UNITED
STATES
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,
2007
|
Commission
File Number 1-12711
DIGITAL
POWER CORPORATION
(Name
of
small business issuer in its charter)
|
California
|
3679
|
94-1721931
|
|
(State
or other jurisdiction of
Incorporation
or organization)
|
(Primary
Standard Industrial
Classification
Code)
|
(I.R.S.
Employer
Identification
No.)
|
41324
Christy Street, Fremont, California 94538-3158
(Address
of principal executive offices)
510-657-2635
(Issuer's
Telephone Number)
Securities
registered under Section 12(b) of the Exchange Act:
|
Title
of Each Class
|
Name
of Each Exchange on Which Registered
|
|
Common
Stock
|
American
Stock Exchange
|
Securities
registered under Section 12(g) of the Exchange Act:
|
Title
of Each Class
|
|
|
None
|
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. Yes o No x
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 o
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. o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
x
Revenues
for the year ended December 31, 2007, were $12,157,000.
As
of
March 3, 2008, the aggregate market value of the voting common stock held by
non-affiliates was approximately $3,764,160 based on the closing price of $
1.06
per share.
As
of
March 25, 2008, the number of shares of common stock outstanding was 6,615,708.
As
used in this annual report, the terms “we,” “us,” “our,” 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. Many of the factors that could
cause actual results to differ materially 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 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 Corporation (“DPC,” the “Company or “we”) designs, develops, manufactures,
markets, sells, private licenses and distributes switching power supply products
to industrial, telecommunication, data communication, medical, and military
industries. We are a California corporation originally formed in 1969. Our
corporate office, which contains our administrative, sales, and engineering
services functions, is located in Fremont, California. In addition, we have
a
wholly-owned subsidiary, Digital Power Limited ("DPL"), located in Salisbury,
England, which designs, manufactures, sells and distributes switching power
supply products for the European marketplace, 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 supply products to the industrial,
telecommunication, data communication, medical, and military industries both
in
North America and Europe. These industries have in recent years experienced
pricing pressure as a result of increased competition that has adversely
affected our operations and financial condition.
In
an
effort to respond to these pressures, we have moved most of the manufacturing
of
our developed products to Asian subcontractors, which offer lower prices with
shorter lead-times. We have also increased our sales of products developed,
manufactured and sold to us for redistribution by Telkoor Telecom Ltd.
("Telkoor"), an Israeli company which currently holds 43.8% of the outstanding
shares of DPC. Although Telkoor manufactures at longer lead times and at higher
‘total costs’ in comparison to other manufacturing partners, as discussed below,
we believe that Telkoor provides other significant design advantages in their
products.
Power
supply products 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
supply products satisfy these issues of allocation and protection by (i)
converting alternating current (AC) electricity into direct current (DC); (ii)
dividing a single input voltage into distinct and isolated output voltages;
and
(iii) regulating and maintaining such output voltages within a narrow range
of
values.
2
Products,
which convert AC from a primary power source into DC, are generally referred
to
as “power supplies” and commonly referred to as AC/DC 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 “step 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
voltage 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 than the linear power
supply - typically, 75% efficient for a 5V output regulator.
We
believe that our switching power supplies and designs have significant
advantages in the power supplies market because they have higher efficiency
and
high power density, or power-to-volume ratio, which make them smaller than
those
of our competitors. We currently secure most of our designs for these products
from Telkoor.
We
believe that another advantage of our power supply products is the flexibility
of their design. We have designed the base model power supply products so that
they can be quickly and economically modified and adapted to the specific power
supply needs of any original equipment manufacturer (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.” It 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. We believe this gives us an
advantage over our competitors, many of whom do charge their customers for
NRE
expenses. Our marketing strategy is to leverage 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 that 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.
Telkoor
Telecom Ltd.
Telkoor,
our largest shareholder, is a corporation organized and headquartered in Israel.
It is primarily engaged in developing, marketing, and selling power supplies
and
power systems for the commercial and military markets. Consistent with our
total
cost reduction efforts, and taking advantage of Telkoor’s strong engineering
team, we have and will continue to utilize Telkoor to assist us in new product
development and manufacturing. Further, during the year ended December 31,
2007,
we made significant progress in penetrating the United States and European
markets with Telkoor’s products. This effort generated sales of approximately
55% of our revenues for 2007. We intend to continue to sell Telkoor’s products
in the future to supplement our line of products.
3
Digital
Power Limited
Digital
Power Limited, organized and 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. Frequency converters manufactured by DPL are used by naval warships
to convert their generated 60-cycle electricity supply to 400 cycles. This
400-cycle supply is used to power their critical equipment such as gyro,
compass, and weapons systems. DPL 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
the
starting and servicing of helicopters on naval vessels, and DPL now supplies
these as part of overall helicopter start and servicing systems. We believe
that
DPL products add diversity to our product line, provide greater access to the
United Kingdom
and
European markets, and strengthen our engineering and technical resources. For
the year ended December 31, 2007, DPL contributed approximately 56% to our
gross
revenues.
The
Market
Geographically,
we serve primarily the North American power electronics market with individual
AC/DC power supplies and DC/DC converters ranging from 50 watts to 1,200 watts
of total output power. DPL serves the United Kingdom and the European
marketplace with AC/DC power supplies, uninterruptible power supplies, and
frequency inverters.
Customers
Our
products are sold in North America and Europe primarily through a network of
manufacturers’ representatives and distributors. Our customers can generally be
grouped into five broad industries, consisting of the industrial,
telecommunication, data communication, medical, and the military. We have a
current base of approximately 330 active customers, some of which are served
through our distributors.
DPL
military products are sold primarily in the UK and in Europe.
Strategy
Our
strategy is to be the supplier of choice to OEMs requiring high-quality power
solutions where power density (size), rapid modification, and time-to-market
are
critical to business success. Target market segments include the industrial,
telecommunication, data communication, medical, and military industries. While
many of these segments 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 and high
density” power supplies allow customers a more effective choice between our
products and products offered by other power supply competitors. Our
“flexibility and high density” 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 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. Because
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 can economically justify the expense and delay
associated with in-house 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
and high density” power supplies, we believe we have an advantage over our
competitors.
4
Products
and Products Strategy
We
have
twelve 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. Simply changing the power transformer construction and a small number
of output components can produce a broad range of output ratings, from 2.0
volts
to 48 volts. 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 and high density” concept applies to all of our EF175/200,
EF300/400, CPCI, Strongbox, US, UP/SP, DP, and UPF product series. Generally
a
common printed circuit board is usually 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 product offerings resulting from our strategic relationship with Telkoor
is:
the eF’s series, CPCI‘s series, Strong Box series, and custom products.
The
new
3.6KW Strongbox® is a single output front end with I2C
data
bus. It features 3 x 1200 watt cassettes. The Strongbox is available in 24V
and
48V outputs with active power factor correction.
The
EF
series are high-density open frame power supplies, which most commonly come
in
12, 24 and 48 volt options with power factor correction.
The
CPCI
series are high-density enclosed central power supplies, which most commonly
come in 5, 12, 24, and 48-volt options with 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 inputs allow
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".
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".
The
HD
and HV series are our newest products and deliver up to 160 watts in a single
output and also includes power factor correction and measures 4” x 2” x 1.5” or
5” x 3” x 1.5”.
DPL
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
40kVA.
DC
Systems - converts main ship's supply to 24VDC. These systems normally supported
by battery backup provide the vessel's emergency DC supplies for machinery,
communications, and other essential services.
6
Transformer
Rectifiers 28Vdc at up to 400A. Ratings of 10 and 15kVA provide DC power to
enable the ship to start and service helicopters. Gresham's Transformer
Rectifiers (TRUs) are in service with a number of Navies, including the Royal
Navy. The scope of supply has now been expanded so that Gresham can supply
entire helicopter start and servicing systems covering a wide range of
aircraft.
Inverters
- 1kVA to 3.6kVA 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
switch mode 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.
DPL
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.
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, our principal source in the Far
East
is Winco Power Technology (“Winco”).
In
coordination with Telkoor, and our other design partners, we also utilize four
additional contract manufacturers in China. In order to accelerate delivery
and
reduce cost of some of these products, we have also obtained the right from
Telkoor to order products directly from Telkoor’s manufacturers in China in
exchange for the payment of a commission to Telkoor. This arrangement does
not
require Digital Power to purchase any minimum product requirement and either
party may cancel upon 12 months prior written notice.
We
have
contract manufacturing relationships with Winco to manufacture our products
at
facilities located in China on a turnkey basis. Purchases from Winco are made
pursuant to purchase orders. For the year ended December 31, 2007, Digital
Power
purchased approximately 13.4% of its power supply requirements through Winco.
Our products are meeting the certification standards according to independent
safety agency requirements.
Regulatory
Requirements
Digital
Power and its manufacturing partners are required to meet applicable regulatory,
environmental, emissions, safety or other requirements where specified by the
customer and accepted by Digital Power or as required by local regulatory or
legal requirements. In July of 2006, the industry began phasing in RoHs and
Wee
requirements in most geographical markets with specific emphasis on consumer
based products. These requirements may require the use of new components or
finish goods to be built with ‘RoHs’ and Wee compliant components potentially
rendering existing or down revision finish goods inventory and component
inventory to risk of obsolescence. In addition, there is some speculation that
RoHs and Wee compliant components may be subject to longer lead-times and higher
prices as the industry transitions to these new requirements.
7
Furthermore,
we are subject to U.S. Export Regulations, including the Arms Export Control
Act
(AECA), associated International Traffic in Arms Regulations (ITAR), as well
as
other federal regulations promulgated by various departments within the U.S.
Government. The ITAR rules regulate the export of technical data and sale of
products to other nations which may use these products for military purposes.
The
failure to comply with present or future regulations could result in fines
being
imposed on us, suspension of production, or a cessation of operations. Any
failure on our part to obtain any required licenses for the export of technical
data and/or sales of our products or to otherwise comply with ITAR, could
subject us to significant future liabilities. The Company currently has an
open
application and voluntary disclosure with the United States State Department
that would permit the company to engage in custom power solutions for the
military market. At present, we have placed on hold two existing programs
pending approval and review by the State Department. The Company may be subject
to fines or a deferment of revenue pending review by the State Department.
While
the Company cannot predict what the outcome of this review will be, the Company
believes that any infractions were minor in nature.
Digital
Power Limited Manufacturing
DPL
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 China. Full assembly, test, and quality assurance take
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
and Marketing
Digital
Power markets its products through a network of independent manufacturer’s
representatives and distributors. 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 shipment. Typically, either the representative organization or
Digital Power may terminate the agreement with 30 days written
notice.
Historically,
we also sold products through multiple distributor arrangements. However, we
have recently consolidated our distributor arrangements. Each of these
arrangements can be terminated by either party with 30 days written notice.
We
also continue to sell directly to our customers.
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, 2007, our warranty reserve was
$86,000.
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 whom may offer products
comparable in quality to ours. Many of our competitors including Power One,
Emerson (Astec) Technologies, Inc., Lambda Electronics, and Mean-Well 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 with our customers. We also
face
competition from current and prospective customers who may decide to design
and
manufacture internally 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 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 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 is
no assurance that we will continue to successfully compete in the power supply
market.
8
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, adaptability,
and
efficiency, while we attempt to anticipate changing market demands for increased
functionality, such as PFC and improved EMI filtering.
The
Company partners with various design and contract engineering firms for
development of its new products supported by its internal engineering services
staff. The Company intends to continue its strategy for engineering and
development.
Employees
As
of
December 31, 2007, Digital Power had 33 employees located in the United States
and the United Kingdom.
Foreign
Currency Fluctuations
DPL
operates 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 year ended December 31, 2007, we recorded a foreign currency translation
profit of $34,000. For the year ended 2006, we recorded a foreign currency
translation profit of $223,000.
Raw
Materials
The
raw
materials for power supplies principally consist of electronic components.
These
raw materials are available from a variety of sources, and we are not dependent
on any one supplier. We generally allow our subcontractors to purchase
components based on orders received or forecasts to minimize our risk of
unusable inventory. To the extent necessary, we may allow them to procure
materials prior to orders received to obtain shorter lead times and to achieve
quantity discounts following a risk assessment. (See regulatory
requirements).
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.
On
July
8, 2004, our trademark, “DP Digital Power - Powering our technologies,” was
registered with the United States Patent and Trademark Office.
9
ITEM
2. DESCRIPTION OF PROPERTY.
Our
headquarters are located in approximately 6,553 square feet of leased office,
engineering, and development space in Fremont, California. Our rent expense
for
the period ended from January 2007 to September 30, 2007 was $9,500 per month.
As of October 1, 2007, we moved to our present location and our rent expenses
decreased to $5,707 per month. During 2002, we issued the prior landlord
warrants to purchase 10,000 shares of Common Stock at an exercise price of
$1.00
per share expiring in September 2013.
DPL
leases approximately 25,000 square feet for its location in Salisbury, England.
DPL's rent expense is approximately $16,500 per month, and the lease expires
on
September 26, 2009. We believe that our existing facilities are adequate for
the
future and have no plans to expand them.
ITEM
3. LEGAL PROCEEDINGS.
The
Company has submitted a claim for an unpaid debt of $82,799.63 for products
sold
to Zultys Technologies. Zultys Technologies filed for bankruptcy protection
following its failure to pay for the goods the Company had delivered. The
Company is represented by counsel in the bankruptcy proceedings. Except
for these proceedings, the Company is not currently involved in any legal
proceedings.
