978 to 1989 and was
elevated to Director of Material and Logistics of Tadiran's Military Group where
he served from 1989 to 1994. Mr. Amitai held positions in engineering and
manufacturing at the California base semiconductor companies: Monolithic
Memories (MMI) and Fairchild Semiconductor. Mr. Amitai earned his engineering
degree from California State University at San Jose, California.
Mr. Yeheskel Manea, age 60, has served as a Director of the Company since
2002. Since 1996, he has been a Branch Manager of Bank Hapoalim, one of the
leading banks in Israel. Mr. Manea has been employed with Bank Hapoalim since
1972. He holds a Bachelors of Science in Economy and Business Administration
from Ferris College, University of Michigan.
Mr. Youval Menipaz, age 54, has served as a Director of the Company since
2002. Mr. Menipaz has been the Managing Director of Foriland Investments since
2000, a privately owned company which invests in and manages several companies.
Since 1977, he has held several executive positions in leading companies within
the Israeli market. Among others, he served as the Operation Manager of Osem
Industries Ltd, Vice President of Elite Industries Ltd, President of Supershuk
Greenberg Ltd. Mr. Menipaz holds a Bachelors of Science in Industrial
Engineering from the Technion, the Israeli Institute of Technology.
Mr. Amos Kohn, age 44, became a director in 2003. Mr. Kohn is the Vice
President of System Engineering & Business Development of AVIVA Communications,
Inc., a high technology cable television and broadcast service company located
in Cupertino, California, from 2003 to the present. From 2000 to 2003, Mr. Kohn
was the Chief Architect & Head of System Solutions of Liberate Technologies, a
software company specializing in telecommunications located in San Carlos,
California. From 1997 to 2000, Mr. Kohn was the Vice President of Engineering &
Technology for Golden Channel, a telecommunications company located in Israel.
Mr. Kohn holds a Bachelors of Science in Electronics from ORT Technological
College, Israel.
Mr. Manea's daughter is married to Mr. Diamant's son. Mr. Menipaz is the
son of Mr. Amitai's cousin. The Board believes Mr. Manea and Mr. Menipaz are
independent and will be Independent Directors under AMEX Rules. There are no
other family relationships between any of the officers or directors.
EXECUTIVE OFFICERS
See "Directors" for the biography of Mr. Diamant.
Mr. Jonathan Wax, age 46, became our CEO and President in January 2004. Mr.
Wax has held Vice President positions with Artesyn Technologies, Inc. and was
stationed both domestically and in the Far East, in addition to holding a wide
variety of sales positions including global account responsibilities with some
of Artesyn Technologies, Inc.'s largest accounts. From 1994 to 1998, prior to
the merger with Zytec and Computer Products, which formed Artesyn Technologies,
Inc., Mr. Wax was Vice President of Customer Support and Quality for Computer
Products. Mr. Wax holds a Bachelor's degree in Business from the University of
Nebraska. Further information is on the attached press release.
Mr. Haim Yatim, age 40, was appointed as the Company's Chief Financial
Officer in August 2002. From 2000 to 2002, he was a partner at Ernst & Young.
From 1995 until 2000, he was an auditor with Ernst & Young. From 1992 to 1994,
he was an Auditor at Almagor. Mr. Yatim is a certified public accountant. Mr.
Yatim received a B.A. degree in Accounting and Economics from Tel-Aviv
University.
AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors determined that Mr. Manea, a member of the Audit
Committee, is qualified as an Audit Committee Financial Expert. All of the
members of the Audit Committee are independent as determined by the AMEX rules.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
Based solely upon a review of Forms 3, 4 and 5 delivered to the Company as
filed with the Securities and Exchange Commission ("Commission"), directors and
officers of the Company and persons who own more than 10% of the Company's
common stock timely filed all required reports pursuant to Section 16(a) of the
Securities Exchange Act of 1934.
CODE OF ETHICS
We have adopted a code of ethics that applies to our principal executive
officer, principal financial officer, principal accounting officer, controller
and other persons performing similar functions. A copy of our code of ethics can
be found on our website at http://www.digipwr.com/forms/Code%20of%20Ethics%
20for%20Financial%20Managers%20(00027128).DOC. The Company will report any
amendment or wavier to the code of ethics on our website within five (5) days.
