U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended December 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from _____ to _____
DIGITAL POWER CORPORATION
(Exact name of registrant as specified in its charter)
California 3679 94-1721931
---------- ---- ----------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
41920 Christy Street, Fremont, California 94538-3158; 510-657-2635
(Address and telephone number of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act:
Title of Each Class
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934,
during the preceding 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Revenues for the year ended December 31, 2001, were $10,329,857.
As of March 15, 2002, the aggregate market value of the voting common stock held
by non-affiliates was approximately $2,804,185 based on the closing price of
$0.80 per share.
As of March 15, 2002, the number of shares of common stock outstanding was
4,510,680.
Documents Incorporated by reference. The information required by Items 9, 10,
11, and 12 of Part III are incorporated by reference to the Company's proxy
statement which will be filed within 120 days of the registrant's year end.
Transitional Small Business Disclosure Format (check one): Yes No |X|
2
With the exception of historical facts stated herein, the following
discussion may contain forward-looking statements regarding events and financial
trends which may affect Digital Power's future operating results and financial
position. Such statements are subject to risks and uncertainties that could
cause Digital Power's actual results and financial position to differ materially
from those anticipated in such forward-looking statements. Factors that could
cause actual results to differ materially include, in addition to other factors
identified in this report, a high degree of customer concentration, the fact
that we have experienced substantial losses from our operations, dependence on
the computer and electronic equipment industries, competition in the power
supply industry, and expenses related to the operation of our Guadalajara,
Mexico facility, all of which factors are set forth in more detail in the
sections entitled "Certain Considerations" and "Management's Discussion and
Analysis or Plan of Operation" herein. Readers of this report are cautioned not
to put undue reliance on "forward looking" statements which are, by their
nature, uncertain as reliable indicators of future performance. Digital Power's
disclaims any intent or obligation to publicly update these "forward looking"
statements, whether as a result of new information, future events, or otherwise.
As used in this annual report, the terms "we," "us," "our," the "Company,"
"Digital" or "Digital Power" mean Digital Power Corporation and its subsidiaries
unless otherwise indicated.
PART I.
Item 1. Description of Business
General
We are a California corporation originally formed in 1969. Our corporate
office is located in Fremont, California. We have a manufacturing facility in
Guadalajara, Mexico, and a design, manufacturing, and sales facility in
Salisbury, England. We design, develop, manufacture, and sell 50 watt to 750
watt switching power supplies and DC/DC converters to original equipment
manufacturers ("OEMs") of computers and other electronic equipment. Through our
subsidiary Digital Power Limited, we also design, manufacture and sell
uninterruptible power supplies, power conversion and distribution equipment for
naval and military applications and DC/AC inverters primarily for the
telecommunications industry in Europe under the label Gresham Power Electronics.
We primarily sell our power supplies to the computer and telecommunications
industries. Both in the United States and Europe, these industries have
experienced reductions in sales which have adversely affected our operations and
financial condition. As a result, we experienced a cash shortage and incurred
substantial losses during the year ended December 31, 2001. To obtain working
capital, we entered into a securities purchase agreement with Telkoor Telecom
Ltd., an Israeli company. Under the terms of the securities purchase, Telkoor
Telecom invested $1,250,000 in us in exchange for 1,250,000 shares of our common
stock and warrants to purchase 1,900,000 shares of our common stock. This
transaction resulted in a change in control of our management and board of
directors.
Power supplies are critical components of electronic equipment that supply,
convert, distribute, and regulate electrical power. The various subsystems
within electronic equipment require a steady supply of direct current (DC)
electrical power, usually at different voltage levels from the other subsystems
within the equipment. In addition, the electronic components and subsystems
require protection from the harmful surges and drops in electrical power that
commonly occur over power lines.
3
Power supplies satisfy these issues of allocation and protection by (i)
converting alternating current (AC) electricity into DC; (ii) by dividing a
single input voltage into distinct and isolated output voltages; and (iii) by
regulating and maintaining such output voltages within a narrow range of values.
Products which convert AC from a primary power source into DC are generally
referred to as "power supplies." Products which convert one level of DC voltage
into a higher or lower level of DC voltage are generally referred to as "DC/DC
converters." "Switching" power supplies are distinguished from "linear" power
supplies by the manner and efficiency with which the power supply "steps down"
voltage levels. A linear power supply converts an unregulated DC voltage to a
lower regulated voltage by "throwing away" the difference between the two
voltages as heat. Consequently, the linear power supply is inherently
inefficient-typically only 45% efficient for a 5V output regulator. By contrast,
a switching power supply converts an unregulated DC voltage to a lower regulated
voltage by storing the difference in a magnetic field. When the magnetic field
grows to a pre-determined level, the unregulated DC is switched off and the
output power is provided by the energy stored in the magnetic field. When the
field is sufficiently depleted, the unregulated DC is switched on again to
deliver power to the output while the excess voltage is again stored in the
magnetic field. As a result, the switching power supply is more
efficient-typically 75% efficient for a 5V output regulator.
One of the great advantages of switching power supplies, in addition to the
high efficiency, is their high power density, or power-to-volume ratio. This
density is the result of the reduction in the size of the various components.
Our switching power supply products have a high power density and are generally
smaller than those of competitors. For example, to the best of our knowledge our
US100 series of power supplies, when originally introduced on a 3"x 5" printed
circuit board, was the smallest 100 watt off-line (AC input) power supply
available in the industry.
Another advantage of our power supply products is the extreme flexibility
of design. We have designed the base model power supply products so that they
can be quickly and inexpensively modified and adapted to the specific power
supply needs of any OEM. This "flexibility" approach has allowed us to provide
samples of modified power supplies to OEM customers in only a few days after
initial consultation, an important capability given the emphasis placed by OEMs
on "time to market." This "flexibility" approach also results in very low
non-recurring engineering (NRE) expenses. Because of reduced NRE expenses, we do
not charge our OEM customers for NRE related to tailoring a power supply to a
customer's specific requirements. This gives us a distinct advantage over our
competitors, many of whom do charge their customers for NRE expenses. Our
marketing strategy is to exploit this combination of high power density, design
flexibility, and short time-to-market to win an increasing share of the growing
power supply market.
In addition to the line of proprietary products offered, and in response to
requests from OEMs, we also provide "value-added services." The term
"value-added services" refers to our incorporation of an OEM's selected
electronic components, enclosures, and cable assemblies with our power supply
products to produce a power subassembly that is compatible with the OEM's own
equipment and specifically tailored to meet the OEM's needs. We purchase parts
and components that the OEM itself would otherwise attach to or integrate with
our power supply, and we provide the OEM with that integration and installation
service, thus saving the OEM time and money. We believe that this value-added
service is well-suited to those OEMs who wish to reduce their vendor base and
minimize their investment in manufacturing which leads to increased fixed costs.
Based on the value-added services, the OEMs do not need to build assembly
facilities to manufacture their own power subassemblies and thus are not
required to purchase individual parts from many vendors.
4
We are a California corporation originally formed in 1969 through a
predecessor. Unless the context indicates otherwise, any reference to "Digital
Power" herein includes our wholly-owned Mexican subsidiary, Poder Digital S.A.
de C.V. and our wholly-owned United Kingdom subsidiary, Digital Power Limited,
dba Gresham Power Electronics. Further, unless otherwise indicated, reference to
dollars in this report shall mean United States dollars.
Telkoor Telecom Ltd.
On November 20, 2001, we completed a securities purchase agreement with
Telkoor Telecom. Under the securities purchase agreement, Telkoor Telecom
acquired (i) 1,250,000 shares of common stock (ii) a warrant to purchase an
additional 900,000 shares of common stock at $1.25 per share; and (iii) a
warrant to purchase an additional 1,000,000 shares of common stock at $1.50 per
share for the aggregate purchase price of $1,250,000. The 900,000 share warrant
will expire sixty (60) days after the Company files its Form 10-KSB for the year
ending December 31, 2002, and the 1,000,000 share warrant will expire on
December 31, 2003.
Further, pursuant to the securities purchase agreement, Telkoor Telecom has
the right to appoint a majority of the Board of Directors. The Board of
Directors now consists of Mr. Ben-Zion Diamant, Chairman of the Board, Mr. David
Amitai, Mr. Mark L. Thum, Mr. Robert O. Smith and Mr. Josef Berger. Mr. Amitai
has also been appointed as President and Chief Executive Officer, and Mr. Uri
Friedlander has been appointed Chief Financial Officer. Mr. Robert Smith, the
Company's previous President and Chief Executive Officer serves as a consultant
to the Company.
Telkoor Telecom is primarily engaged in developing, marketing and selling
power supplies and power systems for the telecommunication equipment industry.
It hoped that we will be able to utilize Telkoor Telecom's engineering expertise
to assist us in the development of our products. Further, we would like to offer
Telkoor Telecom's products in the United States and we are hopeful that we will
be able to sell our products through Telkoor Telecom. Telkoor Telecom used its
own funds to purchase the securities. Telkoor Telecom's initial investment of
1,250,000 shares represents approximately 28% of the outstanding shares, with
the right to increase their ownership to 49% assuming all of the warrants are
exercised.
Digital Power Limited
In 1998, we acquired the assets of Gresham Power Electronics. Headquartered
in Salisbury, England, Digital Power Limited designs, manufactures, and
distributes switching power supplies, uninterruptible power supplies, and
frequency converters for the commercial and military markets under the name
Gresham Power Electronics. Uninterruptible power supplies (UPS) are devices that
are inserted between a primary power source and the primary power input of the
electronic equipment to be protected for the purpose of eliminating the effects
of transient anomalies or temporary outages. A UPS consists of an inverter that
is powered by a battery that is kept trickle-charged by rectified AC from an
incoming power line. In the event of a power interruption, the battery takes
over without the loss of even a fraction of a cycle in the AC output of the UPS.
The battery also provides protection against transients. A frequency converter
is an electronic unit for speed control of a phase induction motor. The
frequency converters manufactured by Digital Power Ltd. are used to convert a
warship's generated 60 cycle electricity supply to 400 cycles. This 400 cycle
supply is used to power critical equipment such as the ship's gyro, compass and
weapons systems. The acquisition of Gresham Power Electronics has diversified
our product line, provided greater access to the United Kingdom and European
5
markets, and strengthened our engineering and technical resources. For the year
ended December 31, 2001, Digital Power Limited contributed approximately 37% to
our gross revenues.
The Market
Since virtually all electronic equipment requires power supplies, the
overall market for power supplies is very large. The growth of the power supply
industry has paralleled that of the general electronics industry. Since 1994,
growth has escalated at an even faster pace, fueled by the demand for networking
communications equipment and computing equipment and its peripherals. Future
growth is expected to come from the same markets, as Internet and intranet
networking and cellular and digital telephones continue to become popular around
the world. However, since the middle of year 2000, the power supply industry has
experienced a substantial decrease in sales due to the overall decline in the
electronic equipment industry.
The electronic power supply market is typically split into "captive" and
"merchant" market segments. The captive segment of the market is represented by
OEMs who design and manufacture power supplies for use in their own products.
The remaining power supply market is served by merchant power supply
manufacturers, such as Digital Power, that design and manufacture power supplies
for sale to OEMs.