On
January 31, 2008, we submitted our notification of an initial notice of
voluntary self-disclosure of possible export compliance problems under the
ITAR
regulations to the Directorate of Defense Trade Controls of the U.S. Department
of State. A final report of voluntary self-disclosure detailing the results
of
the Company's internal review of these matters is due in April 2008 to the
U.S.
Department of State. The initial notice of voluntary self-disclosure described
the Company's apparent omission to register the Company as a manufacturer,
exporter and broker of defense articles and services as required by the ITAR,
and to obtain the requisite export licenses from the U.S. Department of State
pursuant to the ITAR in connection with its performance of certain contracts
involving the manufacture and supply of power supplies for Israeli defense
programs. Companies which violate U.S. export control laws can be subject to
monetary fines and other sanctions, including possible criminal penalties.
We do
not expect the fines or penalties imposed on us, if any, to be material, but
we
cannot assure you that the actual amount of the fines or penalties, if any,
will
not have an adverse effect of our financial condition or reputation. It should
be noted, however, that applicable regulations provide that a company's
voluntary self-disclosure will be an important mitigating factor.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART
II
ITEM
5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER 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
|
|||||
|
12/31/2007
|
$
|
1.90
|
$
|
1.25
|
|||
|
09/30/2007
|
1.84
|
1.31
|
|||||
|
06/30/2007
|
1.39
|
1.11
|
|||||
|
03/31/2007
|
1.80
|
1.26
|
|||||
|
12/31/2006
|
$
|
1.30
|
$
|
1.27
|
|||
|
09/30/2006
|
1.35
|
1.33
|
|||||
|
06/30/2006
|
1.69
|
1.50
|
|||||
|
03/31/2006
|
1.88
|
1.79
|
|||||
10
(b) Holders
As
of
March 1 2008, there were shares of our common shares outstanding, held by
approximately 84 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.
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
General
We
are
engaged in the business of designing, developing, manufacturing, marketing,
distributing and selling switching power supplies to the industrial,
telecommunication, data communication, medical, and military industries.
Revenues are generated from sales to distributors and OEMs in North America,
and
Europe.
During
the year ended December 31, 2007, the Company’s products were received well in
the marketplace. We have continued our promotional efforts to increase sales
to
existing and new customers and continue our strategy to move the manufacturing
of our products to the Far East. While we believe our revenues have increased
to
a sufficient amount to offset our expenses, we may be subject to net losses
in
an individual quarter. We believe that our cash will be sufficient to fund
those
losses for at least 12 months.
11
Results
of Operations
The
table
below sets forth certain statements of operations data as a percentage of
revenues for the years ended December 31, 2007, and 2006:
|
|
|
Years
Ended December 31,
|
|
||||
|
|
|
2007
|
|
2006
|
|||
|
Revenues
|
100.00
|
%
|
100.00
|
%
|
|||
|
Cost
of Revenues
|
72.83
|
73.45
|
|||||
|
Write-off
of excess inventory
|
1.61
|
0.57
|
|||||
|
Gross
profit
|
25.56
|
25.98
|
|||||
|
Engineering
and product development
|
5.99
|
5.25
|
|||||
|
Sales
and marketing
|
8.02
|
9.21
|
|||||
|
General
and administrative
|
11.11
|
10.61
|
|||||
|
Total
operating expenses
|
25.12
|
25.07
|
|||||
|
Operating
income
|
0.44
|
0.91
|
|||||
|
Financial
income
|
0.55
|
0.12
|
|||||
|
Income
before tax benefit
|
0.99
|
1.03
|
|||||
|
Tax
benefit
|
0.01
|
-
|
|||||
|
Net
income
|
1.00
|
%
|
1.03
|
%
|
|||
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 U.S. 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, 2007, compared to Year Ended December 31, 2006.
Revenues
For
the
year ended December 31, 2007, revenues decreased by 3.8% to $12,157,000 from
$12,631,000 for the year ended December 31, 2006. The decrease in product
revenue is mainly attributed to declining demand in our older product lines
as a
result of the maturation of these products.
Revenues
from the defense products of the Company for the year ended December 31, 2007
were $3,140,000, or approximately at the same level of $3,155,000 for the year
ended December 31, 2006. Revenue from the commercial products of the Company
for
the year ended December 31, 2007 decreased by 4.8% to $9,017,000 from $9,476,000
for the year ended December 31, 2006. The decrease in commercial product
revenues is mainly attributed to declining demand on our older product lines
as
a result of the maturation of these products.. The Company is replacing the
older product lines with newer product lines, but is subject to uncertainties
such as customer design cycles, competition, and customer requirements that
may
impact revenues.
Revenues
from the domestic operations of DPC decreased 10.5% to $5,297,000 for the year
ended December 31, 2007, from $5,919,000 for the year ended December 31, 2006.
The decrease in product revenues is mainly attributed to declining demand of
our
older product lines as a result of the maturation of these products. The Company
is replacing the older product lines with newer product lines, but is subject
to
uncertainties such as customer design cycles, competition, and customer
requirements.
Revenues
from the Company’s European operations of DPL increased 2.2% to $6,860,000 for
the year ended December 31, 2007, from $6,712,000 for the year ended December
31, 2006. The increase in revenues for the year ended December 31, 2007 from
the
year ended December 31, 2006 is due to an increase in sales of our high density
product lines offset partially by a decrease in sales of our older product
lines.
Gross
Margins
Gross
margins were 25.56% for the year ended December 31, 2007, compared to 25.98%
for
the year ended December 31, 2006. Gross margins for the year ended December
31,
2007 and 2006 remained approximately at the same level.
12
Engineering
and Product Development
Engineering
and product development expenses were 5.99% of revenues for the year ended
December 31, 2007, compared to 5.25% for the year ended December 31, 2006.
Actual dollar expenditures increased by $65,000 mainly due to product safety
and
consulting expenditures.
Selling
and Marketing
Selling
and marketing expenses were 8.02% of revenues for the year ended December 31,
2007 compared to 9.21% for the year ended December 31, 2006. Actual dollar
expenditures decreased by $188,000 mainly due to a decrease in bonus, and
consulting expenses.
General
and Administrative
General
and administrative expenses were 11.11% of revenues for the year ended December
31, 2007 compared to 10.61% for the year ended December 31, 2006. In actual
dollars, general and administrative expenses increased by $11,000.
Financial
Income, net
Net
financial income was $67,000 for the year ended December 31, 2007, compared
to
net financial income of $15,000 for the year ended December 31, 2006. The
financial income resulted mainly from interest income derived from cash and
cash
equivalents.
Net
Income
Net
income for the year ended December 31, 2007 was $121,000 compared to a net
income of $131,000 for the year ended December 31, 2006.
Critical
Accounting Policies
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles 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 is
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 revenue is such that revenue is
recognized when the risks and rewards of ownership pass, which is primarily
upon
delivery of goods to customers (see Note 2h 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.
13
During
2007 and 2006, the Company recorded inventories write-offs in a total amount
of
$ 196,000 and $ 72,000 respectively.
Allowance
for Doubtful Accounts
Our
accounts receivable are derived from revenues recognized from customers located
in North America and Europe. We perform ongoing credit evaluations of our
customers’ financial condition and currently require no collateral from our
customers. An allowance for doubtful accounts for estimated losses is maintained
in anticipation of the inability or unwillingness of customers to make required
payments. The allowance for doubtful accounts as of December 31, 2007 is
$110,000. When we become aware that a specific customer is unable to meet its
financial obligations, such as the result of bankruptcy or deterioration of
the
customer’s operating results or financial position, we record a specific
allowance to reflect the level of credit risk in the customer’s outstanding
receivable balance. We are not able to predict changes in the financial
condition of customers, and if the condition or circumstances of our customers
deteriorates, estimates of the recoverability of trade receivables could be
materially affected and we may be required to record additional allowances.
Alternatively, if our estimates are determined to be greater than the actual
amounts necessary, we may decrease a portion of such allowance in future periods
based on actual collection experience.
Other
Accrued Liabilities
The
Company's accrued liabilities are based on a variety of factors including past
experience 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.
Equity-based
compensation expense
We
account for equity-based compensation in accordance with SFAS No. 123(R),
“Share-Based Payment.” Under the fair value recognition provisions of this
statement, share-based compensation cost is measured at the grant date based
on
the fair value of the award and is recognized as an expense over the requisite
service periods. Determining the fair value of share-based awards at the grant
date requires the exercise of judgment, including the amount of share-based
awards that are expected to be forfeited. Effective January 2006, the Company
adopted the fair value recognition provisions of SFAS123(R) using the modified
prospective transaction method. If actual results differ from these estimates,
equity- based compensation expense and our results of operations could be
impacted.
Liquidity
and Capital Resources
On
December 31, 2007, we had cash, cash equivalents, and restricted cash of
$1,548,000, and working capital of $3,500,000. This compares to cash, cash
equivalents, and restricted cash of $1,597,000 and working capital of $3,309,000
on December 31, 2006. The increase in working capital is mainly due to increase
in accounts receivable, increase in inventory, decrease in deferred revenues
offset partially by increase in accounts payable and related parties-trade
payables.
Net
cash
provided by operating activities was $88,000 for the year ended December 31,
2007, compared to $358,000 in cash used in operating activities for the year
ended December 31, 2006. Cash provided by operating activities was mainly due
to
increase in accounts payables and in related parties-trade payables due to
timing differences, offset partially by increase in trade receivables due to
higher sales toward the end of the year.
14
Net
cash
used in investing activities was $161,000 for the year ended December 31, 2007,
compared to $150,000 cash provided by investing activities for the year ended
December 31, 2006. The cash used in investing activity was mainly due to
purchase of property and equipment mainly for leasehold improvements in the
new
location in Fremont, California and due to a decrease in a long-term
deposit.
Net
cash
provided by financing activities was $5,000 for the year ended December 31,
2007, compared to $162,000 net cash provided by financing activities for the
year ended December 31, 2006. Cash provided by financing activities is due
to
exercise of options.
We
do not
believe that our sales are seasonal. However, we believe that if inflation
rates
increase due to higher energy and commodity costs this would have a negative
effect on our gross margins in the future. 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 debt or equity, which may dilute
the
shareholders' equity.
In
January 2005, the Company entered into a convertible note agreement with
Telkoor, according to which Telkoor loaned a $250,000 interest free convertible
note. On February 8, 2006, Telkoor issued to the Company a Notice of Conversion
under the terms of a convertible note representing a loan from Telkoor to the
company, for 235,849 common shares of the Company. In April 2006, the entire
amount of the convertible note was converted into 235,849 Common shares. There
is no amount due on the note after the conversion.
RISK
FACTORS
In
addition to the other information presented in this report, the following should
be considered carefully in evaluating our business and us. 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.
Although
we experienced an operating profit during the year ended December 31, 2007,
we
have historical experienced net losses and we may continue to experience net
losses in the future.
For
the
year ended December 31, 2007, we had an operating profit of $53,000. Although
we
have actively taken steps to reduce our costs, we could incur future losses
until we increase revenues through the sale of current products and decrease
manufacturing costs through a greater utilization of Far East contract
manufacturers.
We
depend on Telkoor Telecom Ltd to design our products.
We
depend
on Telkoor Telecom Ltd. ("Telkoor"), the largest shareholder of the Company
and
one of DPC's third party subcontractors for manufacturing capabilities in
production of the products which DPC sells. If Telkoor is unable or unwilling
to
continue manufacturing the Company's products in required volumes on a timely
basis, that could lead to loss of sales, and adversely affect the Company's
operating results and cash position. We also depend on Telkoor's intellectual
property and ability to transfer production to third party manufacturers.
Failure to obtain new products in a timely manner or delay in delivery of
product to customers will have an adverse effect on Company's ability to meet
its customer’s expectation.
Our
strategic focus on our power supply product competencies and cost reduction
plans may be ineffective or may limit our ability to
compete.
We
have
from time to time implemented a series of initiatives designed to increase
efficiency and reduce costs and to focus our core business on power supply
product. While we believe that these actions will reduce costs, they may not
be
sufficient to achieve the required operational efficiencies that will enable
us
to respond more quickly to changes in the market or result in the improvements
in our business that we anticipate. In such event, we may be forced to take
additional cost-reducing initiatives, which may negatively impact quarterly
earnings and profitability as we account for severance and other related costs.
In addition, there is the risk that such measures could have long-term effects
on our business by reducing our pool of talent, decreasing or slowing
improvements in our products, making it more difficult for us to respond to
customers, limiting our ability to increase production quickly if and when
the
demand for our products increases and limiting our ability to hire and retain
key personnel. These circumstances could cause our earnings to be lower than
they otherwise might be.
15
We
are dependent upon our ability to attract, retain and motivate our key
personnel.
Our
success depends on our ability to attract, retain and motivate our key
management personnel, including the Company’s CEO and CFO, and key engineers,
necessary to implement our business plan and to grow our business. Despite
the
adverse economic conditions of the past several years, competition for certain
specific technical and management skill sets is intense. If we are unable to
identify and hire the personnel that we need to succeed, or if one or more
of
our present key employees were to cease to be associated with the Company,
our
future results could be adversely affected. Furthermore, we have recently
experienced a number of changes in our senior management positions, both as
part
of the restructuring initiatives and otherwise. Although we believe we have
taken appropriate measures to address the impact of these changes, there is
the
risk that such changes could impact our business, which could negatively affect
operating results.
We
depend upon a few major customers for a majority of our revenues, and the loss
of any of these customers, or the substantial reduction in the products that
they purchase from us, would significantly reduce our revenues and net
income.