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
------------------------------ --------------------------------- --------------------------
Restricted Securities LTIP All Other
Name and Other Annual Stock Underlying Payouts Compensation
Principal Position Year Salary Compensation ($) Award(s) ($) Options (#) ($)
---------------------------------------------------------------- --------------------------------- --------------------------
David Amitai, 2003 $ 0 $180,961 $0 0 $0 $0
Former Executive CEO, 2002 $ 0 $166,850(1) $0 0 $0 $0
President and CEO 2001 $ 0(1) $ 14,428(1) $0 200,000(2) $0 $0
Robert O. Smith, 2003 $ 0 $100,000 $0 100,000 $0 $0
Consultant and Former 2002 $ 0 $100,000 $0 100,000(3) $0 $0
President and Chief 2001 $125,851 $ 0 $0 100,000(4) $0 $0
Executive Officer
------------------------------------------------------------------------------------------------------------------------------------
(1) For the years ended December 31, 2003 and 2002, the Company did not pay Mr.
Amitai a salary, but did reimburse him for certain expenses related to
living in the United States and his services to the Company, including
rent, telephone, car and other expenses. Such reimbursements also included
Mr. Amitai's federal and state taxes related to the expenses. For the year
ended December 31, 2002, Mr. Amitai's reimbursement was $166,850 including
$54,400 that was reimbursed in 2003.
(2) Represents options to purchase 200,000 shares of common stock at $0.70 per
share.
(3) Pursuant to Mr. Smith's consulting agreement, he is entitled to receive
options to purchase 100,000 shares at $3.00 per share on the first business
day of the year in 2002, 2003 and 2004.
(4) Pursuant to Mr. Smith's former employment contract, he was entitled to
receive options to purchase 100,000 shares of common stock each year. The
exercise price for year 2001 was $1.63.
OPTIONS GRANTED IN LAST FISCAL YEAR
Individual Grants
The information below concerns the individual grants of stock options to
executive officers and former executive officers made during the last fiscal
year.
==============================================================================================
Number of Percent of Total
Securities Options Granted to Exercise Base
Underlying Options Employees in Fiscal Price ($/share) Expiration Date
Name Granted Year
==============================================================================================
David Amitai 0 0% - -
----------------------------------------------------------------------------------------------
Robert O. Smith 100,000 60.6% $3.00 1/2012
==============================================================================================
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth executive officer options exercised and
option values for fiscal year ended December 31, 2003 for all executive officers
at the end of the year.
========================================================================================================================
Value of Unexercised Options
Number of Options at In-the-Money
December 31, 2003 at December 31, 2003
Shares Acquired (Exercisable/ (Exercisable/ Unexercisable)
Name Or Exercised Value Realized Unexercisable)
========================================================================================================================
David Amitai 0 0 200,000 200,000
========================================================================================================================
Robert O. Smith 0 0 511,500 0
========================================================================================================================
DIRECTOR'S COMPENSATION
The financial expert director of the Company is paid $15,000 per annum; all
other directors who are not employees of the Company are paid $10,000 per annum
paid quarterly and granted options to purchase 10,000 shares of common stock
upon joining the Board, vesting upon completion of one year of service.
EMPLOYMENT AGREEMENTS
In January 2004, we entered into an employment agreement with Mr. Jonathan
Wax, our President and Chief Executive Officer. The agreement has a term of one
year with annual renewals thereafter. Annual compensation is $165,000. In the
event of a change in control or early termination without cause, we will be
required to pay Mr. Wax one year's compensation. Mr. Wax will receive an
incentive bonus of $20,000, if the Company earns over $5,500,000 in revenue for
the twelve-month period ended December 31, 2004, excluding revenue earned from
military contracts or Digital Power Limited. As a part of the employment
contract, Mr. Wax was granted options to purchase 150,000 shares, 37,500 shares
vests immediately and the rest is vesting over three years. In the event that
the Company fails to raise additional $250,000 from the sale of its equity
securities by June 30, 2004, Mr. Wax has the option to terminate his employment
and receive a severance of one year of base salary from the Company.
