UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended December 31, 2008
or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE
ACT OF 1934
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For the transition period from
___________ to __________
Commission
File Number 1-12711
DIGITAL
POWER CORPORATION
(Name of
registrant as specified in its charter)
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California
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94-1721931
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(State
or other jurisdiction of
Incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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41324 Christy Street,
Fremont, California 94538-3158
(Address
of principal executive offices)
510-657-2635
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each
Class
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Name of each exchange
on which registered
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Common
Stock, no par value
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NYSE
Amex
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Securities
registered under Section 12(g) of the Act:
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Title of Each
Class
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None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes ¨ No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes ¨ No
þ
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 þ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) 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-K
or any amendment to this Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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Large
accelerated filer ¨
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Accelerated
filer ¨
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Non-accelerated
filer ¨ (do not check if
a smaller reporting company)
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Smaller
reporting company þ
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No
þ
As of
March 20, 2009, the aggregate market value of the voting common stock held by
non-affiliates was approximately $3,373,539, based upon the closing price of the
common stock on the NYSE Amex on that date. Shares of common stock held by each
officer and director and by each person who owns 5% or more of the outstanding
common stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of
March 20, 2009, the number of shares of common stock outstanding was
6,615,708.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
2
As
used in this annual report, the terms “we,” “us,” “our,” Company,” “Digital,” or
“Digital Power,” mean Digital Power Corporation, a California corporation, and
its subsidiaries unless otherwise indicated.
The
following information should be read in conjunction with the Consolidated
Financial Statements and the notes thereto located elsewhere in this Annual
Report on Form 10-K. This Report, and in particular “Management's
Discussion and Analysis of Financial Condition and Results of Operations,”
contains "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. In this report, the words "believes,"
"anticipates," "intends," "expects," "plans," "should," "will," "seeks" and
words of similar import identify forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, performance or achievements to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: our history of net losses; our dependence on
Telkoor Telecom Ltd. to design certain of our standard products; the possible
limits of our strategic focus on our power supply component competencies; our
dependence on a few major customers; uncertainty of market acceptance of our
product; the effects of the current crisis affecting world financial markets;
and other factors referenced in "Risk Factors" and other sections of this Annual
Report. Given these uncertainties, you are cautioned not to place undue reliance
on such forward-looking statements. We assume no obligation to update these
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking statements.
PART
I.
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ITEM
1.
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DESCRIPTION
OF BUSINESS.
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General
Digital
Power Corporation is a solution-driven organization that designs, develops,
manufactures and sells cutting-edge high-grade power system solutions to
military/defense, telecom/datacom, industrial and medical
industries. We are highly focused on custom product designs for both
the commercial and military/defense markets, where customers demand high
density, high efficiency and ruggedized products to meet the harshest operating
conditions. We are a California corporation originally formed in
1969, and our common stock trades on the NYSE Amex under the symbol
“DPW”. Our corporate headquarters is located in the heart of
the Silicon Valley.
We also
have a wholly-owned subsidiary, Digital Power Limited ("DPL"), which operates
under the brand name of “Gresham Power Electronics”
(“Gresham”). Gresham is located in Salisbury, England, and designs,
manufactures, sells and distributes power products and system solutions for the
European marketplace, including power conversion products for naval and military
applications and DC/AC inverters for the telecommunications
industry
We
believe that we are one of the first companies in the power systems solutions
industry to introduce a product strategy based on the premise that products
developed with an extremely flexible architecture enable rapid modifications to
meet unique customer requirements for non-standard output voltages. The
development and implementation of this strategy has resulted in broad acceptance
in both the telecom/industrial and medical market segments for our new line of
high density and high efficiency power products. These products set an industry
standard for providing high power output in package sizes that are smaller than
any other commercially available product.
3
We market
and sell our products to many diverse market segments including the telecom,
industrial, medical and military/defense industries. Our products
serve a global market, with an emphasis on North America and
Europe. We have an extremely broad product offering including Custom
and Modified-Standard, Open-Frame, CompactPCI, ATSC Front-Ends
and Power Over Ethernet (PoE), providing power output from 50 watts to 25,000
watts.
In an
effort to provide short lead-times, high quality products and competitive prices
to support our markets, we have entered into production agreements with numerous
manufacturers located in Asia. These contract manufacturing (CM) agreements
allow us to control production costs and insure high quality products
deliverable in a timely matter to meet market demand.
We intend
to remain an innovative leader in the development of cutting-edge custom power
solutions, rugged power systems to meet harsh and extreme environmental
requirements, and high performance, high density and modular power
systems. We are focusing today on developing even more
high-grade custom power system solutions to numerous customers in a broad range
of industries and challenging environments. Each product development is based on
best of class performance criteria and a special layout to meet each of our
customers’ unique operating conditions where efficiency, size and time to market
are key to their success. We are also exploring innovative “green
power” solutions that will complement our current product lines.
Power
System Solutions
We
provide custom power system solutions, high grade flexibility series power
supply products and value-added services to diverse industries and markets
including military/defense, telecom, medical and industrial. We
believe that our solutions leverage a combination of high power density,
superior power efficiency, design flexibility and short
time-to-market.
Custom
Power System Solutions. We provide
high-grade custom power system solutions to numerous customers in multiple
industry segments. Each custom solution that we develop is based on high power
density and a special layout to meet each of our customer’s unique operation
environments where efficiency, size and performance are key. We
combine our power design capabilities with the latest circuit designs to provide
complete power solutions for virtually any need. In the design
of custom power solutions, we work closely with our customers’ engineering teams
to develop mechanical enclosures to ensure 100% compatibility with any hosted
platform.