We
currently depend upon a few major OEMs and other customers for a significant
portion of our revenues and we expect to continue to derive a significant
portion of our revenues from a limited number of customers in the future. The
loss of any of these customers or a substantial reduction in the products that
they purchase from us would significantly reduce our revenues and net income.
Furthermore, diversions in the capital spending of certain of these customers
to
new network elements have and could continue to lead to their reduced demand
for
our products, which could in turn have a material adverse affect on our business
and results of operation. If the financial condition of one or more of our
major
customers should deteriorate, or if they have difficulty acquiring investment
capital due to any of these or other factors, a substantial decrease in our
revenues would likely result.
We
are dependant on Electronic Equipment Industries.
Substantially
all of our existing customers are in the 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 subcontract
manufacturers.
Since
we
do not own significant manufacturing facilities, we must rely on our
subcontractors’ abilities to purchase components, staff their operations,
maintain high volume and high quality processes and remain financially solvent.
16
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 their 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 conditions of Israel.
Restrictive laws or policies directed towards Israel or Israeli businesses
could
adversely affect us.
We
face intense industry competition, price erosion and product obsolescence,
which, in turn, could reduce our profitability.
We
operate in an industry that is generally characterized by intense competition.
We believe that the principal bases of competition in our markets are breadth
of
product line, quality of products, stability, reliability and reputation of
the
provider, along with cost. Quantity discounts, price erosion, and rapid product
obsolescence due to technological improvements are therefore common in our
industry as competitors strive to retain or expand market share. Product
obsolescence can lead to increases in unsaleable inventory that may need to
be
written off and therefore could reduce our profitability. Similarly, price
erosion can reduce our profitability by decreasing our revenues and our gross
margins. In fact, we have seen price erosion over the last several years on
most
of the products we sell, and we have factored additional price erosion into
our
forecasts.
Our
future results are dependent on our ability to establish, maintain and expand
our distribution channels and our existing third-party
distributors.
We
market
and sell our products through domestic and international OEM relationships.
Our
future results are dependent on our ability to establish, maintain and expand
third party relationships with OEM as well as other marketing and sales
distribution channels. If, however, the third parties with whom we have entered
into such OEM and other arrangements should fail to meet their contractual
obligations, cease doing, or reduce the amount of their business with us or
otherwise fail to meet their own performance objectives, customer demand for
our
products could be adversely affected, which would have an adverse effect on
our
revenues.
We
may not be able to procure necessary key components for our products, or we
may
purchase too much inventory or the wrong inventory.
The
power
supply industry, and the electronics industry as a whole, can be subject to
business cycles. During periods of growth, key components required to build
our
products may become unavailable in the timeframe required for us to meet our
customers’ demands. Our inability to secure sufficient components to build
products for our customers could negatively impact our sales and operating
results. We may choose to mitigate this risk by increasing the levels of
inventory for certain key components. Increased inventory levels can increase
the potential risk for excess and obsolescence should our forecasts fail to
materialize or if there are negative factors impacting our customers’ end
markets. If we purchase too much inventory or the wrong inventory, we may have
to record additional inventory reserves or write-off the inventory, which could
have a material adverse effect on our gross margins and on our results of
operations.
We
depend on sales of our legacy products for a meaningful portion of our revenues,
but these products are mature and its sales will continue to
decline.
A
large
portion of our sales have historically been attributable to our legacy products.
We expect that these products may continue to account for a meaningful
percentage of our revenues for the foreseeable future. However, these sales
are
declining. Although we are unable to predict future prices for our legacy
products, we expect that prices for these products will continue to be subject
to significant downward pressure in certain markets for the reasons described
above. Accordingly, our ability to maintain or increase revenues will be
dependent on our ability to expand our customer base, increase unit sales
volumes of these products and to successfully, develop, introduce and sell
new
products such as our cable and software products. We cannot assure you that
we
will be able to expand our customer base, increase unit sales volumes of
existing products or develop, introduce and/or sell new products.
17
Our
reliance on third parties to manufacture certain aspects of our products
involves risks, including delays in product shipments and reduced control over
product quality.
We
rely
on, and will continue to rely on, a limited number of outside parties to
manufacture parts, components, and equipment. Our reliance upon such third
party
contractors involve several risks, including reduced control over manufacturing
costs, delivery times, reliability and quality of components. If we were to
encounter a shortage of key manufacturing components from limited sources of
supply, or experience manufacturing delays caused by reduced manufacturing
capacity, inability of our contract manufacturers to procure raw materials,
the
loss of key assembly subcontractors, difficulties associated with the transition
to our new contract manufacturers or other factors, we could experience lost
revenues, increased costs, delays in, cancellations or rescheduling of orders
or
shipments, any of which would materially harm our business.
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 a shareholder’s percentage of ownership. As of December 31, 2007, the
Company has employees’ options to purchase 930,190 shares of common stock, with
a weighted average exercise price of $1.15 exercisable at prices ranging from
$0.48 to $3.03 per share, and consultants’ and service providers’ options and
warrants to purchase 220,000 shares of common shares, with a weighted average
exercise price of $1.14 exercisable at prices ranging from $0.55 to
$1.19.
Our
operating results may vary from quarter to quarter, causing our stock price
to
fluctuate.
Our
operating results have in the past been subject to quarter to quarter
fluctuations, and we expect that these fluctuations will continue, and may
increase in magnitude, in future periods. Demand for our products is driven
by
many factors, including the availability of funding for our products in
customers’ capital budgets. There is a trend for some of our customers to place
large orders near the end of a quarter or fiscal year, in part to spend
remaining available capital budget funds. Seasonal fluctuations in customer
demand for our products driven by budgetary and other reasons can create
corresponding fluctuations in period-to-period revenues, and we therefore cannot
assure you that our results in one period are necessarily indicative of our
revenues in any future period. In addition, the number and timing of large
individual sales and the ability to obtain acceptances of those sales, where
applicable, has been difficult for us to predict, and large individual sales
have, in some cases, occurred in quarters subsequent to those we anticipated,
or
have not occurred at all. The loss or deferral of one or more significant sales
in a quarter could harm our operating results. It is possible that in some
quarters our operating results will be below the expectations of public market
analysts or investors. In such events, or in the event adverse conditions
prevail, the market price of our common stock may decline significantly.
We
are subject to certain governmental regulatory restrictions relating to our
international sales.
Some
of
our products are subject to ITAR , which is administered by the
U.S. Department of State. ITAR controls not only the export of certain
products specifically designed, modified, configured or adapted for military
systems, but also the export of related technical data and defense services
as
well as foreign production. While we are in the process of obtaining and will
continue to seek to obtain all required licenses for any exports subject to
the
ITAR, we have undertaken corrective actions with respect to the other ITAR
controls and are implementing improvements in our internal compliance program.
If the corrective actions and improvements were to fail or be ineffective for
a
prolonged period of time or if the process of obtaining required export licenses
for products subject to the ITAR is delayed, it could have a materially adverse
effect on our business, financial condition, and/or operating results. Changes
in United States export laws that require us to obtain additional export
licenses or delays in obtaining export licenses currently being sought sometimes
cause significant shipment delays and, if such delays are too great, could
result in the cancellation of orders. Any future restrictions or charges imposed
by the United States or any other country on our international sales or foreign
subsidiary could have a materially adverse effect on our business, financial
condition, and/or operating results. In addition, from time to time, the Company
has entered into contracts with the Israeli Ministry of Defense which were
funded with monies subject to, and the Company therefore was required to comply
with the regulations governing, the U.S. Foreign Military Financing program.
18
We
depend on international operations for a substantial majority of our
products.
We
purchase a substantial majority of our components from foreign manufacturers
and
have a substantial majority of our commercial products assembled, packaged,
and
tested by subcontractors located outside the United States. These activities
are
subject to the uncertainties associated with international business operations,
including trade barriers and other restrictions, changes in trade policies,
governmental regulations, currency exchange fluctuations, reduced protection
for
intellectual property, war and other military activities, terrorism, changes
in
social, political, or economic conditions, and other disruptions or delays
in
production or shipments, any of which could have a materially adverse effect
on
our business, financial condition, and/or operating results.
We
depend on international sales for a portion of our
revenues.
Sales
to
customers outside of North America accounted for 60.2% of net revenues in 2007,
compared with 55.7% in 2006, and we expect that international sales will
continue to represent a portion of our total revenues. International sales
are
subject to the risks described above as well as generally longer payment cycles,
greater difficulty collecting accounts receivable, and currency restrictions.
We
also have a wholly-owned foreign subsidiary, Digital Power Ltd., doing business
as Gresham Power Electronics, in the United Kingdom, to support European and
other international customers, distributors, and sales representatives, which
is
subject to local regulation. In addition, international sales are subject to
the
export laws and regulations of the United States and other countries.
Decline
in the trading price of our common stock could indicate that our goodwill and
other intangible assets are impaired and we may be required to record a
significant charge to operating income.
Under
generally accepted accounting principles, we review our amortizable intangible
assets for impairment when events or changes in circumstances indicate the
carrying value may not be recoverable. We test our goodwill and intangible
assets deemed to have an indefinite life for impairment annually and when events
or changes in circumstances indicate the carrying value may not be recoverable.
Factors that may be considered a change in circumstances indicating that the
carrying value of our goodwill or intangible assets may not be recoverable
include a decline in stock price and market capitalization, reduced future
cash
flow estimates, and slower growth rates in the industries we serve. We may
be
required to record a significant charge that will have a material adverse impact
to our operating results during the period in which any impairment of our
goodwill or intangible assets is determined.
If
our accounting controls and procedures are circumvented or otherwise fail to
achieve their intended purposes, our business could be seriously
harmed.
We
evaluate our disclosure controls and procedures as of the end of each fiscal
quarter, and are annually reviewing and evaluating our internal controls over
financial reporting in order to comply with SEC rules relating to internal
control over financial reporting adopted pursuant to the Sarbanes-Oxley Act
of
2002. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate. If we
fail
to maintain effective internal control over financial reporting or our
management does not timely assess the adequacy of such internal control, we
may
be subject to regulatory sanctions and our reputation may decline.
19
The
sale of our products is dependent upon our ability to satisfy the proprietary
requirements of our customers.
We
depend
upon a relatively narrow range of products for the majority of our revenue.
Our
success in marketing our products is dependent upon their continued acceptance
by our customers. In some cases, our customers require that our products meet
their own proprietary requirements. If we are unable to satisfy such
requirements, or forecast and adapt to changes in such requirements, our
business could be materially harmed.
The
sale of our products is dependent on our ability to respond to rapid
technological change, including evolving industry-wide standards, and may be
adversely affected by the development, and acceptance by our customers, of
new
technologies which may compete with or reduce the demand for our
products.
Rapid
technological change, including evolving industry standards, could render our
products obsolete. To the extent our customers adopt such new technology in
place of our products, the sales of our products may be adversely affected.
Such
competition may also increase pricing pressure for our products and adversely
affect the revenues from such products.
If
our new development efforts fail to result in products which meet our customers’
needs, or if our customers fail to accept our new products, our revenues will
be
adversely affected.
We
have
recently introduced on a limited basis our HD & HV products. The successful
development, introduction and commercial success of this new technology will
depend on a number of factors, including our ability to meet customer
requirements, the existence of competitive products in the market, our ability
to meet product cost targets generating acceptable margins, timely remediation
of product performance issues, if any, identified during testing, product
performance at customer locations, differentiation of our product from our
competitors’ products, and management of customer expectations concerning
product capabilities and life cycles.
Our
limited ability to protect our proprietary information and technology may
adversely affect our ability to compete, and our products could infringe upon
the intellectual property rights of others, resulting in claims against us
the
results of which could be costly.
Many
of
our products consist entirely or partly of proprietary technology owned by
us.
Although we seek to protect our technology through a combination of copyrights,
trade secret laws, contractual obligations and patents, these protections may
not be sufficient to prevent the wrongful appropriation of our intellectual
property, nor will they prevent our competitors from independently developing
technologies that are substantially equivalent or superior to our proprietary
technology. In addition, the laws of some foreign countries do not protect
our
proprietary rights to the same extent as the laws of the United States. In
order
to defend our proprietary rights in the technology utilized in our products
from
third party infringement, we may be required to institute legal proceedings.
If
we are unable to successfully assert and defend our proprietary rights in the
technology utilized in our products, our future results could be adversely
affected.
20
Although
we attempt to avoid infringing known proprietary rights of third parties
in our
product development efforts, we may become subject to legal proceedings and
claims for alleged infringement from time to time in the ordinary course
of
business. Any claims relating to the infringement of third-party proprietary
rights, even if not meritorious, could result in costly litigation, divert
management’s attention and resources, require us to reengineer or cease sales of
our products or require us to enter into royalty or license agreements which
are
not advantageous to us. In addition, parties making claims may be able to
obtain
an injunction, which could prevent us from selling our products in the United
States or abroad.
If
we are unable to satisfy our customers’ specific product quality, certification
or network requirements, our business could be disrupted and our financial
condition could be harmed.
Our
customers demand that our products meet stringent quality, performance and
reliability standards. We have, from time to time, experienced problems in
satisfying such standards. Defects or failures have in the past, and may
in the
future occur relating to our product quality, performance and reliability.
From
time to time, our customers also require us to implement specific changes
to our
products to allow these products to operate within their specific network
configurations. If we are unable to remedy these failures or defects or if
we
cannot affect such required product modifications, we could experience lost
revenues, increased costs, including inventory write-offs, warranty expense
and
costs associated with customer support, delays in or cancellations or
rescheduling of orders or shipments and product returns or discounts, any
of
which would harm our business.