Consulting Agreement
On November 16, 2001, the Company and Mr. Robert Smith entered into a
consulting agreement for a period of three years. Under the Consulting
Agreement, Mr. Smith is paid $100,000 per year and granted options to purchase
100,000 shares of common stock each year.
Aggregated Option Exercises in Last Fiscal Year and Ten-Year Options/SAR
Repricings
There was no re-pricing of options for the fiscal year ended December 31,
2003.
Compensation Committee Interlocks and Insider Participation
Directors Amos Kohn, Yeheskel Manea and Youval Menipaz serve on the
Compensation Committee.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Equity Compensation Plan Information
Compensation Plan Table
The following table provides aggregate information as of the end of the
fiscal year ended December 31, 2003 with respect to all compensation plans
(including individual compensation arrangements) under which equity securities
are authorized for issuance.
Plan category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and rights future issuance under
warrants and rights equity compensation plans
(excluding securities
reflected in column (a))
(a) (b) (c)
Equity compensation plans 1,232,460 1.474 428,523
approved by security holders
Equity compensation plans 0 0 0
not approved by security
holders
Total 1,232,460 1.474 428,523
Benefit Plans
Employee Stock Ownership Plan
We adopted an Employee Stock Ownership Plan ("ESOP") in conformity with
ERISA requirements. As of December 31, 2003, the ESOP owns, in the aggregate,
167,504 shares of our common stock. All eligible employees of the Company
participate in the ESOP on the basis of level of compensation and length of
service. Participation in the ESOP is subject to vesting over a six-year period.
The shares of our common stock owned by the ESOP are voted by the ESOP trustees.
Mr. Amitai is one of two trustees of the ESOP.
2002, 1998 and 1996 Stock Option Plans and 1993 Stock Option Agreements
We have established the 2002, 1998 and 1996 Stock Option Plans (the
"Plans"). The purposes of the Plans are to encourage stock ownership by our
employees, officers, and directors to give them a greater personal interest in
the success of the business and to provide an added incentive to continue to
advance in their employment or service to us. The Plans provide for the grant of
either incentive or non-statutory stock options. The exercise price of any
incentive stock option granted under the Plans may not be less than 100% of the
fair market value of our common stock on the date of grant. The fair market
value for which an optionee may be granted incentive stock options in any
calendar year may not exceed $100,000. Shares subject to options under the Plans
may be purchased with cash. Unless otherwise provided by the Board, an option
granted under the Plans is exercisable for ten years. The Plans are administered
by the Compensation Committee, which has discretion to determine optionees, the
number of shares to be covered by each option, the exercise schedule and other
terms of the options. The Plans may be amended, suspended, or terminated by the
Board but no such action may impair rights under a previously granted option.
Each incentive stock option is exercisable, during the lifetime of the optionee,
only so long as the optionee remains employed by us. No option is transferable
by the optionee other than by will or the laws of descent and distribution.
As of December 31, 2003, a total of 1,972,000 options are authorized to be
issued under the 1996, 1998 and 2002 Plans and options to purchase 972,460
shares of common stock were outstanding.
401(k) Plan
We adopted a tax-qualified employee savings and retirement plan (the
"401(k) Plan"), which generally covers all of our full-time employees. Pursuant
to the 401(k) Plan, employees may make voluntary contributions to the 401(k)
Plan up to a maximum of six percent of eligible compensation. The 401(k) Plan
permits, but does not require, additional matching and Company contributions on
behalf of Plan participants. We match contributions at the rate of $0.25 for
each $1.00 contributed up to 6% of the base salary. We can also make
discretionary contributions. The 401(k) Plan is intended to qualify under
Sections 401(k) and 401(a) of the Internal Revenue Code of 1986, as amended.
Contributions to such a qualified plan are deductible to the Company when made
and neither the contributions nor the income earned on those contributions is
taxable to Plan participants until withdrawn. All 401(k) Plan contributions are
credited to separate accounts maintained in trust. No amount was contributed on
behalf of Mr. Amitai or Mr. Smith in 2003.
Principal Shareholders
The following table shows the amount of our shares of common stock (AMEX
Symbol: DPW) beneficially owned (unless otherwise indicated) by each shareholder
known by us to be the beneficial owner of more than 5% of our common stock, by
each of our directors and directors and executive officers as a group. As of
March 3, 2004, there were 5,700,703 shares of common stock outstanding. All
information is as of March 3, 2004. Unless indicated otherwise, the address of
all shareholders listed is Digital Power Corporation, 41920 Christy Street,
Fremont, California 94538.