We believe that the merchant market is the more favorable segment of the
power supply market, as OEMs are expected to continue to outsource their power
supply requirements. We believe that this is due, in part, to the fact that
power supplies are becoming an increasingly complex component in the eyes of
OEMs, with constantly changing requirements such as power factor correction
(PFC) and filtering specifications to minimize electromagnetic interference
(EMI).
The power supply market can also be divided between "custom" and "standard"
power supplies. Custom power supplies are those that are customized in design
and manufactured with a specific application in mind, whereas standard power
supplies are sold off-the-shelf to customers whose electronic equipment can
operate from standard output voltages such as 5, 12, or 24 volts. Power supplies
in the captive market that are designed and manufactured by an OEM for use in
its own equipment are an example of a custom design, as the product is not
intended for resale. However, custom power supplies are also common in the
merchant market, as certain OEMs contract with power supply manufacturers to
design a product that meets the form, fit, and function requirements of that
OEM's specific application. A subset of the standard segment of the market has
evolved, commonly known as the "modified standard" segment, comprising power
supply products that have the performance characteristics of a standard power
supply, but require certain, usually minor, modifications. These modifications
typically involve an adjustment to one of the standard output voltages, such as
from 5 volts to 7 volts, or from 15 volts to 18.5 volts.
The power supply industry is highly fragmented. There are approximately 300
domestic merchant power supply competitors in the United States, with over 200
that generate less than $5 million in revenues. No one manufacturer holds more
than ten percent of the total market. The merchant market segment is also highly
fragmented according to the power level, technology, packaging, or application
of a merchant's particular power supply. Most merchant manufacturers concentrate
on niche markets, whether power ranges or industry segments.
6
With no industry standards for power supplies, it is very difficult to
design out an existing power supply component, which prevents large companies
from quickly gaining market share. The key to being a profitable manufacturer is
to have long-term expertise in power electronics and to be able to provide
products needed by customers. We have targeted and serve the industrial and
office automation, industrial and portable computing, and networking
applications niches of the merchant market. We believe that our focus on
high-efficiency, high-density, design-flexible power supplies is ideally suited
to the rapid growth opportunities existing in this market segment.
Geographically, we primarily serve the North American power electronics
market with AC/DC power supplies and DC/DC converters ranging from 50 watts to
750 watts of total output power. Digital Power Ltd. serves the United Kingdom
and the European marketplace with AC/DC power supplies, uninterruptible power
supplies, and frequency inverters. Both commercial and government (Ministry of
Defense) markets are served by Digital Power Ltd.
Customers
Our products are sold domestically and in Canada through a network of 14
manufacturers' representatives. We also have 19 stocking distributors in the
United States and Europe. In addition, we have formed strategic relationships
with one of our customers to private label our products. Our customers can
generally be grouped into three broad industries, consisting of the computer,
telecommunication, and instrument industries. We have a current base of over 150
active customers, including companies such as Telex, Dot Hill, Motorola, Extreme
Networks, Foundry Networks, JDS Uniphase, Ericsson, British Telecom and Lucent.
Gresham Power Electronic products are sold primarily in the United Kingdom
and to a lesser extent in Europe. Our customers in Europe include the United
Kingdom Ministry of Defense, Vosper Thorney Croft, Emerson and Seimens.
Strategy
Our strategy is to be the supplier of choice to OEMs requiring a
high-quality power solution where size, rapid modification, and time-to-market
are critical to business success. Target market segments include
telecommunications, networking, switching, mass storage, and industrial and
office automation products. 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" concept allows customers a unique choice between our products and
products offered by other power supply competitors. OEMs have typically had to
settle for a standard power supply product with output voltages and other
features predetermined by the manufacturer. Alternatively, if the OEM's product
required a different set of power supply parameters, the OEM was forced to
design this modification in-house, or pay a power supply manufacturer for a
custom product. Since custom-designed power supplies are development-intensive
and require a great deal of time to design, develop, and manufacture, only OEMs
with significant volume requirements can economically justify the expense and
delay associated with their production. Furthermore, since virtually every power
conversion product intended for use in commercial applications requires certain
independent safety agency testing at considerable expense, such as by
Underwriters Laboratories, an additional barrier is presented to the smaller
7
OEM. By offering OEM customers a new choice with Digital Power "flexibility"
series, we believe we have an advantage over our competitors. Our "flexibility"
series is designed around a standardized power platform, but allows the customer
to specify output voltages tailored to its exact requirements within specific
parameters. Furthermore, OEMs are seeking power supplies with greater power
density and higher efficiency. Digital Power's strategy in responding to this
demand has been to offer increasingly smaller power supply units or packages.
Product Strategy and Products
We have ten series of base designs from which thousands of individual
models can be produced. Each series has its own printed circuit board (PCB)
layout that is common to all models within the series regardless of the number
of output voltages (typically one to four) or the rating of the individual
output voltages. A broad range of output ratings, from 2.0 volts to 48 volts,
can be produced by simply changing the power transformer construction and a
small number of output components. Designers of electronic systems can determine
their total power requirements only after they have designed the system's
electronic circuitry and selected the components to be used in the system. Since
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 since the holes are eliminated and components can be placed on
both sides of the board. Our US100 series is an example of a product using this
manufacturing technology.
Digital Power's "flexibility" concept applies to all of our US, UP/SP, DP
and UPF product series. A common printed circuit board is shared by each model
in a particular family, resulting in a reduction in parts inventory while
allowing for rapid modifiability into thousands of output combinations. The
following is a description of our products.
The US50 series of power supplies consists of compact, economical, high
efficiency, open frame switchers that deliver up to 50 watts of continuous
power, or 60 watts of peak power, from one to four outputs. The 90-264 VAC
universal input allows them to be used worldwide without jumper selection.
Flexibility options include power good signal, an isolated V4 output, and UL544
(medical) safety approval. All US50 series units are also available in 12VDC,
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 (medical) safety approval. The DP70 is
the same as the US70 except the input is 48 volts DC. We also offer 12 & 24VDC
DC input on this series where the model series changes to DN & DM. This type of
product is ideal for low profile systems, with the power supply measuring 3.2" x
5" x 1.5".
8
The US100/DP100 is the industry's smallest 100 watt switcher. 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. 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 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. The UP300 is also available as the SP300 series, which is jumper
selectable between 115 and 230VAC and provides the OEM an even more economical
solution. 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 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 US350 series is a full-featured unit that has active power factor
correction and was designed to be field-configurable by our international and
domestic sales channels. This feature allows the stocking distributor to lower
its inventory costs but still maintain the required stock to rapidly provide
power supplies with the unique combination of output voltages required by an
OEM. This unit delivers 350 watts from one to four output modules and meets the
total harmonic distortion spec EN 61000-3-2. The US350 has an on-board EMI
filter and operates from 90-264 VAC input. This unit measures 9" x 5" x 2.5". It
can operate without any minimum loads and has an optional internal fan and power
fail/power good signal.
Two of our newer products are the UPF 150 and UPF 300 series. The UPF 150
is an open-frame switcher that delivers up to 150watts of continuous power from
one to four outputs. The UPF 150 is endowed with power factor correction and a
Class B EMI filter, making the series particularly well-suited for those
customers selling into the international market place. Also incorporating active
power factor correction, the UPF 300 delivers up to 300 watts from one or two
outputs and measures 8" x 4.5" x 2".
We also offer our customers various types of value-added services, which
may include the following additions to their standard product offerings:
9
Electrical (power): Paralleled power supplies for (N+1) redundancy, hot
swapability, output OR'ing diodes, AC input receptacle with fuse, external EMI
filter, on/off switch, cabling and connectors, and battery backup with charger.
Electrical (control and monitoring): AC power fail detect signal, DC
output(s) OK signal, inhibit, output voltage margining, and digital control
interface.
Mechanical: Custom hot-plug chassis for (N+1) redundant operation, locking
handle, cover, and fan.
These services incorporate one of our base products along with additional
enclosures, cable assemblies, and other electronic components to arrive at a
power subassembly. This strategy matches with those OEMS wishing to reduce their
vendor base, as the turnkey sub-assembly allows customers to eliminate other
vendors.
Other than certain fabricated parts such as printed circuit boards and
sheet metal chassis which are readily available from many suppliers, we use no
custom components.
Gresham Power Electronics' primary product lines include the following:
Military Power Supplies. Design and manufacture of AC and DC power
conversion equipment which is intended for naval and other applications where
arduous duties demand quality and reliability. Products include transformer
rectifier units to 15KVA and Static Frequency Converters to 5KVA.
Commercial Component Power Supplies. Distribution and service of all
Digital Power's product lines to non-American markets.
Uninterruptible Power Supplies. Distribution and service of uninterruptible
power supplies mainly to the United Kingdom telecommunications industry.
Products offered range from 250VA to 100KVA but main market is up to 10KVA.
Telecommunications Inverters. Design and manufacture of DC to AC sine-wave
inverters. Rugged equipment intended for use in remote areas for the support of
mobile telecommunications installations.
Through our relationship, we intend to sell certain products currently
offered by or under development by Telkoor Telecom. These products include the
Telkoor Telecom's CompactPCI family of products and the eF 175 and eF 306 power
supplies currently under development. The CompactPCI products are high density,
high efficiency, and unique form factor power supplies for the CompactPCI -
standard platforms, telecommunication hubs, high reliability servers and
redundant power systems applications. The eF175 and eF 306 are currently under
development and are anticipated to replace our UPF 150 and 300 series.
Manufacturing Strategy
Consistent with our product flexibility strategy, we aim to maintain a high
degree of flexibility in our manufacturing processes in order to respond to
rapidly changing market conditions. The competitive nature of the power supply
industry has placed continual downward pressure on selling prices. In order to
achieve low cost manufacturing with a labor-intensive product, manufacturers
have the option of automating much of the labor out of their product, or
producing their product in a low labor cost environment. Given the high fixed
costs of automation and the resistance this places on making major product
changes, we believe that our flexible manufacturing strategy is best achieved
10
through a highly variable cost of operation. In 1986, we established a wholly
owned subsidiary in Guadalajara, Mexico to assemble our products. This
manufacturing facility performs materials management, sub-assembly, final
assembly, and test functions for the majority of our power supply products.
Currently, almost all of our manufacturing, including our value-added services,
is done at a 16,000 square foot facility operated by our wholly owned
subsidiary, Poder Digital, S.A. de C.V., located in Guadalajara, Mexico.
During the year ended December 31, 2001, our operating costs at the
Guadalajara, Mexico ("Mexico") manufacturing facility exceed our revenues. As a
result we took steps to reduce these operating costs including the lay off of a
number of workers. During 2001, we experienced charges of $658,000 related to
the severance of employees in Mexico. Currently, we have production over
capacity in Mexico. Although we intend to lay off more employees in Mexico,
under Mexican law, employees are entitled to severance pay if they are laid off.
At this time, we do not have sufficient funds to pay the severance cost to
further reduce our operating cost in Mexico. We are continuing to analyze our
operations in Mexico in order to determine ways to further reduce our costs.
In addition, we have a vendor relationship with Fortron/Source Corp. to
manufacture our products at a facility located in China on a turnkey basis.