If
we ship products that contain defects, the market acceptance of our products
and
our reputation will be harmed and our customers could seek to recover their
damages from us.
Our
products are complex, and despite extensive testing, may contain defects
or
undetected errors or failures that may become apparent only after our products
have been shipped to our customers and installed in their network or after
product features or new versions are released. Any such defect, error or
failure
could result in failure of market acceptance of our products or damage to
our
reputation or relations with our customers, resulting in substantial costs
for
both the Company and our customers as well as the cancellation of orders,
warranty costs and product returns. In addition, any defects, errors, misuse
of
our products or other potential problems within or out of our control that
may
arise from the use of our products could result in financial or other damages
to
our customers. Our customers could seek to have us pay for these losses.
Although we maintain product liability insurance, it may not be adequate.
21
ITEM
7.
Financial
Statements
DIGITAL
POWER CORPORATION
CONSOLIDATED
FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2007
IN
U.S. DOLLARS
INDEX
|
Page
|
||||
|
Report
of Independent Registered Public Accounting Firm
|
2
|
|||
|
Consolidated
Balance Sheet
|
3
|
|||
|
Consolidated
Statements of Income
|
4
|
|||
|
Statements
of Changes in Shareholders' Equity
|
5
|
|||
|
Consolidated
Statements of Cash Flows
|
6
|
|||
|
Notes
to Consolidated Financial Statements
|
7
- 23
|
|||
F-1
 |
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Shareholders of
DIGITAL
POWER CORPORATION
We
have
audited the accompanying consolidated balance sheet of Digital Power Corporation
("the Company") and its subsidiary as of December 31, 2007 and the related
consolidated statements of income, changes in shareholders' equity and
cash
flows for each of the two years in the period ended December 31, 2007.
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 audits in accordance with the standards of the Public Company
Accounting Oversight Board (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. We were not engaged to perform
an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as
a basis
for designing audit procedures that are appropriate in the circumstances,
but
not for the purposes of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express
no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements assessing the
accounting principles used and significant estimates made by management,
and
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the consolidated financial position of the Company
and
its subsidiary as of December 31, 2007 and the consolidated results of
their
operations and cash flows for the two years in the period ended December
31,
2007, in conformity with U.S. generally accepted accounting principles.
As
discussed in Note 2l to the consolidated financial statements, in 2006
the
Company adopted Financial Accounting Standard No. 123 (Revised 2004)
"Share-Based Payment".
|
Tel-Aviv,
Israel
|
KOST
FORER GABBAY & KASIERER
|
|
March
31, 2008
|
A
Member of Ernst & Young Global
|
F-2
DIGITAL
POWER CORPORATION
CONSOLIDATED
BALANCE SHEET
U.S.
dollars in thousands (except share and per share data)
|
December
31,
2007
|
||||
|
ASSETS
|
||||
|
CURRENT
ASSETS:
|
||||
|
Cash
and cash equivalents
|
$
|
1,443
|
||
|
Restricted
cash
|
105
|
|||
|
Trade
receivables, net of allowance for doubtful accounts of $ 110
|
2,751
|
|||
|
Prepaid
expenses and other receivables
|
106
|
|||
|
Inventories
(Note 3)
|
1,657
|
|||
|
|
||||
|
Total
current assets
|
6,062
|
|||
|
|
||||
|
PROPERTY
AND EQUIPMENT, NET (Note 4)
|
202
|
|||
|
|
||||
|
LONG-TERM
DEPOSITS
|
41
|
|||
|
|
||||
|
Total
assets
|
$
|
6,305
|
||
|
|
||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||
|
|
||||
|
CURRENT
LIABILITIES:
|
||||
|
Accounts
payable
|
$
|
727
|
||
|
Related
parties - trade payables (Note 12)
|
1,409
|
|||
|
Other
current liabilities (Note 6)
|
426
|
|||
|
Total
current liabilities
|
2,562
|
|||
|
|
||||
|
COMMITMENTS
AND CONTINGENT LIABILITIES (Note 7)
|
||||
|
|
||||
|
SHAREHOLDERS'
EQUITY (Note 8):
|
||||
|
Share
capital -
|
||||
|
Series
A redeemable, convertible preferred shares, no par value - 500,000
shares
authorized, 0 shares issued and outstanding as of December 31,
2007
|
-
|
|||
|
Preferred
shares, no par value - 1,500,000 shares authorized, 0 shares issued
and outstanding as of December 31, 2007
|
-
|
|||
|
Common
shares, no par value - 30,000,000 shares authorized; 6,615,708
shares
issued and outstanding as of December 31, 2007
|
-
|
|||
|
Additional
paid-in capital
|
13,885
|
|||
|
Accumulated
deficit
|
(10,342
|
)
|
||
|
Accumulated
other comprehensive income
|
200
|
|||
|
|
||||
|
Total
shareholders' equity
|
3,743
|
|||
|
|
||||
|
Total
liabilities and shareholders' equity
|
$
|
6,305
|
||
The
accompanying notes are an integral part of the consolidated financial
statements.
F-3
DIGITAL
POWER CORPORATION
CONSOLIDATED STATEMENTS
OF INCOME
U.S.
dollars in thousands (except per share data)
|
Year
ended
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Revenues
(Note 12)
|
$
|
12,157
|
$
|
12,631
|
|||
|
Cost
of revenues
|
8,854
|
9,277
|
|||||
|
Write-off
of excess inventory
|
196
|
72
|
|||||
|
Gross
profit
|
3,107
|
3,282
|
|||||
|
Operating
expenses:
|
|||||||
|
Engineering
and product development
|
728
|
663
|
|||||
|
Selling
and marketing
|
975
|
1,163
|
|||||
|
General
and administrative
|
1,351
|
1,340
|
|||||
|
Total
operating expenses
|
3,054
|
3,166
|
|||||
|
Operating
income
|
53
|
116
|
|||||
|
Financial
income, net
|
67
|
15
|
|||||
|
Income
before income taxes
|
120
|
131
|
|||||
|
Tax
benefit
|
1
|
-
|
|||||
|
Net
income
|
$
|
121
|
$
|
131
|
|||
|
Basic
net earnings per share
|
$
|
0.018
|
$
|
0.020
|
|||
|
Diluted
net earnings per share
|
$
|
0.018
|
$
|
0.019
|
|||
The
accompanying notes are an integral part of the consolidated financial
statements.
F-4
DIGITAL
POWER CORPORATION
STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
U.S.
dollars in thousands (except share data)
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
Additional
|
|
|
|
accumulated
|
|
Total
|
|
Total
|
|
|||||||||
|
|
|
Common
shares
|
|
paid-in
|
|
Accumulated
|
|
comprehensive
|
|
comprehensive
|
|
shareholders'
|
|
|||||||||
|
|
|
Number
|
|
Amount
|
|
capital
|
|
deficit
|
|
income
(loss)
|
|
income
|
|
equity
|
|
|||||||
|
Balance
as of January 1, 2006
|
6,161,859
|
$
|
-
|
$
|
13,275
|
$
|
(10,594
|
)
|
$
|
(57
|
)
|
$
|
2,624
|
|||||||||
|
Stock
compensation related to options granted to Telkoor's employees
and other
consultant
|
-
|
-
|
52
|
-
|
-
|
52
|
||||||||||||||||
|
Stock
compensation related to options granted to employees
|
-
|
-
|
29
|
-
|
-
|
29
|
||||||||||||||||
|
Exercise
of options
|
213,000
|
-
|
162
|
-
|
-
|
162
|
||||||||||||||||
|
Conversion
of convertible note
|
235,849
|
-
|
250
|
-
|
-
|
250
|
||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
131
|
-
|
$
|
131
|
131
|
||||||||||||||
|
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
223
|
223
|
223
|
|||||||||||||||
|
Total
comprehensive income
|
$
|
354
|
||||||||||||||||||||
|
Balance
as of December 31, 2006
|
6,610,708
|
-
|
13,768
|
(10,463
|
)
|
166
|
3,471
|
|||||||||||||||
|
Stock
compensation related to options granted to Telkoor's employees
and other
consultant
|
-
|
-
|
54
|
-
|
-
|
54
|
||||||||||||||||
|
Stock
compensation related to options granted to employees
|
-
|
-
|
58
|
-
|
-
|
58
|
||||||||||||||||
|
Exercise
of options
|
5,000
|
-
|
5
|
5
|
||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
121
|
-
|
$
|
121
|
121
|
||||||||||||||
|
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
34
|
34
|
34
|
|||||||||||||||
|
Total
comprehensive income
|
$
|
155
|
||||||||||||||||||||
|
Balance
as of December 31, 2007
|
6,615,708
|
$
|
-
|
$
|
13,885
|
$
|
(10,342
|
)
|
$
|
200
|
$
|
3,743
|
||||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
F-5
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands
|
Year
ended
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Cash
flows from operating activities:
|
|||||||
|
|
|||||||
|
Net
income
|
$
|
121
|
$
|
131
|
|||
|
Adjustments
required to reconcile net income to net cash provided by (used
in)
operating activities:
|
|||||||
|
Depreciation
|
82
|
75
|
|||||
|
Stock
compensation related to options granted to employees
|
58
|
29
|
|||||
|
Stock
compensation related to options granted to Telkoor's employees
and other
consultant
|
54
|
52
|
|||||
|
Increase
in trade receivables
|
(530
|
)
|
(230
|
)
|
|||
|
Decrease
in prepaid expenses and other receivables
|
35
|
13
|
|||||
|
Increase
in inventories
|
(244
|
)
|
(100
|
)
|
|||
|
Inventory
write-offs
|
196
|
72
|
|||||
|
Increase
(decrease) in accounts payable and related parties - trade payables
|
420
|
(301
|
)
|
||||
|
Decrease
in deferred revenues and other current liabilities
|
(104
|
)
|
(99
|
)
|
|||
|
|
|||||||
|
Net
cash provided by (used in) operating activities
|
88
|
(358
|
)
|
||||
|
|
|||||||
|
Cash
flows from investing activities:
|
|||||||
|
|
|||||||
|
Decrease
in restricted cash, net
|
-
|
176
|
|||||
|
Increase
in long term deposit
|
(41
|
)
|
-
|
||||
|
Purchase
of property and equipment
|
(120
|
)
|
(26
|
)
|
|||
|
|
|||||||
|
Net
cash provided by (used in) investing activities
|
(161
|
)
|
150
|
||||
|
|
|||||||
|
Cash
flows from financing activities:
|
|||||||
|
|
|||||||
|
Proceeds
from exercise of options
|
5
|
162
|
|||||
|
|
|||||||
|
Net
cash provided by financing activities
|
5
|
162
|
|||||
|
|
|||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
17
|
131
|
|||||
|
|
|||||||
|
Increase
(decrease) in cash and cash equivalents
|
(51
|
)
|
85
|
||||
|
Cash
and cash equivalents at the beginning of the year
|
1,494
|
1,409
|
|||||
|
|
|||||||
|
Cash
and cash equivalents at the end of the year
|
$
|
1,443
|
$
|
1,494
|
|||
|
|
|||||||
|
Supplemental
disclosure of cash flows activities:
|
|||||||
|
|
|||||||
|
Interest
paid
|
$
|
-
|
$
|
2
|
|||
|
|
|||||||
|
Income
taxes paid
|
$
|
2
|
$
|
2
|
|||
The
accompanying notes are an integral part of the consolidated financial
statements.
F-6
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands
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
and
Digital Power Limited ("DPL"), a wholly-owned subsidiary located
in the
United Kingdom, are currently engaged in the design, manufacture
and sale
of switching power supplies and converters. The Company has two
reportable
geographic segments - North America (sales through DPC) and Europe
(sales
through DPL).
|
|
b.
|
The
Company depends on Telkoor Telecom Ltd. ("Telkoor"), a major
shareholder
of the Company and one of DPC's third party subcontractors for
manufacturing capabilities in production of the products which
DPC sells.
If these manufacturers are unable or unwilling to continue manufacturing
the Company's products in required volumes on a timely basis,
that could
lead to loss of sales, and adversely affect the Company's operating
results and cash position. The Company also depends on Telkoor's
intellectual property and ability to transfer production to third
party
manufacturers. Failure to obtain new products in a timely manner
or delay
in delivery of product to customers will have an adverse effect
on
Company's ability to meet its customers expectation. See also
Note
11.
|
NOTE
2:- SIGNIFICANT
ACCOUNTING POLICIES
The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States ("U.S.
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.
|
|
b.
|
Financial
statements in U.S. dollars:
|
All
of
the revenues of the Company are generated in U.S. dollars ("dollar"). In
addition, a substantial portion of the costs of the Company and its subsidiaries
are incurred in dollars. The Company's management believes that the dollar
is
the currency of the primary economic environment in which the Company operates.
The
financial statements of the foreign subsidiary, whose functional currency
has
been determined to be its local currency, have been translated into U.S.
dollars
in accordance with Statement of Financial Accounting Standard No. 52, "Foreign
Currency Translation" ("SFAS No. 52"). All balance sheet accounts have
been
translated using the exchange rates in effect at the balance sheet date.
Statement of income 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 income (loss) in shareholders'
equity.
F-7
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands
NOTE
2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
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 held on account of a letter of credit issued by the Company's bank
and
in respect of future lease payments and for certain customers until the
guarantee expires. The restricted cash is invested in a deposit.
|
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.