---------------------------------------------------------------------------
Shares Beneficially
Owned(1)
--------
Name & Address of Beneficial Owner Number Percent
-----------------------------------
Telkoor Telecom Ltd. 2,440,023 42.8%
5 Giborei Israel
Netanya 42293
Israel
Ben-Zion Diamant 2,807,523(2) 47.6%
David Amitai 2,807,523(3) 47.6%
Yeheskel Manea 10,000(4) *
Youval Menipaz 10,000(4) *
Amos Kohn 0 *
Digital Power ESOP 167,504 2.9%
Robert O. Smith 511,500(5) 8.2%
Barry W. Blank 450,800 7.9%
P.O. Box 32056
Phoenix, AZ 85064
All directors and executive officers as a group 3,497,523(6) 56.7%
(7 persons)
--------------------------------------------------------------------------
Footnotes to Table
------------------
* Less than one percent.
(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of common stock shown as beneficially owned by them, subject to community
property laws where applicable.
(2) Mr. Diamant serves as a director of Telkoor Telecom Ltd. Includes options
to purchase 200,000 shares owned by Mr. Diamant and 2,440,023 shares
beneficially owned by Telkoor Telecom, which may also be deemed
beneficially owned by Mr. Diamant.
(3) Mr. Amitai serves as a director of Telkoor Telecom Ltd. Includes (i)
options to purchase 200,000 shares owned by Mr. Amitai, (ii) 2,440,023
shares beneficially owned by Telkoor Telecom, which may also be deemed
beneficially owned by Mr. Amitai, and (iii) 167,504 shares owned by Digital
Power ESOP of which Mr. Amitai and Mr. Diamant are trustees and may be
deemed beneficial owners.
(4) Includes options to purchase 10,000 shares exercisable within 60 days.
(5) Represents options to purchase 511,500 shares exercisable within 60 days.
(6) Includes options to purchase 420,000 shares owned by directors, 12,500
options to purchase shares owned by Haim Yatim, 37,500 options to purchase
shares owned by Jonathan Wax.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On March 31, 2003, we entered into an agreement to sell 900,000 shares of
common stock to Telkoor Telecom Ltd. ("Telkoor") in consideration of $600,000.
As a part of the transaction, Telkoor's warrant to purchase 900,000 shares was
canceled. The 900,000 warrant would have expired on May 23, 2003. Our Chairman,
Mr. Diamant owns 42.45% and our President and Chief Executive Officer, Mr.
Amitai owns 39.98% of the outstanding shares of Telkoor Telecom Ltd.
Subsequent to the year end, on January 12, 2004, we entered into a
securities purchase agreement with Telkoor. Under the securities purchase
agreement, Telkoor acquired 290,023 shares of common stock for the aggregate
purchase price of $250,000. Additionally, Telkoor may invest an additional
$250,000 on or before June 30, 2004. The purchase price per share for the
additional investment is the average closing price of the Company's common stock
twenty (20) trading days prior to notice of intent to invest. After the
purchase, Telkoor owns 2,440,023 shares or 42.8% of the outstanding common
stock.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of Digital Power
Corporation(1)
3.2 Amendment to Articles of Incorporation(1)
3.3 Bylaws of Digital Power Corporation(1)
4.1 Specimen Common Stock Certificate(2)
4.2 Specimen Warrant(1)
4.3 Representative's Warrant(1)
10.1 Revolving Credit Facility with San Jose National Bank(1)
10.2 KDK Contract(1)
10.3 Agreement with Fortron/Source Corp.(1)
10.4 Employment Agreement With Robert O. Smith(2)
10.5 1996 Stock Option Plan(1)
10.6 Gresham Power Asset Purchase Agreement(3)
10.7 1998 Stock Option Plan(4)
10.8 Technology Transfer Agreement with KDK Electronics(4)
10.9 Loan Commitment and Letter Agreement(5)
10.10 Promissory Note(5)
10.11 Employment Agreement with Robert O. Smith (6)
10.12 Securities Purchase Agreement between the Company and Telkoor Telecom,
Ltd. (7)
10.11 Securities Purchase Agreement between the Company and Telkoor Telecom,
Ltd. (8)
10.12 Employment Letter with David Amitai
10.13 Employment Agreement with Jonathan Wax
21.1 The Company's sole subsidiary is Digital Power Limited, a corporation
formed under the laws of the United Kingdom.