Purchases from Fortron/Source will be made pursuant to purchase orders and the
agreement may be terminated upon 120 days notice. We are manufacturing
approximately 8.30% of our product requirements through Fortron/Source and
expect to increase these production levels due to cost advantages achieved
through Chinese procurement.
Digital Power Limited Manufacturing
Digital Power Limited is ISO9001-1 certified and operates from a 25,000 sq.
ft leased facility located in Salisbury U.K.
The products manufactured in Salisbury are physically different from those
produced in Mexico, but the factory is organized on similar lines; where all
procurement of component parts is out-sourced with only final assembly, test and
quality assurance taking 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. The company operates a fully
integrated production control and accounting system.
Sales, Marketing and Customers
During 2001, we had revenues of $10,329,857 and net loss of $7,040,720
compared to revenues of $17,882,730 and net income of $95,167 during fiscal year
2000.
Digital Power markets its products through a network of thirteen domestic
and one Canadian independent manufacturers' representatives. Each representative
organization is responsible for managing sales in a particular geographic
territory. Generally, the representative has exclusive access to all potential
customers in the assigned territory and is compensated by commissions at 5% of
net sales after the product is shipped, received, and paid for by the customer.
Typically, either we or the representative organization may terminate the
agreement with 30 day's written notice.
11
In certain territories, we have entered into agreements with 20 domestic
and 11 international stocking distributors who buy and resell our products. For
the fiscal years ended December 31, 2001 and 2000, domestic distributor sales
accounted for 16.15% and 31.6%, respectively, of our total sales. Over this same
period, one distributor accounted for 12.62%, and 11.6%, respectively, of total
sales. In addition, international sales through stocking distributors accounted
for less than 2.36% of our sales. In general, the agreements with stocking
distributors are subject to annual renewal and may be terminated upon 90 days'
written notice. Although these agreements may be terminated by either party in
the event a stocking distributor decides to terminate its agreement with us, we
believe that we would be able to continue the sale of our products through
direct sales to the customers of the stocking distributor. Further, and in
general, stocking distributors are eligible to return 25% of their previous
six-months' sales for stock rotation. For the past three years, stock rotations
have not exceeded one percent of total sales.
We have also entered into agreements with one private label customer who
buy and resell our products. Under these agreements, we sell our products to the
private label company who then resells the products with its label to its
customers. We believe that these private label agreements expand our market by
offering the customer a second source for our products. The private label
agreements may be terminated by either party. Further, the private label
agreement requires that any product subject to a private label be available for
five years. For the years ended December 31, 2001 and 2000, private label sales
accounted for 2.39% and 3.1%, respectively, of total sales.
Our promotional efforts to date have included product data sheets, feature
articles in trade periodicals, trade shows and Internet Web sites. Our future
promotional activities will likely include space advertising in
industry-specific publications, a full-line product catalog, application notes,
and direct mail to an industry-specific mail list.
Our products are warranted to be free of defects for a period ranging from
one to two years from date of shipment. No significant warranty returns were
experienced in either 2001 or 2000. As of December 31, 2001 and 2000, our
warranty reserve was $201,094 and $324,602, respectively.
Competition
The merchant power supply manufacturing industry is highly fragmented and
characterized by intense competition. Our competition includes over 500
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 PowerOne,
Artesyn Technologies, Inc., ASTEC America, Lambda Electronics, and American
Power Conversion have substantially greater fiscal and marketing resources and
geographic presence than we do. If we are successful in increasing our revenues,
competitors may notice and increase competition for our customers. We also face
competition from current and prospective customers who may decide to design and
manufacture internally the power supplies needed for their products.
Furthermore, certain larger OEMs tend to contract only with larger power supply
manufacturers. This factor could become more problematic to us if consolidation
trends in the electronics industry continue and some of the OEMs to whom we sell
our products are acquired by larger OEMs. To remain competitive, management
believes that we must continue to compete favorably on the basis of value by
providing advanced manufacturing technology, offering superior customer service
and design engineering services, continuously improving quality and reliability
levels, and offering flexible and reliable delivery schedules. We believe we
have a competitive position with our targeted customers who need a high-quality,
compact product which can be readily modified to meet the customer's unique
12
requirements. However, there can be no assurance that we will continue to
compete successfully in the power supply market.
Research and Development
Our research and development efforts are primarily directed toward the
development of new standard power supply platforms which may be readily modified
to provide a broad array of individual models. Improvements are constantly
sought in power density, modifiability, and efficiency, while we attempt to
anticipate changing market demands for increased functionality, such as PFC and
improved EMI filtering. Internal research is supplemented through the
utilization of consultants who specialize in various areas, including component
and materials engineering and electromagnetic design enhancements to improve
efficiency, while reducing the cost and size of our products. Product
development is performed at our headquarters in California by two engineers who
are supported and assisted by four technicians. Our total expenditures for
research and development were $1,065,872 and $1,166,015 for the years ended
December 31, 2001 and 2000, respectively, and represented 10.32% and 6.52% of
our total revenues for the corresponding periods.
Employees
As of December 31, 2001, we had approximately 177 full-time employees, with
120 of these employed at our wholly-owned subsidiary Poder Digital located in
Guadalajara, Mexico, and 29 employed by Digital Power Ltd. The employees of
Digital Power's Mexican operation are members of a national labor union, as are
most employees of Mexican companies. We have not experienced any work stoppages
at any of our facilities and believe that our employee relations are good.
Guadalajara, Mexico Facility and Foreign Currency Fluctuations
We produce substantially all of our products at our 16,000 square foot
facility located in Guadalajara, Mexico. The products are then delivered to
Fremont, California for testing and distribution. We believe that we have a good
working relationship with our employees in Guadalajara, Mexico and have recently
signed a five-year contract with the union representing the employees. In 1997,
we entered into a "turnkey" manufacturing contract with a manufacturer located
in China to produce our products in an attempt to reduce our dependence on our
Mexican facility. At this time the purchase of products from the manufacturer
located in China accounts for approximately 8.30% of revenues and requires
advance scheduling which affects our ability to produce products quickly.
However, if our revenues grow as anticipated, we intend to manufacture more of
our products utilizing the Chinese manufacturer. In the event that there is an
unforeseen disruption at the Guadalajara production plant or with the Chinese
manufacturer, such disruption may have an adverse effect on our ability to
deliver our products and may adversely affect our financial operations.
Further, the Guadalajara, Mexico facility conducts its financial operations
using the Mexican peso and Gresham Power conducts its financial operation using
the United Kingdom pound. Therefore, due to financial conditions beyond our
control, we are subject to monetary fluctuations between the U.S. dollar,
Mexican peso, and United Kingdom pound.
13
RISK FACTORS
In addition to the other information presented in this report, the
following should be considered carefully in evaluating us and our business. This
report contains various forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from the results
discussed in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed below and elsewhere
in this report.
We experience a net loss during the year ended December 31, 2001, and anticipate
that losses will continue in the near future.
For the year ended December 31, 2001, we incurred a net loss of $7,040,720.
We have actively taken steps to reduce our costs. Although our future losses may
not be of the same magnitude as last year, we will continue to incur a net loss
in the near future until our revenues increase through the sale of current
products and new products under development.
We are experiencing a cash shortage.
As a result of a substantial decrease in sales, we are currently
experiencing a cash shortage. In order to decrease our expenses, we have laid
off employees. Further, in order to conserve cash we have delayed payments to
our vendors and have requested discounts. Although some vendors have complied
with our requests, there are some vendors who do not agree with these requests.
No assurance can be given that some of our vendors may not bring litigation to
collect their bill.
We are dependent on a limited number of customers.
Traditionally, we have relied on a limited number of customers for growth
in sales. It cannot be assured that we will be able to retain current customers,
and the loss of any major OEM customer may have an adverse effect on our
revenues.
We have entered into a $750,000 credit facility that is secured by all our
assets.
We have a $750,000 line of credit pursuant to a promissory note agreement.
This promissory note is secured by all of our assets. During the year ended
December 31, 2001, we were in default under certain covenants of the credit
facility. However, based on discussions with the bank and a subsequent
investment by Telkoor Telecom, we are currently in compliance with the loan
covenants. In the event we default under the promissory note, the bank may have
the right to attach all of our assets which would adversely affect our
operations.
DPL has a (pound)500,000 bank overdraft facility pursuant to a loan
agreement. In the event that the bank overdraft facility is used, the loan would
be collateralized by substantially all of the DPL's assets. At December 31,
2001, no principal or accrued interest was outstanding.
We are dependant on computer and other electronic equipment industries
Substantially all of our existing customers are in the computer and other
electronic equipment industries and they manufacture products that are subject
to rapid technological change, obsolescence, and large fluctuations in demand.
These industries are further characterized by intense competition. The OEMs
serving these markets are pressured for increased product performance and lower
14
product prices. OEMs, in turn, make similar demands on their suppliers, such as
us, for increased product performance and lower prices. The computer industry is
inherently volatile. Recently, certain segments of the computer 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 facility in Guadalajara, Mexico and
manufacturer in China; Foreign currency risks
Substantially all of the products sold by Digital Power in the United
States are produced at our facility located in Guadalajara, Mexico. We also have
a "turnkey" manufacturing contract with a manufacturer located in China to
produce our products in an attempt to reduce our dependence on our Mexican
facility. For the years ended December 31, 2001 and 2000, the purchase of
products from our manufacturer located in China accounted for approximately
8.30% of our revenues.
We are dependant upon key personnel
Our performance is substantially dependent on the performance of its
executive officers and key personnel, and on our ability to retain and motivate
such personnel. The loss of any of our key personnel, particularly David Amitai,
President and Chief Executive Officer, could have a material adverse effect on
our business, financial condition and operating results.
We are dependant on suppliers
We rely on, and will continue to rely on, outside parties to manufacture
parts, components and equipment. We cannot assure you that these suppliers will
be able to meet our needs in a satisfactory and timely manner or that we will be
able to obtain additional suppliers when and if necessary. A significant price
increase, a quality control problem, an interruption in supply or other
difficulties with third party manufacturers could have a material and adverse
effect on our ability to successfully provide our products. Further, the failure
of third parties to deliver the products, components, necessary parts or
equipment on schedule, or the failure of third parties to perform at expected
levels, could delay our delivery of power supply products.
Our products are not patentable
Our products are not subject to any U.S. or foreign patents. We believe
that because our products are continually updated and revised, obtaining patents
would be costly and not beneficial. Therefore, we cannot guarantee that other
competitors or former employees will make use of and develop proprietary
information on which we rely.
Our common stock price is volatile
Our common stock is listed on the American Stock Exchange and is thinly
traded. In the past, our trading price has fluctuated widely, depending on many
factors that may have little to do with our operations or business prospects.
15
The exercise of outstanding options and warrants may adversely affect our stock
price and your percentage of ownership
As of December 31, 2001, options to purchase 1,543,095 shares of common
stock, with a weighted average exercise price of $1.74 exercisable at prices
ranging from $0.70 to $6.25 per share were outstanding. In addition, we had
warrants to purchase 1,900,000 shares of common stock at exercise prices ranging
from $1.25 to $1.50 per share. The exercise of these options and warrants may
have an adverse effect on the price of our common stock price and will dilute
existing shareholder percentage ownership in the Company.
Item 2. Description of Properties.