Cost
is
determined as follows:
Raw
materials, parts and supplies - using the "first-in, first-out"
method.
Work-in-progress
and finished products - on the basis of direct manufacturing costs with
the
addition of indirect manufacturing costs.
The
Company periodically assesses its inventories valuation in respect of dead
and
slow moving items by reviewing, 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
2007 and 2006, the Company recorded inventories write-offs of $ 196 and
$ 72, respectively.
|
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 or the life
of
the asset, whichever is earlier
|
F-8
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands
NOTE
2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
The
long-lived assets of the Company and its subsidiary 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.
During
2007 and 2006, no impairment losses have been identified.
|
h.
|
Revenue
recognition:
|
The
Company and its subsidiary generate their revenues from the sale of their
products through a direct and indirect sales force.
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.
Generally,
the Company does not grant a right of return. However, 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 every sixth
month thereafter for 18 months, at no more than 25% of the distributor's
purchase during the previous six months. Revenues subject to stock rotation
rights are deferred until the products are sold to the end customer or
until the
rotation rights expire.
Service
revenues are deferred and recognized on a straight-line basis over the
term of
the service agreement. Service revenues are immaterial as a proportion
of the
Company's revenues.
|
i.
|
Engineering
and product development:
|
Engineering
and product development costs are charged to the statement of operations
as
incurred.
|
j.
|
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.
F-9
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands
NOTE
2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
On
January 1, 2007, the Company adopted FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes, an Interpretation of FASB
Statement
No. 109" (FIN 48). FIN 48 contains a two-step approach to
recognizing and measuring uncertain tax positions accounted for in accordance
with SFAS No. 109. The first step is to evaluate the tax position taken
or
expected to be taken in a tax return by determining if the weight of available
evidence indicates that it is more likely than not that, on an evaluation
of the
technical merits, the tax position will be sustained on audit, including
resolution of any related appeals or litigation processes. The second step
is to
measure the tax benefit as the largest amount that is more than 50% likely
to be
realized upon ultimate settlement.
|
k.
|
Warranty
costs:
|
The
Company offers a 12-month warranty period for all of its products. The
Company
estimates the costs that may be incurred under its warranty and records
a
liability in the amount of such costs at the time product revenue is recognized.
Factors that affect the Company's warranty liability include the number
of
units, historical rates of warranty claims and cost per claim. The Company
periodically assesses the adequacy of its recorded warranty liability and
adjusts the amounts as necessary.
|
A
tabular reconciliation of the changes in the Company's aggregate
product
warranty liability was not provided due to the
immateriality.
|
|
l.
|
Accounting
for stock-based compensation:
|
|
On
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS No. 123(R)") which requires the
measurement
and recognition of compensation expense based on estimated fair
values for
all share-based payment awards made to employees and directors.
SFAS No.
123(R) supersedes Accounting Principles Board Opinion No. 25,
"Accounting
for Stock Issued to Employees" ("APB No. 25"), for periods beginning
in
fiscal year 2006. In March 2005, the Securities and Exchange
Commission
issued Staff Accounting Bulletin No. 107 ("SAB 107") relating
to SFAS No.
123(R). The Company has applied the provisions of SAB 107 in
its adoption
of SFAS No. 123(R).
|
|
Effective
January 1, 2006, the Company adopted SFAS No. 123(R) using the
modified
prospective transition method. Under that transition method,
compensation
cost recognized in the year ended December 31, 2006, includes:
(a)
compensation cost for all share-based payments granted prior
to, but not
yet vested as of January 1, 2006, based on the grant date fair
value
estimated in accordance with the original provisions of SFAS
No. 123, and
(b) compensation cost for all share-based payments granted subsequent
to
January 1, 2006, based on the grant-date fair value estimated
in
accordance with the provisions of SFAS No. 123(R). On December
21, 2005,
the Company accelerated the vesting of all unvested outstanding
employees'
stock options.
|
F-10
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except per share data)
NOTE
2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
SFAS
No.
123(R) requires companies to estimate the fair value of equity-based payment
awards on the date of grant using an option-pricing model. The value of
the
portion of the award that is ultimately expected to vest is recognized
as an
expense over the requisite service periods in the Company's consolidated
income
statements.
The
Company estimates the fair value of stock options granted under SFAS
No.
123(R) using
the
Black-Scholes option- pricing model that uses the assumption as
follows:
Expected
volatility is based on historical volatility that is representative of
future
volatility over the expected term of the options. The expected term of
options
granted was determined based on the simplified method in accordance with
SAB
107, which is calculated as the midpoint between the vesting date and the
end of
the contractual term of the option. The risk free interest rate is based
on the
yield of U.S Treasury bonds with equivalent terms. The dividend yield is
based
on the Company's historical and future expectation of dividends payouts.
The
Company has not paid cash dividend historically and has no plans to pay
cash
dividends in the foreseeable future.
The
Company recognizes compensation expense based on awards ultimately expected
to
vest, net of estimated forfeitures at the time of grant. Estimated forfeitures
are based on historical pre-vesting forfeitures. SFAS 123(R) requires
forfeitures to be estimated and revised, if necessary, in subsequent periods
if
actual forfeitures differ from those estimates.
The
fair
value for options granted in 2007 is amortized over their vesting period
using a
straight-line recognition method and estimated at the date of grant with
the
following assumptions:
|
2007
|
2006
|
||||||
|
Dividend
yield
|
0
|
%
|
0
|
%
|
|||
|
Expected
volatility
|
99.6
-103.1
|
%
|
93.6
- 107.1
|
%
|
|||
|
Risk-free
interest
|
4.5%
- 4.6
|
%
|
4.5%
- 5.03
|
%
|
|||
|
Forfeiture
rate
|
5
|
%
|
5
|
%
|
|||
|
Expected
life of up to
|
7
years
|
5
- 7 years
|
|||||
The
total
equity-based compensation expense related to all of the Company's equity-based
awards, recognized for the 12 months ended December 31, 2007 and December
31,
2006, were comprised as follows:
|
Year
ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Cost
of goods sold
|
$
|
2
|
$
|
2
|
|||
|
Research
and development
|
2
|
3
|
|||||
|
Sales
and marketing
|
17
|
9
|
|||||
|
General
and administrative
|
37
|
15
|
|||||
|
Total
equity-based compensation expense
|
$
|
58
|
$
|
29
|
|||
F-11
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except per share data)
NOTE
2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
A
summary of option activity under the Company's Stock Option Plans
as of
December 31, 2007 and changes during year then ended are as follows:
|
|
Year
ended December 31, 2007
|
|||||||||||||
|
Amount
of
options
|
|
Weighted
Average exercise price
|
|
Weighted-
average remaining contractual term (in years)
|
|
Aggregate
intrinsic
value
|
|||||||
|
Outstanding
at the beginning of the year
|
901,225
|
$
|
1.12
|
||||||||||
|
Granted
|
100,000
|
$
|
1.60
|
||||||||||
|
Exercised
|
(5,000
|
)
|
$
|
1.16
|
|||||||||
|
Forfeited
|
(66,035
|
)
|
$
|
1.40
|
|||||||||
|
Outstanding
at the end of the year
|
930,190
|
$
|
1.15
|
6.01
|
$
|
323
|
|||||||
|
|
|||||||||||||
|
Vested
or expected to vest at year end
|
892,190
|
||||||||||||
|
|
|||||||||||||
|
Exercisable
options at the end of the year
|
740,190
|
$
|
1.06
|
5.30
|
$
|
306
|
|||||||
The
weighted-average grant-date fair value of options granted during the year
ended
December 31, 2007 was $ 1.60. The aggregate intrinsic value in the table
above
represents the total intrinsic value (the difference between the Company's
closing stock price on December 31, 2007 and the exercise price, multiplied
by
the number of in-the-money-options) that would have been received by the
option
holders had all option holders exercised their options on December 31,
2007.
This amount changes based on the fair market value of the Company's shares.
The
total intrinsic value of options exercised during the year ended December
31,
2007 was $ 1.
As
of
December 31, 2007, there was $ 154 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under
the
Company's stock option plans. That cost is expected to be recognized over
a
weighted average period of 2.66 years. The total fair value of options
vested
during the year ended December 31, 2007 was $ 42.
The
Company applies SFAS No. 123 and Emerging Issues Task Force No. 96-18
"Accounting for Equity Instruments That Are Issued to Other Than Employees
for
Acquiring or in Conjunction with Selling, Goods or Services" ("EITF 96-18"),
with respect to options 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.
F-12
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except per share data)
NOTE
2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
m.
|
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 payable and other current liabilities approximate
their
fair value due to the short-term maturity of such instruments.
|
n.
|
Basic
and diluted net earnings per share:
|
Basic
net
earnings 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").
The
total
number of shares related to the outstanding options and warrants excluded
from
the calculations of diluted net earnings per share because these securities
are
anti-dilutive, was 435,368 options and 254,037 options for the years ended
December 31, 2007 and 2006, respectively.
|
o.
|
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 and trade receivables.
Cash
and
cash equivalents and restricted cash are invested in banks in the U.S.
and in
the 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 concentrations of
credit
risk such as foreign exchange contracts, option contracts or other foreign
hedging arrangements.
F-13
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except per share data)
NOTE
2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
| p. |
Recently
Issued Accounting Pronouncements:
|
In
September 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS
No. 157, "Fair Value Measurements" ("SFAS No. 157"). This Standard defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair value
measurements. The provisions of SFAS No. 157 are effective for the
Company beginning January 1, 2008. The FASB issues a FASB Staff Position
(FSP) to defer the effective date of SFAS No. 157 for one year for all
nonfinancial assets and nonfinancial liabilities, except for those items
that
are recognized or disclosed at fair value in the financial statements on
a
recurring basis. The Company does not expect the adoption will have material
impact on its consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS
No. 159 permits companies to choose to measure certain financial
instruments and certain other items at fair value. The standard requires
that
unrealized gains and losses on items for which the fair value option has
been
elected be reported in earnings. The provisions of SFAS No. 159 are
effective for the Company beginning January 1, 2008. The Company does not
expect the adoption of SFAS No. 159 will have an impact on its
consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"). SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
non
controlling interest in the acquiree and the goodwill acquired. SFAS 141R
also establishes disclosure requirements to enable the evaluation of the
nature
and financial effects of the business combination. SFAS 141R is effective
for fiscal years beginning after December 15, 2008. Earlier adoption is
prohibited. The Company does not expect the adoption of SFAS 141R will have
an impact on its consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51". SFAS
No. 160 establishes accounting and reporting standards that require that
the ownership interests in subsidiaries held by parties other than the
parent be
clearly identified, labeled, and presented in the consolidated statement
of
financial position within equity, but separate from the parent's equity;
the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest be clearly identified and presented on the face
of the
consolidated statement of income; and changes in a parent's ownership interest
while the parent retains its controlling financial interest in its subsidiary
be
accounted for consistently. SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. The Company does not expect the adoption of SFAS No. 160
will have an impact on its consolidated financial statements.
F-14
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except per share data)
NOTE
2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
On
December 21, 2007 the SEC staff issued Staff Accounting Bulletin No. 110
(SAB
110), which, effective January 1, 2008, amends and replaces SAB 107,
"Share-Based Payment". SAB 110 expresses the views of the SEC staff regarding
the use of a "simplified" method in developing an estimate of expected
term of
"plain vanilla" share options in accordance with FASB Statement No. 123(R),
Share-Based Payment. Under the "simplified" method, the expected term is
calculated as the midpoint between the vesting date and the end of the
contractual term of the option.
The
use
of the "simplified" method, which was first described in Staff Accounting
Bulletin No. 107, was scheduled to expire on December 31, 2007. SAB 110
extends
the use of the "simplified" method for "plain vanilla" awards in certain
situations. The SEC staff does not expect the "simplified" method to be
used
when sufficient information regarding exercise behavior, such as historical
exercise data or exercise information from external sources, becomes available.
The Company expects to continue using the simplified method. As a result,
the
Company does not expect that the adoption of SAB No. 110 will have a significant
impact on its consolidated financial statements.
NOTE
3:- INVENTORIES
|
December
31,
2007
|
||||
|
Raw
materials, parts and supplies
|
$
|
176
|
||
|
Work
in progress
|
298
|
|||
|
Finished
products
|
1,183
|
|||
|
$
|
1,657
|
|||
NOTE
4:- PROPERTY
AND EQUIPMENT, NET
|
Cost:
|
||||
|
Computers,
software and related equipment
|
$
|
1,083
|
||
|
Office
furniture and equipment
|
209
|
|||
|
Leasehold
improvements
|
543
|
|||
|
|
||||
|
|
1,835
|
|||
|
|
||||
|
Accumulated
depreciation
|
||||
|
Computers,
software and related equipment
|
1,053
|
|||
|
Office
furniture and equipment
|
202
|
|||
|
Leasehold
improvements
|
378
|
|||
|
|
||||
|
1,633
|
||||
|
Depreciated
cost
|
$
|
202
|
||
Depreciation
expenses were $82 and $75 for the years ended December 31, 2007 and 2006,
respectively.
F-15
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except per share data)
NOTE
5:- CONVERTIBLE
NOTE
In
January 2005, the Company entered into a convertible note agreement with
Telkoor, a major shareholder, according to which Telkoor extended a $ 250
interest-free convertible note to be paid on the tenth business day after
the
Company announced its financial results for 2005. The note was convertible
at
any time into Common shares at a rate of $ 1.06 per share, which is equal
to the
quoted market price of the Company's Common shares on the date the note
was
approved and signed. In accordance with the guidelines of APB No. 14,
"Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants",
EITF Issue No. 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Instruments",
and EITF
Issue No. 00-27, "Application of Issue No. 98-5 to Certain Convertible
Instruments", the Company has determined that the note had no beneficial
conversion feature since the conversion price was equal to the quoted market
price of the Company's Common shares at the date the note was approved
and
signed. In April 2006, the entire amount of the convertible note was converted
into 235,849 Common shares.