Our
standard contract for custom power solutions includes a multi-year high-volume
production forecast that allows us to secure long-term production guarantees
(and therefore possible savings on manufacturing costs for volume orders) while
providing an environment that promotes the development of our IP
portfolio. We believe that this business model provides
an incentive to our customers to be committed to high-volume production
orders.
High
Grade Flexibility Series Power Supply Products. While some of
our customers have special requirements that include a full custom design, other
customers may require only certain electrical changes to standard power supply
products, such as modified output voltages and unique status and control
signals, and mechanical repackaging tailored to fit the specific application. We
offer a wide range of standard and modified standard products that can be easily
integrated with any platform across our diversified market
segments.
Value-Added
Services. In
addition to our custom solutions and high grade flexibility series proprietary
products that we offer, we also provide value-added services to
OEMs. We incorporate an OEM’s selected electronic components,
enclosures, cable assemblies and other compliance components with our power
system solutions 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 systems, and provide the OEM
with the integration and installation service, thus eliminating a complex,
time-consuming and costly integration. We believe that this
value-added service is well suited to those OEMs who wish to reduce their vendor
base and minimize their investment in manufacturing that leads to increased
fixed costs. Based on these 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
Our
products have a standard warranty of 12 months from date of shipment to the
customer.
Markets
We sell
our custom power system solutions, high grade flexibility series power supply
products and value-added services to customers in a diverse range of commercial
and defense industries and markets throughout the world, with an emphasis on
North America and Europe. Our current customer base consists of
approximately 360 companies, some of which are served through our
distributors. We serve the North American power electronics market
primarily through our parent corporation, Digital Power Corporation; the
European marketplace is served through Gresham, our wholly-owned
subsidiary.
Our
products are sold in North America and Europe directly by our sales force and
through a network of manufacturers’ representatives and
distributors. In 2008, we significantly increased our access to our
potential marketplace by assigning many new manufacturing representatives,
defining a new sales strategy of maintaining a close relationship with our end
customers and prospects and establishing an inside sales department. We plan to
continue to build more channels and increase our market share through
2009.
Commercial
Customers. Our commercial
customers include datacom, telecom, medical and industrial companies located
throughout the world, with an emphasis on North America and Europe. Our products
are deployed in a variety of applications and operate in a broad range of
systems where customers require mission critical power
reliability. Examples of the commercial markets we serve and products
for these markets include:
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Datacom / Telecom / Wireless
Infrastructure
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Switches,
routers, servers, voice, video, fiber optic and
more
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Industrial Process Equipment
and Embedded Controls
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Packaging
equipment, pumps, CNC machines,
laser
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Intelligent
/ LED lighting
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Industrial
printers
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Test and
Instrumentation
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Laboratory and
diagnostic equipment
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ATE,
scientific
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Medical – Non-patient
Contact
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Imaging,
dispensing equipment
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Ventilators
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Dialysis,
endoscopy, surgical equipment
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Ultrasound,
MRI
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These
product solutions, which include standard, modified-standard or full custom
designs, are designed to meet our customer’s requirements. Customers
who have implemented our power supply product solutions include: Ericsson,
Qualcomm, Elma Group, Inc., Scientific Atlanta, Inogen, Aurora Networks, Rittal
Corporation, Arris, Tandberg, Martin Entertainment, Harris Corporation, Harmonic
Inc. and Motorola, among others.
Military/Defense
Customers. We have developed a broad range of rugged product
solutions for the military and defense market, featuring the ability to
withstand harsh environments. These product solutions, which include
both specific modifications of existing products or full custom designs, are
designed for combat environments and meet the requirements of customers such as
BAE Systems, Lockheed Martin, L3 Communications, Raytheon, General Dynamics,
Boeing, Perkins and others. We are fully compliant with the
regulations of ITAR (International Traffic in Arms Regulations) and are an
approved vendor for the US Air Force, Navy and Army.
5
At the
core of every military electronic system is a power supply. Mission critical
systems require rugged high performance power platforms that will operate and
survive the harsh environmental conditions placed upon such systems. Our power
supplies function effectively in these severe military
environments:
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Airborne
Systems – Electronic Warfare (EW), radar, guidance and
communication
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Missiles
– Ground-to-air, air-to-air and
sea-to-air
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Land
Based – Communication
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Naval
– Shipboard radar, EW and
communication
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Ground
Vehicles – Active Protection, Communications and
Navigation
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UAV
(Unmanned Aerial Vehicle) – Very lightweight power
systems
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Our products power EW systems, advanced
data links, missiles, rugged computer systems, fire control systems, radar,
navigation systems, Identification Friend or Foe (IFF) systems and many other
electronic defense systems. Meeting these unique requirements of the MIL-SPEC
world is part of our core competence with more than 25 years of field-proven
experience in design and manufacturing.
Space,
weight, output power, electromagnetic compatibility, power density and multiple
output requirements are only part of the challenges that any military power
supply design faces. With many decades of experience, our engineering teams meet
these tough challenges. Our power supplies are a critical component
of many major weapon systems worldwide.
We
leverage our strategic alliance and collaboration with Telkoor, our largest
shareholder, and Gresham, our wholly-owned subsidiary, to develop some of the
MIL-SPEC products.