Our headquarters are located in approximately 9,500 square feet of leased
office, research and development space in Fremont, California. We paid $6,653
per month, subject to adjustment, and the lease expired on January 31, 2001. The
Fremont California lease was renewed until January 31, 2005, with monthly rent
increasing to $11,875 over the next four years. Our manufacturing facility is
located in 16,000 square feet of leased space in Guadalajara, Mexico. We pay
approximately $4,583 per month, subject to adjustment, and the lease expired in
February 2001. The Guadalajara, Mexico lease was renewed to January 31, 2003,
with monthly rent increasing to $6,400. Gresham Power leases approximately
25,000 square feet for its location in Salisbury, England. Gresham Power pays
rent of approximately (pound)20,100 per quarter, and the lease expires September
26, 2009. We believe that our existing facilities are adequate for the
foreseeable future and have no plans to expand them.
Item 3. Legal Proceedings.
There currently are no legal proceeding pending involving the Company or
its properties except for a lawsuit filed by the Company for the collection on
an accounts receivable.
Item 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5. Market for Common Equity and related Stockholder Matters.
(a) Comparative Market Prices
Our common stock is listed and traded on the American Stock Exchange
("AMEX") under the symbol DPW. The following tables set forth the high and low
closing sale prices, as reported by AMEX, for our common stock for the prior two
fiscal years.
Common Stock
------------------------- ---------------- ------------------
Quarter Ended High Low
------------------------- ---------------- ------------------
12/31/2001 $ 3.63 $1.25
9/30/2001 1.70 0.88
6/30/2001 1.21 0.59
3/31/2001 0.90 0.56
16
Common Stock
------------------------- ---------------- ------------------
Quarter Ended High Low
------------------------- ---------------- ------------------
12/31/2000 6.63 1.50
9/30/2000 14.94 2.25
6/30/2000 3.63 2.00
3/31/2000 4.81 1.69
(b) Holders
As of March 15, 2002, there were 4,510,680 shares of our common stock
outstanding, held by approximately 106 holders of record, not including
shareholders whose shares are held in street name.
(c) Dividends
We have not declared or paid any cash dividends since our inception. We
currently intend to retain future earnings for use in the operation and
expansion of the business. We do not intend to pay any cash dividends in the
foreseeable future. The declaration of dividends in the future 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, and
marketing electronic power supplies for use in electronic circuitry. Revenues
are generated from the sale of our power supplies to distributors, OEMs in the
computer and other electronic equipment industries in the United States and
Europe, and the defense industry in the United Kingdom.
During the fiscal year 2001, we experienced a significant slow down in
customer orders in both the United States and Europe due to OEMs having excess
inventories and softness in the marketplace. In response to the decrease in
revenues, we have laid off employees in Fremont, California and Guadalajara,
Mexico to reduce costs. In order to become more efficient and increase sales, we
have hired a new chief operating officer and new sales officer. However, the
current costs of our operations in Guadalajara, Mexico exceed our revenues.
Until revenues increase to a sufficient amount to offset our expenses, we
anticipate that we will continue to experience net losses for the near future.
Results of Operations
The table below sets forth certain statements of operations data as a
percentage of revenues for the years ended December 31, 2001 and 2000:
Years Ended December 31,
2001 2000
---- ----
Revenues 100.00% 100.00%
Cost of goods sold 115.59 73.95
-------- --------
Gross margin (loss) (15.59) 26.05
Research and development 10.32 6.52
Marketing and selling 8.36 7.54
17
Years Ended December 31,
2001 2000
---- ----
General and administrative 21.08 10.60
Impairment of goodwill 9.16 -
-------- --------
Total operating expense 48.92 24.66
-------- --------
Operating income (loss) (64.51) 1.39
Net interest expense and other income (0.76) (0.28)
--------- ---------
Income (loss) before income taxes (65.27) 1.11
Provision for income taxes 2.89 0.58
-------- --------
Net Income (loss) (68.16)% 0.53%
========= ========
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.
Year Ended December 31, 2001, Compared to Year Ended December 31, 2000
Revenues
For the year ended December 31, 2001, revenues decreased by 42.24% to
$10,329,857 from $17,882,730 for the year ended December 31, 2000. The decrease
in revenues during the year ended December 31, 2001, can be attributed primarily
to the sudden and severe drop in demand by virtually every customer in the
Company's markets in the United States and Europe.
Gross Margins
Gross margins were (15.59)% for the year ended December 31, 2001, compared
to 26.05% for the year ended December 31, 2000. The decrease in gross margins
can primarily be attributed to the excess capacity costs of the company's
manufacturing operations in Guadalajara, Mexico, which resulted from the global
slowdown in the electronics industry. While we took steps during the year to
reduce this capacity through variable cost reductions, such as direct labor
layoffs, many fixed costs associated with Poder Digital continued. In connection
with the labor layoffs, we recognized a $658,000 severance charge that was
included in cost of goods sold.
Also included in cost of goods sold was a provision for inventory
obsolescence and excess of $2,714,941. The amount of the provision was
originally higher during the second quarter as a result of rapidly diminishing
sales and the cancellation of purchase orders by two of our customers. During
the fourth quarter of 2001, we reversed approximately $395,781 of the inventory
reserve. The reversal was based upon a fourth quarter analysis of inventory and
future anticipated sales, and a partial resumption of purchase orders to two
customers who had previously cancelled their orders.
In preparation for the downsizing of the Company's Mexican operations and
the transition of more production to China, significant charges were taken for
severance pay and obsolescence of inventory during the year. These charges had a
significant year to date negative impact on the Company's gross margins.
18
Engineering and Product Development
Engineering and product development expenses were 10.32% of revenues for
the year ended December 31, 2001, compared to 6.52% for the year ended December
31, 2000. The increases in engineering and product development expenses reflect
our continuing commitment to new product development.
Marketing and Selling
Marketing and selling expenses were 8.36% of revenues for the year ended
December 31, 2001, compared to 7.54% for the year ended December 31, 2000.
Although marketing and selling expenses were lower in terms of dollars in 2001,
as a percentage they were higher in 2001 than 2000 due to a decrease in revenues
in 2001.
General and Administrative
General and administrative expenses were 21.08% of revenues for
the year ended December 31, 2001, compared to 10.60% for the year ended December
31, 2000. Staff reductions and salary cuts were implemented throughout 2001 in
response to the reduced revenues. However, certain other expenses, such as legal
and accounting, and Amex filing fees in connection with the Telkoor Telecom
purchase resulted in higher total expenses, as a percentage of revenues.
Impairment of Goodwill
During the year, we recognized impairment change of $946,263 for goodwill
associated with the purchase of the assets of Gresham Power due to their general
decline in business and profitability.
Interest Expense
Interest expense, net of interest income, was 0.49% for the year ended
December 31, 2001, compared to 0.34% for the year ended December 31, 2000. Under
the terms of our line of credit, collections from accounts receivables are
immediately applied to the outstanding balance of the line of credit. However,
during the year 2001, we increased the borrowing on our line of credit, which
was $652,261 at December 31, 2001.
Income Before Income Taxes
For the year ended December 31, 2001, we had a loss before income taxes of
$6,741,837 compared to income of $199,167 for the year ended December 31, 2000.
Income Tax
The provision for income tax increased to $298,883 for the year ended
December 31, 2001, from $104,000 for the year ended December 31, 2000. The
company will continue to assess the realizability of the deferred tax assets in
future periods. The valuation allowance increased by $4,049,459 during the year
ended December 31, 2001. During March 2001, the Company fully valued the
deferred tax asset recorded at December 31, 2000 of $350,523 due to the
uncertainty of the Company's ability to recognize the benefit of the deferred
tax asset of Digital Power in the future. The valuation allowance increased by
$212,559 during the year ended December 31, 2000.
19
Net Loss and Net Income
Net loss for the year ended December 31, 2001, was $7,040,720, compared to
a net income of $95,167 for the year ended December 31, 2000. The net loss
primarily resulted from the combined effects of the dramatic drop in revenues,
excess manufacturing capacity and various inventory charges and write-offs as
previously discussed.
Liquidity And Capital Resources
On December 31, 2001, we had cash of $1,242,900 and working capital of
$1,867,959. This compares with cash of $806,407 and working capital of
$6,461,665 at December 31, 2000. The decrease in working capital was mainly due
to an increased allowance for obsolescence and excess inventories. The Company
increased the allowance for obsolescence and excess inventories by approximately
$2,715,000 which was a result of the cancellation of purchase orders by
customers, excess inventory levels, lack of sales orders and delays in delivery
of products by two customers. Cash provided (used in) operating activities
totaled $(828,560) and $178,499 for the year ended December 31, 2001 and 2000.
Cash used in investing activities was $127,405 for the year ended December
31, 2001, compared to $149,947 for the year ended December 31, 2000. Net cash
provided by (used in) financing activities was $1,457,602 for the year ended
December 31, 2001, compared to $151,771, for the year ended December 31, 2000.
During the year, we had a $3 million revolving line of credit loan
("Revolving Loan") with San Jose National Bank, which Revolving Loan was secured
by substantially all of our assets. Under the original terms of the Revolving
Line, we could borrow against a percentage of accounts receivables and
inventory. In August 2001, San Jose National Bank informed us that it we were in
default of certain Revolving Loan covenants, including profitability, net worth
amount and inventory amount. We subsequently met with San Jose National Bank and
entered into a new Revolving Loan Agreement which set the maximum borrowing to
$750,000. This revised Revolving Loan Agreement is subject to the same terms and
conditions as the original Revolving Loan Agreement. We are currently in
compliance with the covenants of the Revolving Loan Agreement.
On September 6, 2001, pursuant to the Securities Purchase Agreement,
Telkoor Telecom advanced the Company $150,000. In addition, during October 2001,
Telkoor Telecom lent the Company an additional $205,000 pursuant to a short-term
convertible promissory note. The promissory note bears interest at 10% and was
due upon the earlier of consummation of the Securities Purchase Agreement or
December 31, 2001. The $205,000 loan was credited against the purchase price
under the Securities Purchase Agreement. Under the Securities Purchase
Agreement, Telkoor Telecom acquired (i) 1,250,000 shares of common stock (ii) a
warrant to purchase an additional 900,000 shares of common stock at $1.25 per
share; and (iii) a warrant to purchase an additional 1,000,000 shares of common
stock at $1.50 per share for the aggregate purchase price of $1,250,000. The
900,000 share warrant will expire sixty (60) days after the Company files its
Form 10-KSB for the year ending December 31, 2002 and the 1,000,000 share
warrant will expire on December 31, 2003.
We do not believe that our sales are seasonal. Further, we do not believe
that inflation will adversely affect our operations.
20
Impact of Recently Issued Standards
Impact of Recently Issued Standards - In June 2001, the Financial
Accounting Standards Board ("FASB") issued Statements of Financial Accounting
Standards No. 141 "Business Combinations" ("SFAS 141") and No. 142 "Goodwill and
Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business
combinations initiated after June 30, 2001 to be accounted for under the
purchase method. For all business combinations for which the date of acquisition
is after June 30, 2001, SFAS 141 also establishes specific criteria for the
recognition of intangible assets separately from goodwill and requires
unallocated negative goodwill to be written off immediately as an extraordinary
gain, rather than deferred and amortized. SFAS 142 changes the accounting for
goodwill and other intangible assets after an acquisition. The most significant
changes made by SFAS 142 are: 1) goodwill and intangible assets with indefinite
lives will no longer be amortized; 2) goodwill and intangible assets with
indefinite lives must be tested for impairment at least annually; and 3) the
amortization period for intangible assets with finite lives will no longer be
limited to forty years. The Company does not believe that the adoption of these
statements will have a material effect on its financial position, results of
operations, or cash flows.