NOTE
6:- OTHER
CURRENT LIABILITIES
|
December
31,
2007
|
||||
|
|
||||
|
Accrued
payroll and payroll taxes
|
$
|
104
|
||
|
Warranty
accrual
|
86
|
|||
|
Government
authorities
|
2
|
|||
|
Accrued
expenses and other
|
234
|
|||
|
$
|
426
|
|||
NOTE
7:- COMMITMENTS
AND CONTINGENT LIABILITIES
| a. |
Lease
commitments:
|
The
Company and its subsidiary rent their facilities under various operating
lease
agreements, which expire on various dates, the latest of which is in 2012.
The
Company's subsidiary has a lease agreement in respect of the U.K. facility
which
has certain repairing covenants. The Company believes it has made an adequate
provision at December 31, 2007 in respect of such repairing covenants.
F-16
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except per share data)
NOTE
7:- COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)
| a. |
Future
rental commitments under non-cancelable leases are as
follows:
|
|
Year
ended December 31,
|
||||
|
2008
|
$
|
267
|
||
|
2009
|
218
|
|||
|
2010
|
71
|
|||
|
2011
|
72
|
|||
|
2012
|
68
|
|||
|
|
||||
|
$
|
696
|
|||
Total
rent expense for the years ended December 31, 2007 and 2006 was approximately
$ 305 and $ 296, respectively.
| b. |
The
Company is subject to U.S. Export Regulations, including the
Arms Export
Control Act (AECA), associated International Traffic in Arms
Regulations
(ITAR), as well as other federal regulations promulgated by
various
departments within the U.S. Government. The ITAR rules regulate
the export
of technical data and sale of products to other nations which
may use
these products for military purposes. The
failure to comply with present or future regulations could
result in fines
being imposed on the Company, suspension of production, or
a cessation of
operations. Any failure on the Company’s part to obtain any required
licenses for the export of technical data and/or sales of our
products or
to otherwise comply with ITAR, could subject the Company to
significant
future liabilities. The Company currently has an open application
and
voluntary disclosure with the United States State Department
that would
permit the Company to engage in custom power solutions for
the military
market. At present, The Company has placed on hold two existing
programs
pending approval and review by the State Department. The Company
may be
subject to fines or a deferment of revenue pending review by
the State
Department. While the Company cannot predict what the outcome
of this
review will be, the Company believes that any infractions were
minor in
nature and will not have an adverse affect on the Company’s financial
condition and results of
operations.
|
NOTE
8:- SHAREHOLDERS'
EQUITY
|
a.
|
Preferred
shares:
|
There
are
authorized Preferred shares in the amount of 500,000 shares of Series A
cumulative redeemable convertible Preferred shares ("Series A"), and an
additional 1,500,000 Preferred shares that have 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 determine 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, 2007, there were no Preferred shares
issued or outstanding.
|
b.
|
Common
shares:
|
Common
shares confer upon the holders the rights to receive notice to participate
and
vote in the general meeting of shareholders of the Company, to receive
dividends, if and when declared, and to participate in a distribution of
surplus
of assets upon liquidation of the Company. At the annual meeting held on
November 2005, the Company's shareholders approved an amendment to increase
the
authorized number of shares of Common stock from 10,000,000 to
30,000,000.
In
April
2006, the Company issued 235,849 Common shares to Telkoor in consideration
for a
$ 250 convertible note that was exercised.
|
c.
|
Share
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
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except per share data)
NOTE
8:- SHAREHOLDERS'
EQUITY (Cont.)
|
2.
|
As
of December 31, 2007, the Company has authorized in the 1996,
1998, and
2002 Incentive Share Option Plans the grant of options to officers,
management, other key employees and others of up to 513,000,
240,000 and
1,519,000, respectively of the Company's Common shares. For all
three
Incentive Share Option Plans the maximum terms of the options
is ten years
from the date of grant. As of December 31, 2007, an aggregate
of 704,715
of the Company's options are still available for future
grant.
|
|
3.
|
The
options granted generally become fully vested after four years.
Any
options that are forfeited or cancelled before expiration become
available
for future grants.
|
The
options outstanding as of December 31, 2007, have been classified by exercise
price, as follows:
Exercise
price
|
|
Options
outstanding
as
of
December
31,
2007
|
|
Weighted
average
remaining
contractual
life
|
|
Weighted
average
exercise
price
|
|
Options
exercisable
as
of
December
31,
2007
|
|
Weighted
average
exercise
price
of
options
exercisable
|
||||||
|
Years
|
||||||||||||||||
|
$ 0.48-
$ 0.70
|
255,000
|
4.46
|
$
|
0.68
|
255,000
|
$
|
0.68
|
|||||||||
|
$ 0.80-
$ 1.05
|
324,000
|
6.18
|
$
|
1.02
|
324,000
|
$
|
1.02
|
|||||||||
|
$ 1.16-
$ 1.813
|
266,035
|
8.35
|
$
|
1.35
|
87,285
|
$
|
1.20
|
|||||||||
|
$ 1.31-
$ 3.03
|
85,155
|
2.65
|
$
|
2.46
|
73,905
|
$
|
2.38
|
|||||||||
|
930,190
|
6.01
|
$
|
1.15
|
740,190
|
$
|
1.06
|
||||||||||
|
d.
|
Warrants
and options issued to service providers and
consultants:
|
The
Company's outstanding warrant and options to consultants and service providers
as of December 31, 2007, are as follows:
|
Issuance
date
|
Options
for Common shares
|
Exercise
price
per share
|
Options
exercisable
|
|||||||
|
May
2002
|
40,000
|
$
|
1.00
|
40,000
|
||||||
|
August
2002
|
10,000
|
$
|
0.55
|
10,000
|
||||||
|
November
2002
|
10,000
|
$
|
1.00
|
10,000
|
||||||
|
February
2005
|
60,000
|
$
|
1.19
|
30,000
|
||||||
|
March
2006
|
100,000
|
$
|
1.16
|
25,000
|
||||||
|
220,000
|
115,000
|
|||||||||
All
options are exercisable for ten years from the date of grant.
F-18
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except per share data)
NOTE
8:- SHAREHOLDERS'
EQUITY (Cont.)
|
In
2005 and 2006, the Company granted 70,000 options to Telkoor's
employees
and 100,000 options to a consultant. The Company accounted for
its options
to non-employees under the fair value method of SFAS No. 123
and EITF
96-18. Those options vest primarily over four years. The fair
value for
these options was estimated using a Black-Scholes option-pricing
model
with the following assumptions for 2007: risk-free interest rates
of
4.1%-5.1%, dividend yield of 0%, volatility of 91.1%-102.1%,
and the
contractual life of the options of 7.2-9 years. Compensation
expense of $
54 and $ 52 was recognized for the years ended December 31, 2007
and
2006.
|
|
e.
|
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 shares as retirement benefits
to the
participants. The Company has not distributed shares since 1998. As of
December
31, 2007, the outstanding Common shares held by the ESOT amount to 167,504
shares.
|
f.
|
Dividends:
|
In
the
event that cash dividends are declared in the future, such dividends will
be
paid in U.S. dollars. The Company does not intend to pay cash dividends
in the
foreseeable future.
NOTE
9:- TAXES
ON INCOME
|
a.
|
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:
|
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Operating
loss carryforwards
|
$
|
1,366
|
$
|
1,594
|
|||
|
Reserves
and allowances
|
218
|
255
|
|||||
|
|
|||||||
|
Net
deferred tax asset before valuation allowance
|
1,584
|
1,849
|
|||||
|
Valuation
allowance
|
(1,584
|
)
|
(1,849
|
)
|
|||
|
|
|||||||
|
Net
deferred tax asset
|
$
|
-
|
$
|
-
|
|||
As
of
December 31, 2007, the Company and its subsidiary provided a valuation
allowance
of $ 1,584, in respect of deferred tax asset resulting from short-term
temporary
differences and depreciation charged in advance of a capital allowance
taken, as
well as from carryforward losses. During 2007, the Company decreased the
tax
valuation by $ 285.
F-19
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except per share data)
NOTE
9:- TAXES
ON INCOME (Cont.)
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 tax loss carryforwards and other temporary differences
will not
be realized in the foreseeable future.
| b. |
Net
operating tax losses carryforwards:
|
As
of
December 31, 2007, the Company had approximately $ 3,282 in federal net
operating loss carryforward for income tax purposes, which can be carried
forward and offset against taxable income for 20 years and expire in
2020-2027.
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. The Company believes that,
as a
result of having undergone an “Ownership change” within the meaning of section
382 of the Internal Revenue Code in 2002, its ability to use its net operating
loss carryforwards and other tax attributes to offset future U.S. taxable
income, and thereby reduce its tax liability, is severely limited.
As
of
December 31, 2007, DPL had accumulated losses for income tax purposes in
the
amount of approximately $ 1,110. These net operating losses may be carried
forward and offset against taxable income in the future for an indefinite
period.
|
c.
|
The
main reconciling items between the statutory tax rate of the
Company and
its subsidiary and the effective tax rate, are the non-recognition
of tax
benefits resulting from the Company's accumulated net operating
losses
carryforwards due to the uncertainty of the realization of such
tax
benefits.
|
| d. |
Income
before income taxes:
|
The
Company adopted the provisions of FIN 48 on January 1, 2007. The adoption
of FIN
48 did not result in a change to the Company's accumulated deficit. Net
income
(loss) before income taxes consists of the following:
|
Year
ended
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Domestic
(U.S.)
|
$
|
(5 |
)
|
$
|
139
|
||
|
Foreign
(U.K.)
|
125
|
(8 |
)
|
||||
|
$
|
120
|
$
|
131
|
||||
The
Company is required to calculate and account for income taxes in each
jurisdiction in which the Company or its subsidiary operate. Significant
judgment is required in determining its worldwide provision for income
taxes and
recording the related assets and liabilities. In the ordinary course of
the
Company's business, there are many transactions and calculations where
the
ultimate tax determination is uncertain.
F-20
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except per share data)
NOTE
10:- NET
EARNINGS PER SHARE
The
following table sets forth the computation of the basic and diluted net
earnings
per share:
1. Numerator:
|
Year
ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Net
income available to Common shareholders
|
$
|
121
|
$
|
131
|
|||
2. Denominator:
|
Denominator
for basic net earnings per Common share
|
6,611,530
|
6,499,978
|
|||||
|
Effect
of dilutive securities:
|
|||||||
|
Stock
options
|
261,786
|
255,007
|
|||||
|
Convertible
note
|
-
|
83,355
|
|||||
|
|
|||||||
|
Denominator
for diluted net earnings per Common share
|
6,873,316
|
6,838,340
|
|||||
NOTE
11:- RELATED
PARTY TRANSACTIONS
The
results of operations from transactions with Telkoor, a major shareholder,
were
as follows:
|
Year
ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
|
|
|
|
|
|
||
|
Purchases
of products from Telkoor
|
$
|
5,142
|
$
|
4,974
|
|||
Transactions
with Telkoor are derived mainly from purchase of power supplies from
Telkoor.
The
Company believes that the transactions described above, are on a basis
no less
favorable than could be obtained from an independent third party. Although
it is
not practical to determine the amounts that the Company would have incurred
had
it operated as an unaffiliated entity, management believes that the amounts
chargeable for the services provided by these agreements are reasonable.
All
future transactions between the Company and Telkoor will be on terms no
less
favorable than could be obtained from an independent third party.