Products features for our
military/defense customers include:
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Full
custom design projects
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Program
management for each project
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Quality
assurance and control
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Compliance
with Mil-Q 9858A & ISO
9001:2000
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FRACAS
(Failure Reporting, Analysis, and Corrective Action
System)
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Environmental
testing in accordance with
MIL-STD-810
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100%
screening, including Environmental Stress Screening (ESS) and Acceptance
Test Procedure (ATP) with random vibration and temperature cycling
tests
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Strategy
Our
strategy is to be the supplier of choice to those companies and OEMs requiring
high-quality power system solutions where custom design, superior product,
high-quality, time-to-market and very competitive prices are critical to
business success. We believe that we provide advanced custom product design
services to deliver cutting-edge, high-grade products that reach the highest
efficiency and density and can meet the most rigorous power requirements. Our
customers benefit from a direct relationship with us that is intended to support
all their needs for designing and manufacturing power solutions and products. By
implementing our advance core technology including process implementation in
integrated circuits (IC) we can provide cost reductions to our customers by
replacing their existing power sources with our custom design cost-effective
products.
6
Our
target market segments include the industrial, telecommunication, medical, and
military/defense industries. We do not participate in the personal
computer power supply market, because of the low margins arising out of the high
volume and extremely competitive nature of that market.
Our
strategy will continue to focus on expanding our market share by adding new
customers from all our target market segments. We are developing long term
relationships in the military and defense market segment, providing advanced
rugged products to customers in this segment. We also intend to expand our
customer base in our commercial market segments, including medical and
telecom/industrial, while continuing to maintain our existing
customers. We believe that our custom power supply solutions,
flexibility series, high density and high-grade power product solutions provide
customers with a more effective choice as compared to products offered by other
power solution competitors, due in part to a customer’s ability to specify
output voltages and other features such as redundancy and sense control tailored
to its exact requirements within specific parameters.
Furthermore,
we believe that we have the talent and engineering experience to satisfy any of
our customers’ product or platform requirements. If an OEM customer
specifies a different set of power system parameters, we will custom design or
modify a product to meet the OEM’s requirements With a
wide range of solutions from our custom designs to our high grade flexibility
series products, our professional design team can provide economical and timely
product solutions to our OEM customers. In addition, as our power
systems meet all appropriate environmental requirements and safety standards,
our smaller OEM customers can expedite the process of independent safety agency
testing by companies such as by Underwriters Laboratories, and save considerable
expense. By offering OEM customers a new choice with Digital
Power’s custom, flexibility series, high-grade and high-density power system
solutions, we believe we provide certain strategic advantages over our
competitors.
Digital
Power Limited (“Gresham”)
Digital
Power Limited, our wholly-owned subsidiary organized and headquartered in
Salisbury, England, designs, manufactures, and distributes switching power
supplies, uninterruptible power supplies, and power conversion and distribution
equipment frequency converters for the commercial and military markets, under
the name Gresham Power Electronics. Frequency converters manufactured by Gresham
are used by navel warships to convert their generated 60-cycle electricity
supply to 400 cycles. This 400-cycle supply is used to power their
critical equipment such as gyro, compass, and weapons
systems. Gresham also designs and manufactures Transformer Rectifiers
for naval use. Typically, these provide battery supported back up for
critical DC systems such as machinery and communications. In
addition, higher power rectifiers are used for the starting and servicing of
helicopters on naval vessels, and Gresham now supplies these as part of overall
helicopter start and servicing systems. We believe that Gresham products add diversity to our product
line, provide greater access to the United Kingdom and European
markets, and strengthen our engineering and technical resources. For
the years ended December 31, 2008 and 2007, Gresham contributed approximately
53% and 56%, respectively, to our gross revenues.
Manufacturing
and Testing
Consistent
with our strategy focusing on custom design products and high-grade flexibility
series products, we aim to maintain a high degree of flexibility in our
manufacturing through the use of strategically focused contract
manufacturers. We select contract manufacturers to ensure that
they will meet our near term cost, delivery, and quality goals. In
addition, we believe these relationships will eventually give us access to new
markets and beneficial cross-licensing opportunities. The competitive
nature of the power supply industry has placed continual downward pressure on
selling prices. In order to achieve our low cost manufacturing goals
with labor-intensive products, we have entered into production agreements with
certain contract manufacturers in Asia. At present, our principal
contract manufacturers in Asia are Winco-Power Technology (“Winco”), Watt
(Murata Power Solutions), Ultra Level Tech Co., Ltd. and Acropolis, Energy
Recovery Products’ CM.
7
We sell
certain products developed, manufactured and sold to us by Telkoor Telecom Ltd.
(“Telkoor”), an Israeli company which currently holds 43.8% of our outstanding
common stock. In coordination with Telkoor, and in order to
accelerate delivery and reduce the cost of some of the products we purchase from
Telkoor, we have obtained the right to order products directly from Telkoor’s
manufacturers in China in exchange for the payment of a commission to
Telkoor.
We are
continually improving our internal processes while monitoring the processes of
our contract manufacturers, to ensure the highest quality and consistent
manufacturing of our power solutions. We test all our custom power assemblies
per clearly defined test procedures developed by us and our customers. This
approach ensures that our customers can use our systems right out of the box.
Customer specific testing services are offered with custom designed test stands
to simulate operation within our customer applications.
Compliance
with international safety agency standards is critical in every application, and
power solutions play a major role in meeting these compliance requirements. Our
safety engineers and quality assurance teams help ensure that our custom
products are designed to meet all safety requirements and are appropriately
documented to expedite safety approval processes.