In June 2001, the FASB also approved for issuance SFAS 143 "Asset
Retirement Obligations." SFAS 143 establishes accounting requirements for
retirement obligations associated with tangible long-lived assets, including (1)
the timing of the liability recognition, (2) initial measurement of the
liability, (3) allocation of asset retirement cost to expense, (4) subsequent
measurement of the liability and (5) financial statement disclosures. SFAS 143
requires that an asset retirement cost should be capitalized as part of the cost
of the related long-lived asset and subsequently allocated to expense using a
systematic and rational method. The Company will adopt the statement effective
no later than January 1, 2003, as required. The transition adjustment resulting
from the adoption of SFAS 143 will be reported as a cumulative effect of a
change in accounting principle. At this time, the Company cannot reasonably
estimate the effect of the adoption of this statement on its financial position,
results of operations, or cash flows
In October 2001, the FASB also approved SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 replaces SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The new accounting model for long-lived assets to be disposed
of by sale applies to all long-lived assets, including discontinued operations,
and replaces the provisions of APB Opinion No. 30, "Reporting Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business," for
the disposal of segments of a business. Statement 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. Statement 144 also broadens the reporting of discontinued operations
to include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The provisions of Statement
144 are effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, are to be applied prospectively. At this
time, the Company cannot estimate the effect of this statement on its financial
position, results of operations, or cash flows.
Item 7. Financial Statements.
The financial statements of the Company, including the notes thereto and
report of the independent auditors thereon, are attached hereto as exhibits as
page numbers F-1 through F-21.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
21
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act of the Registrant.
We intend to file a definitive proxy statement for the 2002 Annual Meeting
of Shareholders with the Securities and Exchange Commission within 120 days of
December 31, 2001. Information regarding our directors will appear under the
caption "Election of Directors" in the proxy statement and is incorporated
herein by reference. Information regarding compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, and executive officers will appear
under the captions "Executive Compensation" -- Section 16(a) Principal
Shareholders and Share Ownership of Management and Directors in the proxy
statement and is incorporated herein by reference
Item 10. Executive Compensation.
Information regarding executive compensation will appear under the captions
"Compensation of Directors," "Executive Compensation" in the proxy statement and
is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Information regarding security ownership of certain beneficial owners and
management will appear under the caption "Principal Shareholders and Share
Ownership of Management and Directors" in the proxy statement and is
incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
Information regarding Certain Relationships and Related Transactions will
appear under the caption "Certain Relationships and Related Transactions" in the
proxy statement and is incorporated herein by reference. Item 13. Exhibits and
Reports on Form 8-K.
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of Digital Power
Corporation(1)
3.2 Amendment to Articles of Incorporation(1)
3.3 Bylaws of Digital Power Corporation(1)
4.1 Specimen Common Stock Certificate(2)
4.2 Specimen Warrant(1)
4.3 Representative's Warrant(1)
10.1 Revolving Credit Facility with San Jose National Bank(1)
10.2 KDK Contract(1)
10.3 Agreement with Fortron/Source Corp.(1)
10.4 Employment Agreement With Robert O. Smith(2)
10.5 1996 Stock Option Plan(1)
10.6 Gresham Power Asset Purchase Agreement(3)
10.7 1998 Stock Option Plan
10.8 Technology Transfer Agreement with KDK Electronics(4)
22
10.9 Loan Commitment and Letter Agreement(5)
10.10 Promissory Note(5)
10.11 Employment Agreement with Robert O. Smith (6)
10.12 Securities Purchase Agreement Between the Company and Telkoor Telecom,
Ltd. (7)
21.1 The Company's subsidiaries consist of Poder Digital S.A. de C.V., a
corporation formed under the laws of Mexico, and Digital Power Limited,
a corporation formed under the laws of the United Kingdom.
23.1 Consent of Hein + Associates LLP
(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 November 21,
2001.
(b) Reports on Form 8-K
On November 21, 2001, we filed a Form 8-K disclosing the consummation of
the Securities Purchase Agreement with Telkoor Telecom and resulting change in
control
23
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: March 25, 2002 DIGITAL POWER CORPORATION,
a California Corporation
/s/ David Amitai
------------------------------------
David Amitai,
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signatures Date
/s/ David Amitai March 25, 2002
---------------------------------------
David Amitai, Chief Executive Officer
(Principal Executive Officer)
/s/ Uri Friedlander
---------------------------------------- March 29, 2002
Uri Friedlander, Chief Financial Officer
(Principal Accounting and
Financial Officer)
----------------------------------------- March __, 2002
Ben Zion Diamant, Director
/s/ Josef Berger
----------------------------------------- March 25, 2002
Josef Berger, Director
----------------------------------------- March __, 2002
Mark L. Thum, Director
/s/ Robert Smith
----------------------------------------- March 25, 2002
Robert Smith, Director
F-1
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Digital Power Corporation and Subsidiaries
Fremont, California
We have audited the accompanying consolidated balance sheet of Digital Power
Corporation and subsidiaries as of December 31, 2001, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 2001 and 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Digital Power
Corporation and subsidiaries as of December 31, 2001, and the results of their
operations and their cash flows for the years ended December 31, 2001 and 2000,
in conformity with accounting principles generally accepted in the United States
of America.
/s/HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
February 19, 2002
F-2
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
2001
------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,242,900
Accounts receivable - trade, net of allowance for
doubtful accounts of $370,000 2,203,664
Income tax refund receivable 72,388
Other receivables 91,971
Inventories, net 1,999,168
Prepaid expenses and deposits 47,534
-----------
Total current assets 5,657,625
PROPERTY AND EQUIPMENT, net 820,318
OTHER ASSETS 35,116
------------
TOTAL ASSETS $ 6,513,059
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 652,261
Current portion of capital lease obligations 35,856
Accounts payable 1,590,830
Accrued liabilities 1,510,719
------------
Total current liabilities 3,789,666
CAPITAL LEASE OBLIGATIONS, less current portion 24,376
OTHER LONG TERM LIABILITIES 13,607
------------
Total liabilities 3,827,649
------------
COMMITMENTS AND CONTINGENCIES (Notes 8 and 13)
STOCKHOLDERS' EQUITY:
Preferred stock issuable in series, no par value,
2,000,000 shares authorized, no shares issued or -
outstanding
Common stock, no par value, 10,000,000 shares authorized,
4,510,680 shares issued and outstanding 11,036,251
Additional paid in capital 733,256
Accumulated deficit (8,771,654)
Accumulated other comprehensive loss (312,443)
------------
Total stockholders' equity 2,685,410
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,513,059
============
See accompanying notes to these consolidated financial statements.
F-3
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
2001 2000
------------- -------------
REVENUES $ 10,329,857 $ 17,882,730
COST OF GOODS SOLD 11,939,985 13,223,441
------------- -------------
Gross margin (loss) (1,610,128) 4,659,289
------------- -------------
OPERATING EXPENSES:
Research and development 1,065,872 1,166,015
Marketing and selling 863,898 1,348,545
General and administrative 2,177,611 1,895,280
Impairment of goodwill 946,263 -
------------- -------------
Total operating expenses 5,053,644 4,409,840
------------- -------------
INCOME (LOSS) FROM OPERATIONS (6,663,772) 249,449
------------- -------------
OTHER INCOME (EXPENSE):
Interest income 12,829 29,920
Interest expense (63,461) (90,992)
Other (expense) (4,364) -
Gain (loss) on disposal of assets (23,069) 10,790
------------- -------------
Other (expense) (78,065) (50,282)
------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES (6,741,837) 199,167
INCOME TAX PROVISION 298,883 104,000
------------- -------------
NET INCOME (LOSS) $ (7,040,720) $ 95,167
============= =============
Basic net income (loss) per share $ (2.07) $ 0.03
============= =============
Diluted net income (loss) per share $ (2.07) $ 0.03
============= =============
F-4
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001 and 2000
ACCUMULATED
ADDITIONAL NOTE OTHER COMP- TOTAL
COMMON STOCK PAID-IN RECEIVABLE - ACCUMULATED REHENSIVE STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL STOCKHOLDER DEFICIT (LOSS) EQUITY (LOSS)
--------- ------------ --------- ------------- ------------ ---------- ------------ ------------
BALANCES,
January 1, 2000 2,771,435 $ 9,012,679 $ 566,504 $ (52,200) $ (1,826,101) $ (48,675) $ 7,652,207
Exercise of stock
options 484,245 754,197 (52,200) 52,200 - - 754,197
Income tax benefit
related to exercise
of stock options - - 101,397 - - - 101,397
Stock granted for
services 5,000 19,375 - - - - 19,375
Compensation cost
recognized upon
issuance of warrants
for services - - 117,555 - - - 117,555
Comprehensive loss:
Net income - - - - 95,167 - 95,167 $ 95,167
Foreign currency
translation
adjustment - - - - - (198,624) (198,624) (198,624)
Total -----------
comprehensive
loss - - - - - - - $ (103,457)
--------- ------------ --------- ------------ ------------ ---------- ----------- ===========
BALANCES,
December 31, 2000 3,260,680 9,786,251 733,256 - (1,730,934) (247,299) 8,541,274
Issuance of common
stock to Telkoor
Telecom, Ltd.
pursuant to
investment agreement 1,250,000 1,250,000 - - - - 1,250,000
Comprehensive loss:
Net loss - - - - (7,040,720) - (7,040,720) $(7,040,720)
Foreign currency
translation
adjustment - - - - - (65,144) (65,144) (65,144)
Total -----------
comprehensive
loss - - - - - - - $(7,105,864)
--------- ------------ --------- ------------ ------------ ---------- ----------- ===========
BALANCES,
December 31, 2001 4,510,680 $ 11,036,251 $ 733,256 $ - $ (8,771,654) $ (312,443) $ 2,685,410
========= ============ ========= ============ ============= ========== ===========
See accompanying notes to these consolidated financial statements
F-5
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (7,040,720) $ 95,167
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 450,752 475,987
(Gain) loss on disposal of assets 23,069 (10,790)
Deferred income taxes 334,037 16,755
Warranty expense (64,806) 55,000
Increase in provision for inventory
obsolescence 2,714,941 -
Bad debt expense 158,130 23,504
Compensation cost recognized upon issuance
of warrants - 117,555
Income tax benefit related to exercise of
stock options - 101,397
Stock issued for services - 19,375
Impairment of goodwill 946,263 -
Severance accrual 658,000 -
Changes in operating assets and liabilities:
Accounts receivable 894,288 (466,506)
Income tax refund receivable 106,812 (108,212)
Other receivables (1,517) 9,421
Inventories 429,515 (612,363)
Prepaid expenses 166,164 (152,372)
Other assets (6,565) (14,493)
Accounts payable (358,353) 753,013
Accrued liabilities (252,177) (98,939)
Other long-term liabilities 13,607 (25,000)
------------ ------------
Net cash provided by (used in) operating activities (828,560) 178,499
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (133,281) (176,068)
Proceeds from sale of assets 5,876 26,121
------------ ------------
Net cash (used in) investing activities (127,405) (149,947)
------------ ------------
(Continued)
F-6
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------
2001 2000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants $ - $ 754,197
Proceeds received (payments made) on notes payable 252,261 (540,000)
Principal payments on capital lease obligations (44,659) (62,426)
Investment from Telkoor Telecom, Ltd. 1,250,000 -
------------ ------------
Net cash provided by (used in) financing activities 1,457,602 151,771
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (65,144) (198,624)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 436,493 (18,301)
------------ ------------
CASH AND CASH EQUIVALENTS, beginning of period 806,407 824,708
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,242,900 $ 806,407
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Interest $ 67,009 $ 131,650
============ ============
Income taxes $ 97,918 $ 180,000
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of equipment through capital leases $ - $ 42,846
============ ============
See accompanying notes to these consolidated financial statements.