F-21
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except per share data)
NOTE
12:- SEGMENTS
CUSTOMERS AND GEOGRAPHICAL INFORMATION
|
a.
|
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:
|
Year
ended December 31, 2007
|
|||||||||||||
|
DPC
|
DPL
|
Eliminations
|
Total
|
||||||||||
|
Revenues
|
$
|
5,297
|
$
|
6,860
|
$
|
-
|
$
|
12,157
|
|||||
|
Intersegment
revenues
|
136
|
32
|
(169
|
)
|
-
|
||||||||
|
|
|||||||||||||
|
Total
revenues
|
$
|
5,433
|
$
|
6,893
|
$
|
(169
|
)
|
$
|
12,157
|
||||
|
|
|||||||||||||
|
Depreciation
expense
|
$
|
21
|
$
|
61
|
$
|
-
|
$
|
82
|
|||||
|
|
|||||||||||||
|
Operating
income (loss)
|
$
|
(217
|
)
|
$
|
270
|
$
|
-
|
$
|
53
|
||||
|
Financial
income, net
|
67
|
||||||||||||
|
|
|||||||||||||
|
Tax
benefit
|
1
|
||||||||||||
|
|
|||||||||||||
|
Net
income
|
$
|
121
|
|||||||||||
|
|
|||||||||||||
|
Expenditures
for segment assets as of December 31, 2007
|
$
|
82
|
$
|
38
|
$
|
-
|
$
|
120
|
|||||
|
Identifiable
assets as of December 31, 2007
|
$
|
2,259
|
$
|
4,046
|
$
|
-
|
$
|
6,305
|
|||||
F-22
DIGITAL
POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except per share data)
NOTE
12:- SEGMENTS
CUSTOMERS AND GEOGRAPHICAL INFORMATION (Cont.)
|
Year
ended December 31, 2006
|
|||||||||||||
|
DPC
|
DPL
|
Eliminations
|
Total
|
||||||||||
|
Revenues
|
$
|
5,919
|
$
|
6,712
|
$
|
-
|
$
|
12,631
|
|||||
|
Intersegment
revenues
|
614
|
-
|
(614
|
)
|
-
|
||||||||
|
|
|||||||||||||
|
Total
revenues
|
$
|
6,533
|
$
|
6,712
|
$
|
(614
|
)
|
$
|
12,631
|
||||
|
|
|||||||||||||
|
Depreciation
expense
|
$
|
19
|
$
|
56
|
$
|
-
|
$
|
75
|
|||||
|
|
|||||||||||||
|
Operating
income (loss)
|
$
|
(87
|
)
|
$
|
203
|
$
|
-
|
$
|
116
|
||||
|
|
|||||||||||||
|
Financial
income, net
|
$
|
15
|
|||||||||||
|
|
|||||||||||||
|
Net
income
|
$
|
131
|
|||||||||||
|
Expenditures
for segment assets as of December 31, 2006
|
$
|
21
|
$
|
5
|
$
|
-
|
$
|
26
|
|||||
|
Identifiable
assets as of December 31, 2006
|
$
|
2,437
|
$
|
3,267
|
$
|
-
|
$
|
5,704
|
|||||
|
b.
|
Major
customers' data as percentage of total
revenues:
|
|
Year
ended
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Customer
A
|
13
|
%
|
7
|
%
|
|||
|
|
|||||||
|
Customer
B
|
12
|
%
|
3
|
%
|
|||
|
c.
|
Total
revenues from external customers divided on the basis of the
Company's
product lines is as follows:
|
|
Year
ended
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Revenues:
|
|||||||
|
Commercial
products
|
$
|
9,017
|
$
|
9,476
|
|||
|
Defense
products
|
3,140
|
3,155
|
|||||
|
|
|||||||
|
$
|
12,157
|
$
|
12,631
|
||||
F-23
ITEM
8. Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
ITEM
8A(T). Controls
and Procedures
Evaluation
of Disclosure Controls and Procedures
As
of
December 31, 2007, the Company has carried out an evaluation, under the
supervision of, and with the participation of, the Company's management,
including the Company's chief executive officer and principal financial officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 13a-15(f) under the Securities Exchange
Act of 1934, as amended. Based upon that evaluation, the chief executive
officer
and principal financial officer concluded that the Company’s disclosure controls
and procedures (as defined in Rules 13a-15(e) under the Securities Exchange
Act
of 1934) were effective as of the end of the period covered by the report
to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified by the SEC's rules
and
forms, and that such information is accumulated and communicated to the
Company's management, including its chief executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding required
financial disclosure
22
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(i)
pertain to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (iii) provide reasonable assurance regarding prevention
or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007. In making this assessment, our management
used the criteria set forth by the Committee of Sponsoring Organizations
of the
Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Our
management has concluded that, as of December 31, 2007, our internal control
over financial reporting was effective.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal controls over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
Evaluation
of Changes in Internal Controls over Financial Reporting
There
were no changes in our internal control over financial reporting (as defined
in
Rule 13a-15(f) under the Securities Exchange Act of 1934) during the quarter
ended December 31, 2007 that have materially affected, or are reasonably
likely
to materially affect our internal control over financial reporting.
Item
8B. Other
Information.
None.
23
PART
III
ITEM
9.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The
Company's executive officers and directors and their ages and positions as
of
December 31, 2007 are as follows:
|
Name
|
Age
|
Positions
Held
|
Director
Since
|
||||
|
Jonathan
Wax (1)
|
50
|
President,
CEO & Director
|
2005
|
||||
|
Ben
Zion Diamant
|
57
|
Director
& Chairman of the Board
|
2001
|
||||
|
Amos
Kohn
|
47
|
Director
|
2003
|
||||
|
Yeheskel
Manea
|
62
|
Director
|
2002
|
||||
|
Benjamin
Kiryati
|
60
|
Director
|
2006
|
||||
|
Uri
Friedlander
|
45
|
CFO
& Secretary
|
2007
(2)
|
|
(1)
|
Effective
March 31, 2008, Mr. Wax retired as the Company’s President and Chief
Executive Officer. Mr. Wax also resigned as a director effective
as of
February 29, 2008.
|
|
(2)
|
This
is a reference to the beginning of Mr. Friedlander’s service as CFO and
Secretary.
|
The
current members of the Audit Committee are Messrs. Kohn, Manea and Kiryati.
All
Audit Committee members were determined by the Board to be independent
directors, and Mr. Manea was determined by the Board to be the Audit Committee
Financial Expert.
The
current members of the Compensation Committee are Messrs. Kohn, Manea
and
Kiryati.
All
Compensation Committee members were determined by the Board to be independent
directors
DIRECTORS
Ben-Zion
Diamant
Mr.
Ben-Zion Diamant, 57, has been the Company’s Chairman of the Board since
November 2001. Mr. Diamant was also appointed Interim Chief Executive Officer
of
the Company on February 29, 2008. He has also been Chairman of the Board
of
Telkoor Power Ltd. since 1994. Between 1992-1994, he was a partner and business
development manager of Phascom, and from 1989 to 1992, a partner and manager
of
Rotel Communication. He earned his B.A. in Political Science from Bar-Ilan
University.
24
Amos
Kohn
Mr.
Amos
Kohn, age 48, became a director of the Company in 2003. Mr. Kohn is the Managing
Director and CEO of TechLead corporation ,a high tech company located in
the Bay
Area of California that develops and implements an end-to-end system solutions
for the Telco’s and Multimedia industries. Most recently Mr. Kohn was the Vice
President of Solutions Engineering of ICTV Inc., an innovator in bringing
Web
media to the mass audiences of television utilizing unique approach of MPEG
streaming and processing to deliver personalized clickable video streams.rk
and
driven by Internet standards. In the past Mr. Kohn was the Chief Architect
of
Liberate Technologies, a software company specializing in telecommunications
technology located in San Carlos, California. Prior of 2000, Mr. Kohn was
the
Vice President of Engineering & Technology of Golden Channel, the largest
Cable Operator (MSO) in Israel. Mr. Kohn holds a B.S. in Electrical/Electronic
Engineering.
The
Board
is of the opinion that Mr. Kohn is qualified to serve as an independent
director.
Yeheskel
Manea
Mr.
Yeheskel Manea, 62, 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
B.A. in Economy and Business Administration from Ferris College in Michigan.
The
Board
is of the opinion that Mr. Manea is qualified to serve as an independent
director.
Benjamin
Kiryati
Benjamin
Kiryati, 55, became a Director at Digital Power in October 2006. Mr. Kiryati
was
the Chairman of the Israel Children Fund, a non-profit organization that
helps
the underprivileged. He also served as the mayor of Tiberias, Israel, from
1998 to 2003. Prior to that Mr. Kiryati had distinguished military and
legal careers. He served nine years in the Israeli Military as a combat pilot,
and after graduating in 1978 from the Tel Aviv University school of law he
practiced law in industrial relations.
The
Board
is of the opinion that Mr. Kiryati is qualified to serve as an independent
director
Jonathan
Wax
Mr.
Jonathan Wax, 50, became the Company’s Chief Executive Officer and President in
January 2004. Mr. Wax held vice-president positions with Artesyn Technologies,
Inc., and was stationed both domestically and in the Far East. He held 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 B.S. in Business from the University of Nebraska.
Effective March 31, 2006, Mr. Wax retired as the Company’s President and Chief
Executive Officer, pursuant to a separation agreement entered into between
Mr.
Wax and the Company (the “Separation Agreement”), which is described in this
report. Mr. Wax also resigned as a director effective February 29,
2008.
OTHER
EXECUTIVE OFFICERS
Uri
Friedlander - Chief Financial Officer and Secretary
Mr.
Friedlander, age 45, has been chief financial officer of Telkoor Telecom
Ltd.
Since 1997 and also has been the chief financial officer of Digital Power
from
November 2001 to August 2002.From 1991 to 1996 Mr. Friedlander was a controller
of International Technology Lasers Ltd. And Quality Power supplies ltd.,
members
of Clal Group. From 1987 to 1990, he served as Auditor for Luboshitz Kasierer
(currently Ernst & Young) Public accountants. Mr. Friedlander holds B.A
degree in Accounting and Economics from Tel -Aviv University.
25
Family
Relationships
Two
of
Mr. Manea's children are married to two of Mr. Diamant's children. Mr. Diamant’s
son, Ran Diamant, who is also Mr. Manea’s son-in-law, serves as Telkoor’s Vice
President Control and budget . There are no other relations.
Audit
Committee
The
Board
has established an Audit Committee. The members of the Audit Committee in
2007
were Messrs. Amos Kohn, Yeheskel Manea., and Benjamin Kiryati. All Audit
Committee members were determined by the Board to be independent directors,
and
Mr. Manea was determined by the Board to be the Audit Committee Financial
Expert.
The
Audit
Committee makes recommendations regarding the retention of independent auditors,
reviews the scope of the annual audit undertaken by the Company’s independent
auditors and the progress and results of their work, and reviews the Company’s
financial statements, internal accounting and auditing procedures with respect
to Sarbanes Oxley, and corporate programs to ensure compliance with applicable
laws. The Audit Committee reviews the services performed by the independent
auditor and determines if the services rendered are compatible with maintaining
the independent auditors’ impartial opinion. The Audit Committee’s charter is
reviewed annually, and changes may be required due to industry accounting
practices or the promulgation of new rules or guidance documents. The Audit
Committee has met four times during fiscal 2007.
Section
16(a) Compliance
Section
16(a) of the Exchange Act requires the Company’s executive officers and
directors to file reports of ownership and changes in ownership of its common
stock with the SEC. Executive officers and directors are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms
they
file. Based solely upon a review of Forms 3, 4 and 5 delivered to the Securities
and Exchange Commission during fiscal year 2007, all current directors and
officers of the Company filed on time all required reports pursuant to Section
16(a) of the Securities Exchange Act of 1934.
Code
of Ethics
We have adopted the Code of Ethical Conduct that applies to the Company's
principal executive officer, principal financial officer, principal accounting
officer, controller or person performing similar functions
(collectively, the “Financial Managers”). The
Code
of Ethical Conduct is designed to deter wrongdoing and to promote honest
and
ethical conduct and compliance with applicable laws and regulations. The
full
text of our Code of Ethical Conduct is published on our website at www.digipwr.com.
DPC
shall disclose any
substantive amendments to the Code of Ethical Conduct or any waivers, explicit
or implicit from a provision of the code on its website at www.digipwr.com
or in
a report on Form 8-K.
The
policy of the Nominating Committee regarding the consideration of director
candidates recommended by its shareholders is that the Nominating Sub-Committee
will consider such candidates on the same basis that it considers its own
recommended candidates. If
a
shareholder wishes to formally place a candidate’s name for consideration, he or
she must do so in accordance with the provisions of the Company’s Bylaws.
Suggestions for candidates to be considered by the Board must be sent to
Chief
Financial Officer, Corporate Secretary
26
ITEM
10.
EXECUTIVE COMPENSATION.
The
following table sets forth the annual compensation paid by us to our named
executive officers for services to us in all capacities during 2007 and
2006.
SUMMARY
COMPENSATION TABLE
|
Long
Term Compensation
|
|||||||||||||||||||||||||
|
Annual
Compensation
|
Awards
|
Payouts
|
|||||||||||||||||||||||
|
Restricted
|
|||||||||||||||||||||||||
|
Name
and
|
Other
Annual
|
Stock
|
Option
|
LTIP
|
|||||||||||||||||||||
|
Principal
|
Salary
|
Compensation
|
Award(s)
|
Awards
|
Payouts
|
All
Other
|
Total
|
||||||||||||||||||
|
Position
|
Year
|
($)
|
($)
|
($)
|
($)
|
($)
|
Compensation
|
Compensation
|
|||||||||||||||||
|
Jonathan
Wax,
|
2006
|
$
|
162,323
|
$
|
15,820
|
-
|
4,874
|
-
|
-
|
$
|
183,017
|
||||||||||||||
|
Chief
Executive
|
|||||||||||||||||||||||||
|
Officer
|
2007
|
$
|
162,323
|
$
|
19,167
|
-
|
14,103
|
-
|
-
|
$
|
195,593
|
||||||||||||||
|
Leo
Yen
|
2006
|
$
|
39,600
|
$
|
30,104
|
-
|
3,741
|
-
|
-
|
$
|
73,445
|
||||||||||||||
|
Chief
Financial
|
|||||||||||||||||||||||||
|
Officer
(1)
|
2007
|
$
|
36,720
|
$
|
6,242
|
-
|
4,024
|
-
|
-
|
$
|
46,986
|
||||||||||||||
(1)
Mr.
Leo Yen served as the Company’s Chief Financial Officer until September 30,
2007, after which time he was replaced by Mr. Friedlander.
The
following table sets forth the annual compensation paid by us to our directors
during 2007.