Regulatory
Requirements
We and our manufacturing partners are
required to meet applicable regulatory, environmental, emissions, safety and
other requirements where specified by the customer and accepted by us or as
required by local regulatory or legal requirements. The products that
we market and sell in Europe may be subject to the 2003 European Directive on
Restriction of Hazardous Substances (RoHS), which restricts the use of six
hazardous materials in the manufacture of certain electronic and electrical
equipment as well as the 2002 European Directive on Waste Electrical and
Electronic Equipment (WEEE), which determines collection, recycling and recovery
goals for electrical goods. In July of 2006, our industry began
phasing in RoHS and WEEE requirements in most geographical markets with specific
emphasis on consumer-based products. We believe that RoHS and
WEEE-compliant components may be subject to longer lead-times and higher prices
as the industry transitions to these new requirements.
Some of our products are subject to the
U.S. ITAR (International Trafficking and Arms Regulations), which is
administered by the U.S. Department of State. ITAR controls not only the export
of certain products specifically designed, modified, configured or adapted for
military systems, but also the export of related technical data and defense
services as well as foreign production. We obtain required export licenses for
any exports subject to ITAR. Compliance with ITAR may require a prolonged period
of time; if the process of obtaining required export licenses for products
subject to ITAR is delayed, it could have a materially adverse effect on our
business, financial condition, and operating results. Any future restrictions or
charges imposed by the United States or any other country on our international
sales or sales by or the operations of Gresham, our foreign subsidiary, could
have a materially adverse effect on our business, financial condition, and
operating results. In addition, from time to time we have entered into contracts
with the Israeli Ministry of Defense which contracts were funded with monies
subject to, and we therefore were required to comply with the regulations
governing, the U.S. Foreign Military Financing program.
Sales
and Marketing
We market
our products directly through our internal salesforce as well as through a
network of independent manufacturer’s representatives and
distributors. Each representative organization is responsible for
managing sales in a particular geographic territory. Generally, the
representative has the opportunity to earn an exclusive access to all potential
customers in the assigned territory as a result of achieving its marketing and
sales goals as defined in the representative agreement. Our manufacturer
representative agreements provide for a commission equal to five percent of net
sales, payable after the product is shipped, for any direct sale
contribution. Typically, either we or the representative organization
may terminate the agreement with 30 days’ written notice.
8
Historically,
we have also sold products through multiple distributor arrangements which do
not specify a particular territory. Each of these arrangements can be
terminated by either party with 30 days’ written notice.
Our
promotional efforts to date have included product data sheets, participation in
trade shows, and our website, www.digipwr.com. We have recently
developed and launched a new corporate website that emphasizes our capabilities
and marketing direction. We will continue to enhance our website by adding more
features and functionalities such as ecommerce that will allow our customers to
buy directly through our website.. Our future promotional activities
will likely include advertising in industry-specific publications, as well as
application notes.
Engineering
and Technology
Our
engineering and product development efforts are primarily directed toward
developing new products in connection with custom product design and
modification of our standard power systems to provide a broad array of
individual models. In the years ended December 31, 2008 and 2007, we
expended a total of $622,000 and $728,000, respectively, on engineering and
product development.
Our new
custom product design solutions are driven by our ability to provide to our
customers advanced technology that meets their product needs with a short
turnaround time and a very competitive price point. Our standard contract for
custom power solutions includes a multi-year high-volume production forecast
that allows us to secure long-term production guarantees while providing an
environment that promotes the development of our IP portfolio.
We also
partner with various design and contract engineering firms for development of
some of our new products supported by our internal engineering services
staff. Furthermore, we continue to leverage the close relationship we
have with one of our major shareholders, Telkoor, to introduce new products that
Telkoor develops for its market and makes available for us. Finally, from time
to time we modify standard products to meet specific customer requirements when
applicable. We constantly continue to improve our product
power density, adaptability, and efficiency, while attempting to anticipate
changing market demands for increased functionality, such as PFC and improved
EMI filtering.
Competition
The power
system solutions industry is highly fragmented and characterized by intense
competition. Our competition includes hundreds of companies located
throughout the world, some of whom have advantages over us in terms of labor and
component costs, and some of whom may offer products comparable in quality to
ours. Many of our competitors including Power One, Emerson (Astec)
Technologies, Inc., Lambda Electronics, and Mean-Well Power Supplies have
substantially greater fiscal and marketing resources and geographic presence
than we do. If we are successful in increasing our revenues,
competitors may notice and increase competition with our
customers. We also face competition from current and prospective
customers who may decide to design and manufacture internally power supplies
needed for their products. Furthermore, certain larger OEMs tend to
contract only with larger power supply manufacturers.
In April
2008, Telkoor, one of our major shareholders and strategic supplier, signed a
“Private Label” agreement with Murata Power Solutions in Canada to sell
Telkoor’s products under the Murata brand name. This agreement positions Murata
as a direct competitor of ours for selling Telkoor’s products in North
America.
We
anticipate that with the current economic downturn, additional competitors may
enter into strategic alliances or even acquisitions. Competition
could thus become more problematic if consolidation trends in the electronics
industry continue and some of the OEMs to whom we sell our products are acquired
by larger OEMs. To remain competitive, we must continue to compete
favorably on the basis of value by providing reliable manufacturing, offering
customer service engineering services including custom design and manufacturing,
continuously improving quality and reliability levels, and offering flexible and
reliable delivery schedules.
9
We
believe that our power system solutions and advanced product design have
significant advantages in the power supply solutions market because they have
higher efficiency and high power density, or power-to-volume ratio, which make
them smaller than the solutions offered by our competitors and can thus fit well
in numerous custom environments in compliance with our customers’
requirements.