F-7
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS:
Digital Power Corporation ("DPC"), a California corporation, and its wholly
owned subsidiaries, Poder Digital, S.A. de C.V. ("PD"), located in
Guadalajara, Mexico, and Digital Power Limited ("DPL"), located in the
United Kingdom, are engaged in the design, manufacture and sale of
switching power supplies. DPC, PD, and DPL are collectively referred to as
the "Company".
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation - The consolidated financial statements include
the accounts of DPC and its wholly owned subsidiaries, PD and DPL. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Statements of Cash Flows - For purposes of the statements of cash flows,
the Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market.
Property and Equipment - Property and equipment are stated at cost.
Depreciation of equipment and furniture is calculated using the
straight-line method over the estimated useful lives (ranging from 5 to 10
years) of the respective assets. Leasehold improvements are amortized over
the shorter of their estimated useful life or the term of the lease. The
cost of normal maintenance and repairs is charged to operations as
incurred. Material expenditures that increase the life of an asset are
capitalized and depreciated over the estimated remaining useful life of the
asset. The cost of fixed assets sold, or otherwise disposed of, and the
related accumulated depreciation or amortization are removed from the
accounts, and any resulting gains or losses are reflected in current
operations.
Excess of Purchase Price Over Net Assets Acquired - Excess of purchase
price over net assets acquired ("Goodwill") represents the purchase price
in excess of the fair value of the net assets of the acquired business and
was being amortized using the straight-line method over its estimated
useful life of ten years.
As a result of DPL's sustained losses during the year ended December 31,
2001, management has determined the value of the unamortized goodwill
related to the 1998 acquisition of DPL as impaired resulting in a charge of
$946,263.
Income Taxes - The Company accounts for income taxes under the liability
method which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included
in the financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
F-8
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition - Sales revenue is recognized when the products are
shipped to customers, including distributors. Customers receive a one or
two-year product warranty and certain sales to distributors are subject to
a limited right of return. At the same time sales revenue is recognized,
the Company provides a reserve for estimated warranty costs and a reserve
for estimated product returns.
Research and Development Costs - Research and development costs are charged
to operations in the period incurred.
Foreign Currency Translation - Gains and losses from the effects of
exchange rate fluctuations on transactions denominated in foreign
currencies are included in the results of operations. Assets and
liabilities of the Company's foreign subsidiaries are translated into U.S.
dollars at year-end exchange rates. Income and expense items are translated
at average exchange rates prevailing during the year. The resulting
translation adjustment is recorded as a component of accumulated other
comprehensive income (loss), a component of stockholders' equity.
Earnings Per Share - Basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity.
Use of Estimates - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
requires the Company's management to make estimates and assumptions that
affect the amounts reported in these consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
The Company's consolidated financial statements are based upon a number of
significant estimates, including the allowance for doubtful accounts,
technological obsolescence of inventories, the estimated useful lives
selected for property and equipment and goodwill, realizability of deferred
tax assets, allowance for sales returns, and warranty reserve. Due to the
uncertainties inherent in the estimation process, it is at least reasonably
possible that these estimates will be further revised in the near term and
such revisions could be material.
Impairment of Long-Lived Assets - In the event that facts and circumstances
indicate that the cost of long lived assets may be impaired, an evaluation
of recoverability would be performed. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down to
market value or discounted cash flow value is required.
Stock Based Compensation - The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB25) and related interpretations in accounting for its employee stock
options. In accordance with FASB Statement No. 123 "Accounting for
Stock-Based Compensation" (FASB123), the Company will disclose the impact
of adopting the fair value accounting of employee stock options.
Transactions in equity instruments with non-employees for goods or services
have been accounted for using the fair value method as prescribed by
FASB123.
F-9
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentrations of Credit Risk - Credit risk represents the accounting loss
that would be recognized at the reporting date if counterparties failed
completely to perform as contracted. Concentrations of credit risk (whether
on or off balance sheet) that arise from financial instruments exist for
groups of customers or counterparties when they have similar economic
characteristics that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic or other
conditions described below.
The Company operates in one segment, manufacture and sale of power
supplies. Financial instruments that subject the Company to credit risk
consist of cash balances maintained in excess of federal depository
insurance limits and accounts receivable, which have no collateral or
security. See Note 14 for major customers.
Fair Value of Financial Instruments - The estimated fair values for
financial instruments under FASB Statement No. 107, Disclosures about Fair
Value of Financial Instruments, are determined at discrete points in time
based on relevant market information. These estimates involve uncertainties
and cannot be determined with precision. The estimated fair value of cash,
cash equivalents, accounts receivable and accounts payable approximates
their carry value due to their short-term nature. The estimated fair value
of long-term debt approximates its carrying value because it carries
interest rates which approximates market rates.
Comprehensive Income - The Company has adopted the Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (FASB130). FASB130 defines comprehensive
income as all changes in stockholders' equity exclusive of transactions
with owners, such as capital investments. Comprehensive income includes net
income or loss and changes in certain assets and liabilities that are
reported directly in equity, such as, translation adjustments on
investments in foreign subsidiaries.
Impact of Recently Issued Standards - In June 2001, the Financial
Accounting Standards Board ("FASB") issued Statements of Financial
Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and No.
142 "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires
all business combinations initiated after June 30, 2001 to be accounted for
under the purchase method. For all business combinations for which the date
of acquisition is after June 30, 2001, SFAS 141 also establishes specific
criteria for the recognition of intangible assets separately from goodwill
and requires unallocated negative goodwill to be written off immediately as
an extraordinary gain, rather than deferred and amortized. SFAS 142 changes
the accounting for goodwill and other intangible assets after an
acquisition. The most significant changes made by SFAS 142 are: 1) goodwill
and intangible assets with indefinite lives will no longer be amortized; 2)
goodwill and intangible assets with indefinite lives must be tested for
impairment at least annually; and 3) the amortization period for intangible
assets with finite lives will no longer be limited to forty years. The
Company does not believe that the adoption of these statements will have a
material effect on its financial position, results of operations, or cash
flows.
F-10
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2001, the FASB also approved for issuance SFAS 143 "Asset
Retirement Obligations." SFAS 143 establishes accounting requirements for
retirement obligations associated with tangible long-lived assets,
including (1) the timing of the liability recognition, (2) initial
measurement of the liability, (3) allocation of asset retirement cost to
expense, (4) subsequent measurement of the liability and (5) financial
statement disclosures. SFAS 143 requires that an asset retirement cost
should be capitalized as part of the cost of the related long-lived asset
and subsequently allocated to expense using a systematic and rational
method. The Company will adopt the statement effective no later than
January 1, 2003, as required. The transition adjustment resulting from the
adoption of SFAS 143 will be reported as a cumulative effect of a change in
accounting principle. At this time, the Company cannot reasonably estimate
the effect of the adoption of this statement on its financial position,
results of operations, or cash flows.
In October 2001, the FASB also approved SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 replaces SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The new accounting model for long-lived assets
to be disposed of by sale applies to all long-lived assets, including
discontinued operations, and replaces the provisions of APB Opinion No. 30,
"Reporting Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business," for the disposal of segments of a business.
Statement 144 requires that those long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or in discontinued operations. Therefore,
discontinued operations will no longer be measured at net realizable value
or include amounts for operating losses that have not yet occurred.
Statement 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from
the ongoing operations of the entity in a disposal transaction. The
provisions of Statement 144 are effective for financial statements issued
for fiscal years beginning after December 15, 2001 and, generally, are to
be applied prospectively. At this time, the Company cannot estimate the
effect of this statement on its financial position, results of operations,
or cash flows.
3. BASIS OF PRESENTATION:
The Company incurred a net loss of $7,040,720 and used cash in operations
of $828,560 during the year ended December 31, 2001. The Company had net
income of $95,167 and cash provided by operations of $178,499 during the
year ended December 31, 2000. The Company had working capital of $1,867,959
and $6,461,665, at December 31, 2001 and 2000, respectively, The increase
in net loss and substantial decrease of working capital is due in part to
certain non-cash expenses, including, an increase in the inventory
allowance for obsolescence of $2,715,000, an impairment of goodwill by
$946,000, a severance accrual of $658,000 for employees in Poder, increase
in the allowance for bad debt of $158,000, and the valuation taken against
the deferred tax asset of $350,000.
The Company's management has addressed the decrease in cash and working
capital through the execution of the Securities Purchase Agreement in which
the Company received $1,250,000 in cash and developed a strategic alliance
with Telkoor Telecom, Ltd. (Telkoor). The Company's management team is
currently comprised of officers of Telkoor and if needed, Telkoor has
committed to lend to the Company, and/or make further investments in the
Company, to sustain its operations. See note 10 for additional terms of the
Telkoor investment.
In management's opinion, these proceeds combined with revenue from sales
and Telkoor's continued commitment to protect its investment will provide
sufficient cash flow to pay the Company's obligations as they come due for
at least the next year.
4. INVENTORIES:
Raw materials $ 3,831,093
Work-in-process 985,924
Finished goods 146,861
-------------
4,963,878
Allowance for obsolescence (2,964,710)
-------------
$ 1,999,168
=============
During the year ended December 31, 2001, the Company increased the
allowance for obsolescence and excess inventories by approximately
$2,715,000 which was a result of the cancellation of purchase orders by
customers, excess inventory levels, lack of sales orders and delays in
delivery of products by two customers. The additional provision for
obsolete and excess inventory is included in the cost of sales.
F-11
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following as of December 31, 2001:
Machinery and equipment $ 1,503,030
Office equipment and furniture 875,726
Leasehold improvements 525,846
Transportation equipment 81,089
-------------
2,985,691
Accumulated depreciation and amortization (2,165,373)
-------------
$ 820,318
=============
Depreciation expense related to property and equipment for the year ended
December 31, 2001 and 2000, was $378,571 and $331,987, respectively.