DIRECTOR
COMPENSATION TABLE(1)
|
Fees
Earned
|
|||||||||||||
|
or
Paid in
|
Options
|
All
Other
|
Total
|
||||||||||
|
Cash
|
Awards
|
Compensation
|
Compensation
|
||||||||||
|
Name
|
($)
|
($)
|
($)
|
($)
|
|||||||||
|
Ben-Zion
Diamant
|
$
|
-
|
-
|
-
|
$
|
-
|
|||||||
|
Amos
Kohn
|
$
|
10,000
|
2,012
|
0
|
$
|
12,012
|
|||||||
|
Yeheskel
Manea
|
$
|
15,000
|
2,012
|
0
|
$
|
17,012
|
|||||||
|
Benjamin
Kiryati
|
$
|
2,500
|
682
|
0
|
$
|
3,182
|
|||||||
(1) As
an
employee director of the Company, Mr. Wax was not paid any additional
compensation for his service on the Company’s Board of Directors.
Independent
directors receive $10,000 annually for serving on the Board. The director
designated by the Board as the Audit Committee Financial Expert, receives
an
additional annual fee of $5,000 for serving as the Financial Expert.
In
accordance with the Company’s 2002 Stock Option Plan, each independent director
receives a grant of 10,000 stock options upon joining the Board. In addition,
subject to Board approval, each independent director may be granted on an
annual
basis, stock options for 10,000 shares of Common Stock. Options vest over
four
years. Each option has an exercise price equal to the fair market value of
the
Common Stock on the grant date and a maximum term of ten years, subject to
earlier termination following the optionee’s cessation of Board service.
Employment
Agreements
In
January 2004, the Company entered into an employment agreement with Mr. Jonathan
Wax, 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, it will be required
to pay Mr. Wax a year’s compensation. As a part of the employment contract,
Mr.
Wax
was granted options to purchase 150,000 shares, 37,500 shares vested immediately
and the remainder vested over three years. As of December 2005, all options
were
accelerated as part as the company stock options acceleration.
27
Effective
March 31, 2008, the Employment Agreement was terminated pursuant to the
Separation Agreement. Under the terms of the Separation Agreement, Mr. Wax
was
granted certain severance benefits, including (i) payment by the Company
of
$165,000 less certain deductions, payable in four quarterly installments
beginning April 1, 2008; (ii) continued payments of the Company’s portions of
the cost of providing certain health benefits to Mr. Wax for one year, unless
such coverage is sooner obtained by Mr. Wax from another source; and (iii)
the
ability to exercise any vested options until September 30, 2008. Mr. Wax
is also
subject to a one-year limitation on solicitation of any employee or contractor
of the Company under the terms of the Separation Agreement, and is not permitted
to use any confidential information of the Company to solicit its customers.
As
part of the Separation Agreement, Mr. Wax resigned from his position as director
of the Company effective February 29, 2008. The Separation Agreement also
contained releases of claims by both parties.
On
August
13, 2002, Mr. Friedlander was granted options to purchase 10,000 shares at
an
exercise price of $0.55 and on February 28, 2005, Mr. Friedlander was grated
options to purchase 5,000 shares at an exercise price of $1.19 per share.
Both
grants were under the terms of the Company’s 2002 Stock Option Plan. The shares
vest over a four year period. As of December 31, 2007, 12,500 shares were
vested
The
Compensation Committee of the Board reviews and approves executive compensation
policies and practices, reviews the salaries and the bonuses of the officers,
including the Chief Executive Officer and Chief Financial Officer, administers
the Company’s stock option plan and other benefit plans, and considers other
matters as may, from time to time, be referred to it by the Board
28
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
Name
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Iptions
(#)
Unexercisable
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number of
Shares
or
Units of
Stock
That
Have
Not
Vested
(#)
|
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)
|
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares
Units
or
Other
Rights
That
Have
Not
Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
($)
|
|||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|||||||||||||||||||
|
Jonathan
Wax
|
150,000
|
-
|
-
|
$
|
0.99
|
1/16/2014
|
-
|
-
|
-
|
-
|
||||||||||||||||||
|
50,000
|
$
|
1.70
|
3/4/2017
|
50,000
|
$
|
68,500
|
||||||||||||||||||||||
|
Uri
Friedlander
|
10,000
|
$
|
0.55
|
8/10/2012
|
-
|
-
|
-
|
-
|
||||||||||||||||||||
|
5,000
|
$
|
1.19
|
2/26/2015
|
2,500
|
$
|
3,425
|
||||||||||||||||||||||
ITEM
11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The
following table sets forth certain information regarding beneficial ownership
of
our common stock as of December 31, 2007:
|
Shares
Beneficially Owned(1)
|
|||||||
|
Name
& Address of Beneficial Owner
|
Number
|
Percent
|
|||||
|
Telkoor
Telecom Ltd.
5
Giborei Israel
Netanya
42293
Israel
|
2,897,110
|
43.8
|
% | ||||
|
Ben-Zion
Diamant
|
3,264,614
|
(2)
|
47.9
|
%
|
|||
|
Jonathan
Wax
|
367,504
|
(3)
|
5.4
|
%
|
|||
|
Yeheskel
Manea
|
40,000
|
(4)
|
*
|
||||
|
Amos
Kohn
|
40,000
|
(4)
|
*
|
||||
|
Benjamin
Kiryati
|
20,000
|
||||||
|
Uri
Friedlander
|
15,000
|
(4)
|
|||||
|
Digital
Power ESOP
41324
Christy Street
Fremont,
CA 94538
|
167,504
|
2.5
|
%
|
||||
|
Barry
W. Blank
P.O.
Box 32056
Phoenix,
AZ 85064
|
615,830
|
9.3
|
%
|
||||
|
All
directors and executive officers as a group (5
persons)
|
3,564,614
|
(5)
|
49.40
|
%
|
|||
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 2,897,110 shares
beneficially owned by Telkoor Power Ltd., which may also be deemed
beneficially owned by Mr. Diamant.
|
|
(3)
|
Includes
options to purchase 200,000 shares owned by Mr. Wax and 167,504
shares
owned by Digital Power ESOP of which Mr. Wax is trustee and may
be deemed
beneficial owner.
|
|
(4)
|
Includes
options to purchase 75,000 shares exercisable within 60
days.
|
|
(5)
|
Includes
2,897,110 shares owned by Telkoor Telecom Ltd., which may be deemed
beneficially owned by Mr. Diamant, options to purchase 500,000
shares
owned by directors, and 167,504 shares owned by Digital Power ESOP
of
which Mr. Wax and Mr. Diamant are trustees and may be deemed beneficial
owners.
|
29
|
Number
of
securities
remaining
|
||||||||||
|
Number
of
securities
to be
|
Weighted-average
|
avilable
for
future
|
||||||||
|
issued
upon
exercise
of
|
exercise
price
of
|
issuance
under equity
|
||||||||
|
outstanding
options,
|
outstanding
options,
|
comp.
plans (excluding
|
||||||||
|
warrants
and
rights
|
warrants
and
rights
|
securities
in
column
(a))
|
||||||||
|
Name
|
(a)
|
(b)
|
(c)
|
|||||||
|
Equity
compensation plans
approved by security
holders
|
950,190
|
$
|
1.18
|
704,715
|
||||||
|
Equity
compensation plans
not approved by security
holders
|
150,000
|
$
|
0.99
|
-
|
||||||
|
TOTAL
|
1,100,190
|
$
|
1.14
|
704,715
|
||||||
On
January 17, 2004, the Board granted 150,000 options that are not part of
compensation plans approved by the security holders. There are options to
purchase 150,000 shares of common stock granted in fiscal 2004 to the Company’s
Chief Executive Officer and President at an exercise price of $0.99, vest
25%
annual, beginning January 17, 2004.
During
2002, we issued warrants to purchase 10,000 shares of Common Stock to our
landlord at an exercise price of $1.00 per share and 40,000 shares of Common
Stock to Silicon Valley Bank at and exercise price of $1.00 per share. The
warrants are expiring in 2012.
ITEM
12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Family
Relationships
Two
of
Mr. Manea's children are married to two of Mr. Diamant's children. Mr. Diamant’s
son, Ran Diamant, who is also Mr. Manea’s son in law, serves as Telkoor’s
Corporate Secretary and Controller. There are no other relations.
Business
Relations
Mr.
Leo
Yen served as the Company’s Chief Financial Officer until September 30, 2007,
and is the President of Sagent Management, a financial and tax consulting
firm.
Sagent
Management was hired by the Company to prepare and file the Company’s tax
returns and provide other accounting services. The Company paid Sagent
Management for these services. In addition, the Company paid Sagent Management
for Mr. Yen’s services as the Company’s CFO. The aggregate fees billed by Sagent
Management for professional services rendered in fiscal years ended December
31,
2007 and December 31, 2006, were $45,976 and $ 69,704,
respectively.
Telkoor
Telecom Ltd. ("Telkoor"), is one of DPC's third party subcontractors for
manufacturing capabilities in production of the products which DPC sells.
Transactions with Telkoor are derived mainly from the purchase of power
supplies. For the year ended December 31, 2007 and for the year ended December
31,2006 we purchased from Telkoor $5,142,000 and $4,974,000 respectively.
30
The
Company believes that the transactions described above, are on a basis no
less
favorable than could be obtained from an independent third party. Although
it is
not practical to determine the amounts that the Company would have incurred
had
it operated as an unaffiliated entity, management believes that the amounts
chargeable for the services provided by these agreements are reasonable.
All
future transactions between the Company and Telkoor will be on terms no less
favorable than could be obtained from an independent third party.
Independent
Directors:
The
following persons are considered independent directors:
Yeheskel
Manea
Amos
Kohn
Benjamin
Kiryati
The
Company uses its own definition of what constitutes independence and this
will
be included in future proxy statements.
ITEM
13.
EXHIBITS
(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
|
| 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.
(now
Telkoor Power Ltd.) (7)
|
| 10.11 |
Securities
Purchase Agreement between the Company and Telkoor Telecom, Ltd.
(now
Telkoor Power Ltd.) (8)
|
| 10.12 |
Employment
Letter with David Amitai (9)
|
| 10.13 |
Employment
Agreement with Jonathan Wax (9)
|
| 10.14 |
Convertible
Note with Telkoor Power Ltd. (10)
|
| 10.15 |
Separation
Agreement with Jonathan Wax
|
| 14 |
Code
of Ethics
|
31
| 21.1 |
The
Company's sole subsidiary is Digital Power Limited, a corporation formed
under the laws of the United
Kingdom.
|
| 23.1 |
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
|
| 99.1 |
Charter
of the Board’s Audit Committee
|
| 99.2 |
Charter
of the Board’s Nominating and Corporate Governance
Committee
|
| (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.
|
| (9) |
Previously
filed with the Commission with its Form 10-KSB for the year ended
December
31, 2003.
|
| (10) |
Previously
filed with the Commission with its Form 8-K filed on February 9,
2005.
|
| (11) |
Previously
filed with the Commission with its Form 8-K filed on February 8,
2006.
|
ITEM
14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
E&Y
served as our independent auditors for the annual audit since the fiscal
year
ended December 31, 2002. In accordance with a resolution of the Audit Committee,
this appointment is being presented to shareholders for ratification at this
meeting. If the shareholders do not ratify the appointment of E&Y, the Audit
Committee will reconsider their appointment. A representative of E&Y will be
present at the annual meeting and will have the opportunity to make a statement
if desired, and be available to answer any questions from stockholders.
Related
Business
E&Y
serves also as the independent auditors of Telkoor, the largest shareholder
of
the Company. The Company’s business and Telkoor’s business are handled by
separate teams within E&Y.
Audit
Fees
The
aggregate fees billed by E&Y for professional services rendered for the
audit of the Company's financial statements for the fiscal years ended December
31, 2007 and December 31, 2006, were $123,000 and $123,000,
respectively.
Audit-Related
Fees
The
aggregate fees billed for assurance and related services by the principal
accountant, which are reasonably related to the performance of the audit
or
review of the Company's financial statements for the fiscal years ended December
31, 2007, and December 31, 2006, were $0 for each such year.
Tax
Fees
The
aggregate fees billed for tax compliance, tax advice, and tax planning rendered
by our independent auditors for the fiscal years ended December 31, 2007,
and
December 31, 2006, were $0 for each such year.
32
All
Other Fees
The
aggregate fees billed for all other professional services rendered by the
Company’s independent auditors for the fiscal years ended December 31, 2007, and
December 31, 2006, were $0 and $0, respectively.
The
Audit
Committee approved 100% of the fees paid to the principal accountant for
audit-related, tax and other, fees in fiscal 2007. The Audit Committee
pre-approves all non-audit services to be performed by the auditor in accordance
with the Audit Committee Charter.
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.
|
DIGITAL
POWER CORPORATION,
a
California Corporation
|
||
| |
|
|
| Dated: March 31, 2008 | /s/ Ben-Zion Diamant | |
|
Ben-Zion Diamant, |
||
|
Chief
Executive Officer
(Principal
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.
| Dated: March 31, 2008 | /s/ Ben Zion Diamant | |
|
Ben Zion Diamant, Chairman |
||
| Dated: March 31, 2008 | /s/ Ben-Zion Diamant | |
|
Ben-Zion Diamant, |
||
|
Chief
Executive Officer
(Principal
Executive Officer)
|
||
|
|
||
| Dated: March 31, 2008 | /s/ Amos Kohn | |
|
Amos Kohn, Director |
||
| Dated: March 31, 2008 | /s/ Yeheskel Manea | |
|
Yeheskel Manea, Director |
||
| Dated: March 31, 2008 | /s/ Benjamin Kiryati | |
|
Benjamin Kiryati, Director |
||
| Dated: March 31, 2008 | /s/ Uri Friedlander | |
|
Uri Friedlander, Chief Financial Officer |
||
|
(Principal
Accounting and Financial Officer)
|
||
33