Another
advantage of our power system solutions product line is based on the flexible
series that employs flexible power range of product design. We
believe we have a competitive position with our targeted customers who need a
high-quality, compact product, which can be readily modified to meet the
customer’s unique requirements. We have designed the base model power
system platform so that it can be quickly and economically modified and adapted
to the specific power needs of any hosting platform or OEM. This
“flexibility” approach has allowed us to provide samples of modified power
systems to OEM customers in only a few days after initial consultation, an
important capability given the emphasis placed by OEMs on “time to market.” It
also results in very low NRE expenses. Because of reduced NRE
expenses, we do not generally charge our OEM customers for NRE related to
tailoring a power system to a customer’s specific requirements. We
believe this gives us an advantage over our competitors, many of whom do charge
their customers for NRE expenses.
Raw
Materials
The raw
materials for power supplies principally consist of electronic
components. These raw materials are available from a variety of
sources, and we are not dependent on any one supplier. We generally
allow our subcontractors to purchase components based on orders received or
forecasts to minimize our risk of unusable inventory. To the extent
necessary, we may allow them to procure materials prior to orders received to
obtain shorter lead times and to achieve quantity discounts following a risk
assessment.
Intellectual
Property
We rely
upon a combination of trade secrets, industry expertise, confidential
procedures, and contractual provisions to protect our intellectual
property. We believe that because our products are continually
updated and revised, obtaining patents would be costly and not beneficial.
However, in the future as we continue to develop unique core technology we may
obtain patents to some of the core technology. On July 8, 2004, our
trademark, “DP Digital Power – Powering Your Technologies,” was registered with
the United States Patent and Trademark Office.
Employees
As of
December 31, 2008, we had 33 employees located in the United States and the
United Kingdom, of whom six were engaged in engineering and product development,
eight in sales and marketing, eleven in general operations and eight in general
administration and finance All but five of these employees are
employed on a full-time basis. None of our employees are currently
represented by a labor union. We consider our relations with our employees to be
good
|
ITEM
1A.
|
RISK
FACTORS.
|
The risk
factors listed in this section provide examples of risks, uncertainties and
events that may cause our actual results to differ materially from the
expectations we describe in our forward-looking statements. Readers should be
aware that the occurrence of any of the events described in these risk factors
could have a material and adverse effect on our business, results of operations
and financial condition. We undertake no obligation to update or revise publicly
any forward-looking statements, whether as a result of new information, future
events, or otherwise.
10
Although
we experienced operating income during the year ended December 31, 2008, we
have historically experienced net losses and may experience net losses in the
future.
For the
year ended December 31, 2008, we had operating income of $391,000. We also
had operating income of $53,000 for the year ended December 31,
2007. Although we have actively taken steps to reduce our costs, we
could incur losses in the future until we increase revenues through the sale of
current products and decrease manufacturing costs through a greater use of
contract manufacturers in Asia and other strategic locations.
We
depend on Telkoor to design and manufacture many of our products.
We depend
on Telkoor, our largest shareholder and one of our third party subcontractors,
for design and manufacturing capabilities for many of the products which we
sell. If Telkoor is unable or unwilling to continue designing or manufacturing
our products in required volumes on a timely basis, that could lead to loss of
sales, and adversely affect our operating results and cash position. We also
depend on Telkoor's intellectual property and ability to transfer production to
third party manufacturers. Failure to obtain new products in a timely manner or
delay in delivery of product to customers will have an adverse effect on our
ability to meet our customers’ expectations. In addition, we operate in highly
competitive markets where our ability to sell Telkoor’s products could be
adversely affected by long lead-times and the high costs of Telkoor’s products.
Telkoor’s principal offices, research and development and manufacturing
facilities are located in Israel. Political, economic, and military conditions
in Israel directly affect Telkoor’s operations.
Our strategic focus on our custom
power supply solution competencies and concurrent cost reduction plans may be
ineffective or may limit our ability to compete.
As a
result of our strategic focus on custom power supply solutions, we will continue
to devote significant resources to developing custom products for a large number
of customers, where each product represents a uniquely tailored solution for a
specific customer’s requirements. A failure to meet these customer
product requirements or a failure to meet production schedules and/or product
quality standards may put us at risk with one or more of these
customers. The loss of one or more of our significant custom power
supply solution customers could have a material adverse impact on our revenues,
business or financial condition.
We have
also implemented a series of initiatives designed to increase efficiency and
reduce costs. While we believe that these actions will reduce costs,
they may not be sufficient to achieve the required operational efficiencies that
will enable us to respond more quickly to changes in the market or result in the
improvements in our business that we anticipate. In such event, we may be forced
to take additional cost-reducing initiatives, which may negatively impact
quarterly earnings and profitability as we account for severance and other
related costs. In addition, there is the risk that such measures could have
long-term effects on our business by reducing our pool of talent, decreasing or
slowing improvements in our products or services, making it more difficult for
us to respond to customers, limiting our ability to increase production quickly
if and when the demand for our solutions increases and limiting our ability to
hire and retain key personnel. These circumstances could cause our earnings to
be lower than they otherwise might be.
If our new custom products
development efforts fail to result in products which meet our customers’ needs,
or if our customers fail to accept our new products, our revenues will be
adversely affected.
We have
recently introduced a new strategy of developing multiple custom products
design. The successful development, introduction and commercial success of this
new technology will depend on a number of factors, including our ability to meet
customer requirements, our ability to meet all product criteria, ,
successful transition from development stage to production stage, our ability to
meet product cost targets generating acceptable margins, timely remediation of
product performance issues, if any, identified during testing, product
performance at customer locations, differentiation of our product from our
competitors’ products, and management of customer expectations concerning
product capabilities and life cycles.
11
We are dependent upon our ability to
attract, retain and motivate our key personnel.