23.2 Consent of Ernst & Young
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act
(1) Previously filed with the Commission on October 16, 1996, to the Company's
Registration Statement on Form SB-2.
(2) Previously filed with the Commission on December 3, 1996, to the Company's
Pre-Effective Amendment No. 1 to Registration Statement on Form SB-2.
(3) Previously filed with the Commission on February 2, 1998, to the Company's
Form 8-K.
(4) Previously filed with the Commission with its Form 10-QSB for the quarter
ended September 30, 1998.
(5) Previously filed with the Commission with its Form 10-KSB for the year
ended December 31, 1998.
(6) Previously filed with the Commission with its Form 10-KSB for the year
ended December 31, 1999.
(7) Previously filed with the Commission with its Form 8-K filed on November
21, 2001.
(8) Previously filed with the Commission with its Form 8-K filed on January 14,
2004.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the last quarter of the
period covered by this report:
Date of Event Reported Item Reported
---------------------- -------------
January 12, 2004 Investment by Telkoor Telecom Ltd.
November 14, 2004 Change in Management of Digital Power
Corporation
Item 14. Principal Accounting Fees and Services.
Relationship with Independent Auditors
On September 10, 2002, we changed our independent auditors from Hein +
Associates LLP to Kost Forer Gabbay & Kasierer, a Member of Ernst & Young Global
served as our independent auditors.
Audit Fees
The aggregate fees billed to Kost Forer Gabbay & Kasierer, a Member of
Ernst & Young Global for professional services rendered for the audit of the
Company's annual financial statements on Form 10-KSB and the review of the
financial statements included in the Company's third quarter report on Form
10-QSB for the fiscal year ended December 31, 2002 was $82,000 and December 31,
2003 was $95,000.
Audit-Related Fees
The aggregate fees billed for assurance and related services by the
principal accountant that are reasonably related to the performance of the audit
or review of the Company's financial statements for the year ended December 31,
2002 was $0 and December 31, 2003 was $0.
Tax Fees
The aggregate fees billed for tax compliance, tax advice and tax planning
rendered by our independent auditors for the fiscal year ended December 31, 2002
was $50,000 and December 31, 2003 was $0. The services comprising these fees
include tax consulting and submitting tax return.
All Other Fees
The aggregate fees billed for all other professional services rendered by
the Company's independent auditors for the fiscal year ended December 31, 2002
was $0 and December 31, 2003 was $0.
The Audit Committee approved 100% of the fees paid to the principal
accountant for audit-related, tax and other fees. The Audit Committee
pre-approves all non-audit services to be performed by the auditor in accordance
with the Audit Committee Charter. The percentage of hours expended on the
principal accountant's engagement to audit the Company's financial statements
for the most recent fiscal year that were attributed to work performed by
persons other than the principal accountant's full-time, permanent employees was
0%.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: March 16, 2004 DIGITAL POWER CORPORATION,
a California Corporation
/s/ Jonathan Wax
-------------------------------------
Jonathan Wax,
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/ Ben Zion Diamant March 16, 2004
----------------------------------------------------
Ben Zion Diamant, Chairman
/s/ Jonathan Wax March 16, 2004
----------------------------------------------------
Jonathan Wax, President and Chief Executive Officer
(Principal Executive Officer)
/s/ David Amitai March 16, 2004
-------------------------------------------------------
David Amitai, Director
/s/ Amos Kohn March 16, 2004
------------------------------------------------------
Amos Kohn, Director
/s/ Yeheskel Manea March 16, 2004
-------------------------------------------------------
Yeheskel Manea, Director
/s/ Youval Menipaz March 16, 2004
-------------------------------------------------------
Youval Menipaz, Director
/s/ Haim Yatim March 16, 2004
-------------------------------------------------------
Haim Yatim, Chief Financial Officer
(Principal Accounting and Financial Officer)