6. ACCRUED LIABILITIES:
Accrued liabilities consist of the following as of December 31, 2001:
Accrued payroll and benefits $ 167,129
Accrued commissions and royalties 120,567
Accrued warranty and product return expense 201,094
Income taxes payable 190,175
Severance accrual for PD employees 508,000
Other 323,754
-------------
$ 1,510,719
=============
During the year ended December 31, 2001, the Company recorded an estimated
severance liability related to its Mexican subsidiary of $658,000. The
severance accrual is a result of depressed sales of the Company's products
in the United States, which has resulted in excess capacity of the
workforce at its Guadalajara, Mexico facility. In addition, the Company is
considering moving a portion of its manufacturing to China which would
increase the excess capacity at PD. The liability was reduced in September
2001 by $150,000 for the payment of severance as a result of a reduction of
PD employees.
F-12
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. NOTES PAYABLE:
DPC has a $750,000 line of credit pursuant to a promissory note agreement.
The line of credit agreement provides for borrowings up to 80% of eligible
accounts receivable. Borrowing under this line of credit bears interest
based upon an index equal to the lender's prime rate (totaling 6.75% at
December 31, 2001), interest only, payable monthly with outstanding
principal due on demand. If no demand is made, the outstanding principal
and unpaid accrued interest is due April 15, 2002. At December 31, 2001,
the outstanding principal balance was $652,261. Under the terms of the
agreement, the Company is required to maintain certain ratios and be in
compliance with other covenants. At December 31, 2001, the Company was in
compliance with all covenants.
DPL has a (United Kingdom pounds)500,000 bank overdraft facility pursuant
to a loan agreement. Borrowing under this line of credit bears interest at
2% per annum over the Bank's Base rate (totaling 6.5% at December 31,
2001), interest only, payable monthly with outstanding principal due on
demand. If no demand is made, the outstanding principal and accrued
interest is due March 31, 2002. In the event of the loan being used, the
loan would be collateralized by substantially all of the DPL's assets. At
December 31, 2001, no principal or accrued interest was outstanding.
8. CAPITAL LEASE OBLIGATIONS:
The Company leases certain equipment and vehicles under agreements
classified as capital leases. The net book value of assets under capital
leases is $59,229. Depreciation expense of $39,545 and $52,147 was
recognized for the years ended December 31, 2001 and 2000, respectively.
The future minimum lease payments as of December 31, 2001, are as follows:
YEARS ENDING
DECEMBER 31, AMOUNT
------------- ---------
2002 $ 45,736
2003 31,183
---------
Total future minimum lease payments 76,919
Less amount representing interest (16,687)
---------
Present value of net minimum lease
payments 60,232
Less current portion (35,856)
---------
$ 24,376
=========
9. PREFERRED STOCK:
The preferred stock has one series authorized, 500,000 shares of Series A
cumulative redeemable convertible preferred stock ("Series A"), and an
additional 1,500,000 shares of preferred stock has been authorized, but the
rights, preferences, privileges and restrictions on these shares has not been
determined. DPC's Board of Directors is authorized to create new series of
preferred stock and fix the number of shares as well as the rights, preferences,
privileges and restrictions granted to or imposed upon any series of preferred
stock. As of December 31, 2001, there were no shares issued or outstanding.
F-13
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMON STOCK:
In September 2001, the Company executed a securities purchase agreement
with Telkoor Telecom, Ltd. (Telkoor) for cash proceeds of $1,250,000 in
exchange for the purchase of 1,250,000 shares of common stock and the
issuance of 900,000 warrants to purchase common stock at an exercise price
of $1.25 per share and an additional 1,000,000 warrants to purchase common
stock at an exercise price of $1.50 per share. The warrants vest
immediately and expire during the year ended December 31, 2003. In
addition, the Company's Board of Directors will appoint a number of
individuals recommended by Telkoor necessary to constitute a majority of
the Board and the then current president and CEO, Robert Smith, will resign
as president with an individual selected by Telkoor appointed to the
position of president and CEO.
11. STOCK OPTIONS AND WARRANTS:
Stock Options - In May 1996, the Company adopted the 1996 Stock Option Plan
covering 513,000 shares. Under the plan, the Company can issue either
incentive or non-statutory stock options. The price of the options granted
pursuant to the plan will not be less than 100% of the fair market value of
the shares on the date of grant. The compensation committee of the Board of
Directors will decide the vesting period of the options, if any, and no
option will be exercisable after ten years from the date granted.
In February 1998, the Company adopted the 1998 Stock Option Plan covering
240,000 shares of common stock. Under the plan, the Company can issue
either incentive or non-qualified stock options. The exercise price of the
options granted pursuant to the plan will not be less than 100% of the
quoted market value of the shares on the grant date. The compensation
committee of the Board of Directors will determine the vesting period of
the options, if any, and no options will be exercisable after ten years
from the date of grant. During the year ended December 31, 1999, the
Company granted options for the purchase of 11,900 shares of the Company's
common stock under the 1998 Stock Option Plan to certain employees. The
exercise prices of the options range from $1.5625 to $1.8750 per share,
which was equal to the quoted market value on the date of grant. The
options vest over 5 years at 25% per year starting in the second year.
In April 2000, the Company adopted the 2000 Stock Option Plan covering
500,000 shares of common stock. Under the plan, the Company can issue
either incentive or non-qualified stock options. The exercise price of the
options granted pursuant to the plan will not be less than 100% of the
quoted market value of the shares on the grant date. The compensation
committee of the Board of Directors will determine the vesting period of
the options, if any, and no options will be exercisable after ten years
from the date of grant.
During the years ended December 31, 2001 and 2000, the Company issued in
each year non-qualified options for the purchase of 100,000 shares of the
Company's common stock to Mr. Robert Smith who was the president of the
Company until his resignation on November 13, 2001, in accordance with his
employment agreement. The exercise prices of $1.63 and $1.56 per share were
equal to the quoted market value on the date of grant. Such options vested
immediately and expire beginning in 2009.
F-14
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2001, the Company granted options for
the purchase of 200,000 shares of the Company's common stock to David
Amitai, CEO and President, and 200,000 shares of the Company's common stock
to Ben Zion Diamant, Chairman of the Board. The exercise price of $0.70 per
share was equal to the quoted market value on the date of grant. Such
options vest over 2 years at 50% per year starting in the second year.
During each of the years ended December 31, 2001, and 2000, the Company
granted non-qualified options under the 1998 plan & 2000 plan for the
purchase of 30,000 shares of the Company's common stock to outside
directors. The exercise prices range from $0.70 to $2.38 per share were
equal to the quoted value on the date of grant. The options vest after one
year.
During the year ended December 31, 2001, the Company granted options for
the purchase of 136,000 shares of the Company's common stock under the 2000
Stock Option Plan to certain employees. The exercise prices range from
$0.70 to $1.18 per share were equal to the quoted market value on the date
of grant. The options vest over 4 or 5 years at 25% per year starting in
the second year.
During the year ended December 31, 2000, the Company granted options for
the purchase of 117,500 shares of the Company's common stock under the 1996
Stock Option Plan to certain employees. The exercise price of $2.38 per
share was equal to the quoted market value on the date of grant. The
options vest over 5 years at 25% per year starting in the second year.
During the year ended December 31, 2000, the Company granted options for
the purchase of 57,500 shares of the Company's common stock under the 1998
Stock Option Plan to certain employees. The exercise price of $2.38 per
share was equal to the quoted market value on the date of grant. The
options vest over 5 years at 25% per year starting in the second year.
During the year ended December 31, 2000, the Company granted options for
the purchase of 53,000 shares of the Company's common stock under the 2000
Stock Option Plan to certain employees. The exercise price of the options
ranges from $2.38 to $3.88 per share were equal to the quoted market value
on the date of grant. The options vest over 5 years at 25% per year
starting in the second year.
The following table sets forth activity for all options:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
---------- --------------
OUTSTANDING, January 1, 2000 1,083,630 $ 2.09
Granted 366,000 2.16
Forfeited (26,665) 3.31
Exercised (484,245) 1.56
---------- -------
OUTSTANDING, December 31, 2000 938,720 $ 2.39
Granted 691,000 0.90
Forfeited (86,625) 2.10
---------- -------
OUTSTANDING, December 31, 2001 1,543,095 $ 1.74
========== =======
F-15
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2001, options to purchase 40,000 shares, with a weighted
average exercise price of $6.06, were exercisable at prices ranging from
$6.00 to $6.25 per share. These options have a weighted average contractual
life of 6.25 years.
At December 31, 2001 options to purchase 729,296 shares were exercisable
with exercise prices ranging from $1.56 to $3.88 per share, a weighted
average exercise price of $2.05 and a weighted average remaining
contractual life of 7.45 years. The remaining 773,799 unvested options have
exercise prices ranging from $.70 to $1.18, a weighted average contractual
life of 9.76 years, and are exercisable as follows:
WEIGHTED
NUMBER OF AVERAGE
YEAR ENDING DECEMBER 31, SHARES EXERCISE PRICE
----------- -----------------
2002 122,337 $ 1.77
2003 330,962 1.17
2004 279,000 1.02
2005 31,500 0.81
2006 10,000 0.70
----------- -------
773,799 $ 1.19
=========== =======
If not previously exercised the outstanding options will expire as follows:
WEIGHTED
NUMBER OF AVERAGE
YEAR ENDING DECEMBER 31, SHARES EXERCISE PRICE
------------- -----------------
2003 30,500 $ 1.80
2006 78,250 1.80
2007 105,500 2.31
2008 317,845 2.78
2009 100,000 1.95
2010 245,000 2.39
2011 666,000 0.87
---------- -------
1,543,095 $ 1.74
========== =======
Warrants -During March 1997, the Company granted warrants for the purchase
of 15,000 shares of the Company's common stock in connection with investor
related services provided to the Company. The warrants have an exercise
price of $6.75 per share, vested immediately and expire in 2002.
In October 2000, the Company issued warrants to purchase 60,000 shares of
common stock at $3.88 per share to an investor relations firm for services
provided. Compensation expense of $117,555 was recognized upon issuance of
the warrants. The warrants are immediately exercisable and expired in
October 2001.
F-16
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
See footnote 9 for additional warrants issued during the year ended
December 31, 2001.
The following sets forth the activity for all warrants:
AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
----------------- -----------------
OUTSTANDING, January 1, 2000 195,000 $ 5.38
Granted 60,000 3.88
------------- --------------
OUTSTANDING, December 31, 2000 255,000 5.03
Granted 1,900,000 1.43
Expired (240,000) 4.92
-------------- --------------
OUTSTANDING, December 31, 2001 1,915,000 $ 1.42
============= ==============
As stated in Note 2, the Company has not adopted the fair value accounting
prescribed by FASB123 for employees. Had compensation cost for stock
options or warrants issued to employees been determined based on the fair
value at grant date for awards in 2001 and 2000, consistent with the
provisions of FASB123, the Company's net income (loss) and net income
(loss) per share would have been reduced to the proforma amounts indicated
below:
2001 2000
------------- -------------
Net loss $ (7,413,887) $ (158,079)
============= =============
Net loss per common share:
Basic and diluted $ (2.18) $ (0.05)
============= =============
The fair value of each option or warrant was estimated on the date of grant
using the Black-Scholes option pricing model using the following
assumptions: average risk-free interest rates ranging from 4.23% to 5.6%,
expected life of five years, dividend yield of 0%; and expected volatility
ranging from 55.0% to 125.9%. The weighted-average fair value of the
options on the grant date for the years ended December 31, 2001 and 2000
was $0.70 and $0.94 per share, respectively.