Our
success depends on our ability to attract, retain and motivate our key
management personnel, including but not limited to our CEO and CFO, controller,
sales force, and key engineers, necessary to implement our business plan and to
grow our business. Despite the adverse economic conditions at this time and
occurring over the past several years, competition for certain specific
technical and management skill sets is intense. If we are unable to identify and
hire the personnel that we need to succeed, or if one or more of our present key
employees were to cease to be associated with us, our future results could be
adversely affected.
We depend upon a few major customers
for a majority of our revenues, and the loss of any of these customers, or the
substantial reduction in the quantity of products that they purchase from us,
would significantly reduce our revenues and net income.
We
currently depend upon a few major OEMs and other customers for a significant
portion of our revenues. Because of the global economic downturn, we have
already experienced the reduction of orders by OEMs and the reduction or
cancellation of orders, scaling back of certain activities and workforce layoffs
by other customers. The loss of any of these customers or a
substantial reduction in the quantity of products that they purchase from us
would significantly reduce our revenues and net income. Furthermore, diversions
in the capital spending of certain of these customers to new network elements
have and could continue to lead to their reduced demand for our products, which
could in turn have a material adverse affect on our business and results of
operation. If the financial condition of one or more of our major customers
should deteriorate, or if they have difficulty acquiring investment capital due
to any of these or other factors, a substantial decrease in our revenues would
likely result.
We
are dependent on the electronic equipment industry, and accordingly will be
affected by the impact on that industry of the current economic
downturn.
Substantially
all of our existing customers are in the electronic equipment industry and they
manufacture products that are subject to rapid technological change,
obsolescence, and large fluctuations in demand. This industry is
further characterized by intense competition and volatility. The OEMs
serving this industry are pressured for increased product performance and lower
product prices. OEMs, in turn, make similar demands on their
suppliers, such as us, for increased product performance and lower
prices. The current economic downturn has affected the entire supply
chain, including us. Recently, certain segments of the electronic
industry 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.
Our
reliance on subcontract manufacturers to manufacture certain aspects of our
products involves risks, including delays in product shipments and reduced
control over product quality.
Since we
do not own significant manufacturing facilities, we must rely on, and will
continue to rely on, a limited number of subcontract manufacturers to
manufacture our power supply products. Our reliance upon such subcontract
manufacturers involves several risks, including reduced control over
manufacturing costs, delivery times, reliability, quality of components,
unfavorable currency exchange fluctuations, and continued inflationary pressures
on many of the raw materials used in the manufacturing of our power supply
products. If we were to encounter a shortage of key manufacturing components
from limited sources of supply, or experience manufacturing delays caused by
reduced manufacturing capacity, inability of our subcontract manufacturers to
procure raw materials, the loss of key assembly subcontractors, difficulties
associated with the transition to our new subcontract manufacturers or other
factors, we could experience lost revenues, increased costs, delays in,
cancellations or rescheduling of orders or shipments, any of which would
materially harm our business.
12
We face intense industry competition,
price erosion and product obsolescence, which, in turn, could reduce our
profitability.
We
operate in an industry that is generally characterized by intense competition.
We believe that the principal bases of competition in our markets are breadth of
product line, quality of products, stability, reliability and reputation of the
provider, along with cost. Quantity discounts, price erosion, and rapid product
obsolescence due to technological improvements are therefore common in our
industry as competitors strive to retain or expand market share. Product
obsolescence can lead to increases in unsaleable inventory that may need to be
written off and therefore could reduce our profitability. Similarly, price
erosion can reduce our profitability by decreasing our revenues and our gross
margins. In fact, we have seen price erosion over the last several years on most
of the products we sell, and we have factored additional price erosion into our
forecasts.
Our future results are dependent on
our ability to establish, maintain and expand our OEM relationships and our
other distribution channels.
We market
and sell our products through domestic and international OEM relationships and
other distribution channels. Our future results are dependent on our ability to
establish, maintain and expand our relationships with OEMs as well as with other
marketing and sales distribution channels. If, however, the third parties with
whom we have entered into such OEM and other arrangements should fail to meet
their contractual obligations, cease doing, or reduce the amount of their
business with us or otherwise fail to meet their own performance objectives,
customer demand for our products could be adversely affected, which would have
an adverse effect on our revenues.
We may not be able to
procure necessary key components for our products, or we may purchase too much
inventory or the wrong inventory.
The power supply industry, and the
electronics industry as a whole, can be subject to business cycles. During
periods of growth, key components required to build our products may become
unavailable in the timeframe required for us to meet our customers’ demands. Our
inability to secure sufficient components to build products for our customers
could negatively impact our sales and operating results. We may choose to
mitigate this risk by increasing the levels of inventory for certain key
components. Increased inventory levels can increase the potential risk for
excess and obsolescence should our forecasts fail to materialize or if there are
negative factors impacting our customers’ end markets. If we purchase too much
inventory or the wrong inventory, we may have to record additional inventory
reserves or write-off the inventory, which could have a material adverse effect
on our gross margins and on our results of operations.
We depend on sales of our legacy
products for a meaningful portion of our revenues, but these products are mature
and their sales will continue to decline.
A large
portion of our sales have historically been attributable to our legacy products.
We expect that these products may continue to account for a meaningful
percentage of our revenues for the foreseeable future. However, these sales are
declining. Although we are unable to predict future prices for our legacy
products, we expect that prices for these products will continue to be subject
to significant downward pressure in certain markets for the reasons described
above. Accordingly, our ability to maintain or increase revenues will be
dependent on our ability to expand our customer base, increase unit sales
volumes of these products and to successfully, develop, introduce and sell new
products such as custom design and value added products. We cannot assure you
that we will be able to expand our customer base, increase unit sales volumes of
existing products or develop, introduce and/or sell new products.