F-17
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. NET INCOME (LOSS) PER COMMON SHARE:
The following represents the calculation of net income per common share:
2001 2000
------------- -------------
BASIC
Net income (loss) applicable to common shareholders $ (7,040,720) $ 95,167
============= =============
Weighted average number of common shares 3,407,930 2,939,034
============= =============
Basic earnings (loss) per share $ (2.07) $ 0.03
============= =============
DILUTED
Net income (loss) applicable to common shareholders $ (7,040,720) $ 95,167
============= =============
Weighted average number of common shares 3,407,930 2,939,034
Common stock equivalent shares representing shares
issuable upon exercise of stock options Anti-dilutive 336,349
Weighted average number of shares used in
calculation of diluted earnings per share 3,407,930 3,275,383
------------- -------------
Diluted earnings (loss) per share $ (2.07) $ 0.03
============= =============
The weighted average shares used in the calculation of diluted earnings per
share for the year ended December 31, 2001 and 2000, excludes shares of
1,543,095 and 24,346, respectively, which relate to employee stock options
outstanding and 1,915,000 and 255,000 which relates to warrants
outstanding.
13. COMMITMENTS:
LEASES - The Company leases its office space in California, a manufacturing
facility in Guadalajara, Mexico, and the facility and certain equipment in
the UK under operating leases. The total future minimum lease payments, as
of December 31, 2001, are as follows:
YEARS ENDING DECEMBER 31,
2002 $ 327,440
2003 287,760
2004 304,312
2006 310,012
2006 132,362
-------------
$ 1,361,886
=============
Lease payments on the manufacturing facility in Mexico are to be made in
Mexican Pesos. Lease payments on the facility and equipment in the UK are
to be made in GB pound-sterling. The above schedule was prepared using the
conversion rates in effect at December 31, 2001. Changes in the conversion
F-18
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
rate will have an impact on the Company's required minimum payments and its
operating results.
Rent expense was $350,152 and $172,560 for the years ended December 31,
2001 and 2000, respectively.
Termination Of Employment Agreement/Entering Consulting Agreement - The
Company entered into a Termination of Employment Agreement/Entering
Consulting Agreement on November 13, 2001, with Robert O. Smith. This
Consulting Agreement will continue in effect for a period of three (3)
years unless terminated or extended upon mutual agreement. Under the terms
of the agreement, Mr. Smith agrees to assist the Company in managing its
power supply business and related projects. The agreement requires payment
of $l00,000 per annum, at the end of each calendar year or pro rated by
month. At December 31, 2001, the Company has $15,000 accrued under this
agreement. Mr. Smith is entitled to receive options to acquire l00,000
shares of Digital Power's common stock on an annual basis beginning on
January l, 2002 pursuant to Digital Power's stock option plan at an
exercise price of $3.00 per share. Mr. Smith has the opportunity to sell to
Telkoor Telecom, Ltd up to 50% of the common stock held by him, but under
no circumstances more than 5% of the issued and outstanding common stock of
the Company on a fully diluted basis as of the date of the sale.
14. MAJOR CUSTOMERS:
The Company frequently sells large quantities of inventory to its
customers. For the year ended December 31, 2001, one customer accounted for
13% of the Company's net sales. For the year ended December 31, 2000, three
customers accounted for 29% of the Company's net sales. Of the Company's
consolidated revenues for the year ended December 31, 2001, 63% of revenues
were earned from customers in the United States, 30% from customers in the
United Kingdom, and 7% for the rest of the world. Consolidated revenues for
the year ended December 31, 2000, were earned 70% from customers in the
United States, 21% from customers in the United Kingdom, and 9% for the
rest of the world.
For the year ended December 31, 2001 and 2000, DPL contributed 37% and 29%,
respectively, of the Company's revenues. No one customer of DPL contributed
greater than 10% of the Company's consolidated revenues for the years ended
December 31, 2001 and 2000.
15. EMPLOYEE BENEFIT PLANS:
401(K) PROFIT SHARING PLAN - The Company has a 401(k) profit sharing plan
(the "Plan") covering substantially all employees of DPC. Eligible
employees may make voluntary contributions to the Plan, which are matched
by the Company at a rate of $.25 for each $1.00 contributed, up to a
maximum of six percent of eligible compensation. The Company can also make
discretionary contributions. The Company made matching contributions to the
Plan of $12,238 and $12,665 for years ended December 31, 2001 and 2000,
respectively.
The Company's subsidiary DPL, has a group personal pension plan covering
substantially all of its employees. Eligible employees may make voluntary
contributions to the plan. The Company will contribute 7% of the employees
basic annual salary to the plan. Contributions are charged to operations as
incurred. The Company made contributions totaling $55,334 and $66,908 to
the plan for the years ended December 31, 2001 and 2000, respectively.
F-19
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYEE STOCK OWNERSHIP PLAN - The Company also has an employee stock
ownership plan (the "ESOP") covering substantially all employees of DPC.
The Company can make discretionary contributions of cash or company stock
(as defined in the ESOP plan document) up to deductible limits prescribed
by the Internal Revenue Code.
16. INCOME TAXES:
Income tax expense (benefit)is comprised of the following:
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
2001 2000
------------- -------------
Current
Federal $ - $ 60,000
State 800 21,000
Foreign (36,506) 23,000
-------------- -------------
(35,706) 104,000
-------------- -------------
Deferred
Federal 299,995 -
State 50,528 -
Foreign (15,934) -
-------------- -------------
334,589 -
-------------- -------------
$ 298,883 $ 104,000
============= =============
F-20
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net deferred tax asset and liability recognized as of
December 31, 2001 are as follows:
Current deferred tax assets (liabilities):
Accounts receivable, principally due to allowance
for doubtful accounts $ 148,518
Compensated absences, principally due to accrual
for financial reporting purposes 21,422
Accrued commissions 28,326
Acrrued payroll 10,035
Accrued severance 203,911
Inventory reserve 1,190,035
Warranty reserve 64,764
Stock rotation liability 20,070
UNICAP Credit carryforward 28,546
Accrued liabilities 66,065
Other (272)
-------------
1,781,420
Valuation allowance (1,781,420)
-------------
Net current deferred tax asset $ -
=============
Long-term deferred tax assets (liabilities):
Net operating loss carryforwards $ 1,935,548
UNICAP Credit carryforward 74,167
Goodwill 505,188
Depreciation 56,618
-------------
2,571,521
Valuation allowance (2,571,521)
-------------
Net long-term deferred tax liability $ -
=============
Total income tax expense differed from the amounts computed by applying the
U.S. federal statutory tax rates to pre-tax income as follows:
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
2001 2000
------------ ------------
Total expense computed by applying the
U.S. statutory rate (34.0%) 34.0%
Permanent differences (0.1) 5.1
State income taxes 0.2 10.9
Tax effect resulting from foreign activities 8.0 (101.0)
Change in valuation allowance (5.3) 105.2
Change in beginning deferred asset 35.6 0.0
Other 0.0 0.3
------------ ------------
4.4% 54.5%
============ ============
The Company will continue to assess the realizability of the deferred tax
assets in future periods. The valuation allowance increased by $4,049,459
during the year ended December 31, 2001. During March 2001, the Company
F-21
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fully valued the deferred tax asset recorded at December 31, 2000 of
$350,523 due to the uncertainty of the Company's ability to recognize the
benefit of the deferred tax asset in the future. The valuation allowance
increased by $212,559 during the year ended December 31, 2000.
At December 31, 2001, the Company has net operating loss carryforwards of
approximately $3,599,674 which begin to expire in the year 2020. The
Company has California net operating loss carryforwards for the year ended
December 31, 2001, of $1,854,876, which expire through 2011. As a result of
certain non-qualified stock options, which have been exercised, the tax
benefit from the utilization of the net operating loss carryforward will be
charged to additional-paid in capital when, and if, the losses are
utilized. The net operating loss may be subject to Internal Revenue Code
Section 382 limitations.
No provision has been made for U.S. Federal and state income taxes or
foreign taxes that may result from future remittance of the undistributed
earnings of foreign subsidiaries because it is expected that such earnings
will be reinvested overseas indefinitely. Determination of the amount of
any unrecognized deferred income tax liability on these unremitted earnings
is not practicable.
17. SEGMENT REPORTING:
The Company has identified its segments based upon its geographic
operations. These segments are represented by each of the Company's
individual legal entities: DPC, PD and DPL. Segment operations are measured
consistent with accounting policies used in these consolidated financial
statements. Segment information is as follows:
December 31, 2001
DPC PD DPL Eliminations Totals
------------- ------------- ------------- ------------ -------------
Revenues $ 6,475,533 $ - $ 3,854,324 $ - $ 10,329,857
============= ============= ============= ============ =============
Intersegment
Revenues $ - $ 778,450 $ 599,848 $ (1,378,298) $ -
============= ============= ============= ============ ============
Interest Income $ 24,350 $ 310 $ 12,519 $ (24,350) $ 12,829
============= ============= ============= ============ ============
Interest Expense $ 56,874 $ - $ 30,937 $ (24,350) $ 63,461
============= ============= ============= ============ ============
Depreciation and
Amortization $ 196,555 $ 139,526 114,671 $ - $ 450,752
============= ============= ============= ============ ============
Income Tax $ 350,523 $ 11,356 $ (62,996) $ - $ 298,883
============= ============= ============= ============ ============
Net Income(loss) $ (5,360,730) $ (1,596,321) $ (207,140) $ 123,471 $ (7,040,720)
============= ============= ============== ============ ============
Expenditures for
Segment Assets $ 104,257 $ 5,424 $ 23,600 $ - $ 133,281
============= ============= ============= ============ ============
Segment Assets $ 6,833,699 $ 409,601 $ 2,562,562 $ (3,292,803) $ 6,513,059
============= ============= ============= ============ ============
F-22
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
DPC PD DPL Eliminations Totals
------------- ------------- ------------- ------------ -------------
Revenues $ 12,721,567 $ 15,302 $ 5,145,861 $ - $ 17,882,730
============= ============= ============= ============= =============
Intersegment
Revenues $ - $ 3,026,933 $ 483,394 $ (3,510,327) $ -
============= ============= ============= ============= =============
Interest Income $ 63,010 $ 1,742 $ 5,711 $ (40,543) $ 29,920
============= ============= ============= ============= =============
Interest Expense $ 79,997 $ 2,021 $ 49,517 $ (40,543) $ 90,992
============= ============= ============= ============= =============
Depreciation and
Amortization $ 303,890 $ 54,346 $ 117,751 $ - $ 475,987
============= ============= ============= ============= =============
Income Tax
Expense $ 80,000 $ - $ 24,000 $ - $ 104,000
============= ============= ============= ============= =============
Net Income $ (525,919) $ 179,333 $ 441,753 $ - $ 95,167
============== ============== ============= ============= =============
Expenditures for
Segment Assets $ 133,972 $ 19,517 $ 65,425 $ - $ 218,914
============= ============= ============= ============= =============
Segment Assets $ 10,674,886 $ 180,624 $ 2,631,015 $ (1,321,475) $ 12,165,050
============= ============= ============= ============== =============