13
Our operating results may vary from
quarter to quarter.
Our
operating results have in the past been subject to quarter to quarter
fluctuations, and we expect that these fluctuations will continue, and may
increase in magnitude, in future periods. Demand for our products is driven by
many factors, including the availability of funding for our products in
customers’ capital budgets. There is a trend for some of our customers to place
large orders near the end of a quarter or fiscal year, in part to spend
remaining available capital budget funds. Seasonal fluctuations in customer
demand for our products driven by budgetary and other reasons can create
corresponding fluctuations in period-to-period revenues, and we therefore cannot
assure you that our results in one period are necessarily indicative of our
revenues in any future period. In addition, the number and timing of large
individual sales and the ability to obtain acceptances of those sales, where
applicable, has been difficult for us to predict, and large individual sales
have, in some cases, occurred in quarters subsequent to those we anticipated, or
have not occurred at all. The loss or deferral of one or more significant sales
in a quarter could harm our operating results. It is possible that in some
quarters our operating results will be below the expectations of public market
analysts or investors. In such events, or in the event adverse conditions
prevail, the market price of our common stock may decline
significantly.
We are subject to certain governmental
regulatory restrictions relating to our international sales.
Some of our products are subject to ITAR
regulation, which is administered by the U.S. Department of State. ITAR
controls not only the export, import and trade of certain products specifically
designed, modified, configured or adapted for military systems, but also the
export of related technical data and defense services as well as foreign
production. Any delays in obtaining the required export,
import or trade licenses for products subject to the ITAR could have a
materially adverse effect on our business, financial condition, and/or operating
results. In addition, changes in United States export and import laws
that require us to obtain additional export and import licenses or delays in
obtaining export or import licenses currently being sought could cause
significant shipment delays and, if such delays are too great, could result in
the cancellation of orders. Any future restrictions or charges imposed by the
United States or any other country on our
international sales or foreign subsidiary could have a materially adverse effect
on our business, financial condition, and/or operating results. In addition,
from time to time, we have entered into contracts with the Israeli Ministry of
Defense which were funded with monies subject to, and we therefore was required
to comply with the regulations governing, the U.S. Foreign Military Financing
program.
We depend on
international operations for a substantial majority of our components and
products.
We purchase a substantial majority of
our components from foreign manufacturers and have a substantial majority of our
commercial products assembled, packaged, and tested by subcontractors located
outside the United
States. These activities
are subject to the uncertainties associated with international business
operations, including trade barriers and other restrictions, changes in trade
policies, governmental regulations, currency exchange fluctuations, reduced
protection for intellectual property, war and other military activities,
terrorism, changes in social, political, or economic conditions, and other
disruptions or delays in production or shipments, any of which could have a
materially adverse effect on our business, financial condition, and/or operating
results.
We depend on
international sales for a portion of our revenues.
Sales to customers outside of
North America accounted for 55.7% of net revenues in
the year ended December 31, 2008, compared with 60.2% in 2007, and we expect
that international sales will continue to represent a material portion of our
total revenues. International sales are subject to the risks of international
business operations as described above as well as generally longer payment
cycles, greater difficulty collecting accounts receivable, and currency
restrictions. In addition, Gresham, our wholly-owned foreign subsidiary in
the United
Kingdom, supports our
European and other international customers, distributors, and sales
representatives, and therefore is also subject to local
regulation. International sales are also subject to the export laws
and regulations of the United States and other
countries.
14
If our accounting controls and
procedures are circumvented or otherwise fail to achieve their intended
purposes, our business could be seriously harmed.
We
evaluate our disclosure controls and procedures as of the end of each fiscal
quarter, and are annually reviewing and evaluating our internal controls over
financial reporting in order to comply with SEC rules relating to internal
control over financial reporting adopted pursuant to the Sarbanes-Oxley Act of
2002. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate. If we fail
to maintain effective internal control over financial reporting or our
management does not timely assess the adequacy of such internal control, we may
be subject to regulatory sanctions and our reputation may decline.
The sale of our products is dependent
upon our ability to satisfy the proprietary requirements of our
customers.
We depend
upon a relatively narrow range of products for the majority of our revenue. Our
success in marketing our products is dependent upon their continued acceptance
by our customers. In some cases, our customers require that our products meet
their own proprietary requirements. If we are unable to satisfy such
requirements, or forecast and adapt to changes in such requirements, our
business could be materially harmed.
The sale of our products is dependent
on our ability to respond to rapid technological change, including evolving
industry-wide standards, and may be adversely affected by the development, and
acceptance by our customers, of new technologies which may compete with or
reduce the demand for our products.
Rapid
technological change, including evolving industry standards, could render our
products obsolete. To the extent our customers adopt such new technology in
place of our products; the sales of our products may be adversely affected. Such
competition may also increase pricing pressure for our products and adversely
affect the revenues from such products.
Our limited ability to protect our
proprietary information and technology may adversely affect our ability to
compete, and our products could infringe upon the intellectual property rights
of others, resulting in claims against us the results of which could be
costly.
Many of
our products consist entirely or partly of proprietary technology owned by us.
Although we seek to protect our technology through a combination of copyrights,
trade secret laws and contractual obligations , these protections may not be
sufficient to prevent the wrongful appropriation of our intellectual property,
nor will they prevent our competitors from independently developing technologies
that are substantially equivalent or superior to our proprietary technology. In
addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent as the laws of the United States. In order to defend
our proprietary rights in the technology utilized in our products from third
party infringement, we may be required to institute legal proceedings. If we are
unable to successfully assert and defend our proprietary rights in the
technology utilized in our products, our future results could be adversely
affected.
Although
we attempt to avoid infringing known proprietary rights of third parties in our
product development efforts, we may become subject to legal proceedings and
claims for alleged infringement from time to time in the ordinary course of
business. Any claims relating to the infringement of third-party proprietary
rights, even if not meritorious, could result in costly litigation, divert
management’s attention and resources, require us to reengineer or cease sales of
our products or require us to enter into royalty or license agreements which are
not advantageous to us. In addition, parties making claims may be able to obtain
an injunction, which could prevent us from selling our products in the United
States or abroad.
15
If we are unable to satisfy our
customers’ specific product quality, certification or network requirements, our
business could be disrupted and our financial condition could be
harmed.
Our
customers demand that our products meet stringent quality, performance and
reliability standards. We have, from time to time, experienced problems in
satisfying such standards. Defects or failures have in the past, and may in the
future occur relating to our product quality, performance and reliability. From
time to time, our customers also require us to implement specific changes to our
products to allow these products to operate within their specific network
configurations. If we are unable to remedy these failures or defects or if we
cannot affect such required product modifications, we could experience lost
revenues, increased costs, including inventory write-offs, warranty expense and
costs associated with customer support, delays in or cancellations or
rescheduling of orders or shipments and product returns or discounts, any of
which would harm our business.
If we ship products that contain
defects, the market acceptance of our products and our reputation will be harmed
and our customers could seek to recover their damages from
us.
Our
products are complex, and despite extensive testing, may contain defects or
undetected errors or failures that may become apparent only after our products
have been shipped to our customers and installed in their network or after
product features or new versions are released. Any such defect, error or failure
could result in failure of market acceptance of our products or damage to our
reputation or relations with our customers, resulting in substantial costs for
both the Company and our customers as well as the cancellation of orders,
warranty costs and product returns. In addition, any defects, errors, misuse of
our products or other potential problems within or out of our control that may
arise from the use of our products could result in financial or other damages to
our customers. Our customers could seek to have us pay for these losses.
Although we maintain product liability insurance, it may not be
adequate.
Our common stock price is
volatile.
Our
common stock is listed on the NYSE Amex 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. The
exercise of outstanding options and warrants may adversely affect our stock
price and a shareholder’s percentage of ownership. As of December 31,
2008, we have outstanding options to purchase an aggregate of 779,035 shares of
common stock, with a weighted average exercise price of $1.02 per share,
exercisable at prices ranging from $0.48 to $3.03 per share.
|
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS.
|
None.
|
ITEM
2.
|
DESCRIPTION
OF PROPERTY.
|
Our
headquarters are located in approximately 6,600 square feet of leased office,
engineering, and development space in Fremont, California. The lease
expires on November 30, 2012, and calls for an annual base rent that increases
through the lease term. Our rent under this lease is currently $5,707
per month. The lease also provides for one option to renew for a
five-year period.
We
currently anticipate that with the increase of our activities and our expected
growth, and despite the global economic turmoil, we will require a larger
facility during 2009. We believe that we will be able to obtain
suitable space on acceptable terms and conditions.
Our
wholly-owned subsidiary Gresham subleases a 25,000 square foot facility in
Salisbury U.K., where we design, develop, manufacture, market, and distribute
commercial and military power products for the European market. Sales and
service support staff for our European network of distributors are located
within the building together with other functions, such as engineering and
administration. Gresham’s rent expense is approximately $15,000
per month, and the lease expires on September 26, 2009, with certain
repairing covenants. Gresham intends to enter into a new lease with
the building owner and continue operations at the current premises after such
date.
16
|
ITEM
3.
|
LEGAL
PROCEEDINGS.
|
On January 31, 2008, we submitted an
initial notice of voluntary self-disclosure of possible export compliance
problems under the ITAR regulations to the Directorate of Defense Trade Controls
of the U.S. Department of State. The initial notice of
voluntary self-disclosure described our apparent omission to register as a
manufacturer, exporter and broker of defense articles and services as required
by ITAR, and to obtain the requisite export licenses from the U.S. Department of
State pursuant to ITAR in connection with our performance of certain contracts
involving the manufacture and supply of power supplies for Israeli defense
programs. In
April 2008, we submitted to the U.S. Department of State a final report of
voluntary self-disclosure detailing the results of our internal review of these
matters, and received a notice from the State Department closing this
case without further action. In addition, we have registered with the State
Department as a “Broker” and “Manufacturer/Exporter” of Defense
Articles/Services under ITAR.
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
|
We held our 2008 Annual Meeting of
Shareholders at our corporate headquarters in Fremont, California, on November 17, 2008, at 9:00
a.m. At the annual meeting, our shareholders were asked to vote on
the following proposals:
1. Elect five members of our Board of
Directors, each to serve on our Board until our next annual meeting of
shareholders or until his respective successor is duly elected and
qualified;
2. Ratify the appointment of Kost
Forer Gabbay & Kasierer, a member of Ernst & Young Global Limited. as our independent auditors for the
fiscal year ending December 31, 2009; and
3. Act upon such other matters as may
properly come before the annual meeting or any adjournments or postponements
thereof.
An aggregate of 5,725,480 shares of the
6,615,708 shares of issued and outstanding common stock were represented at the
annual meeting. The proposals were voted on as follows:
|
Nominee
|
Votes
For
|
Votes
Against
|
Abstentions
|
|
Ben-Zion
Diamant
|
5,608,685
|
--
|
116,795
|
|
Amos
Kohn
|
5,620,285
|
--
|
105,195
|
|
Israel
Levi
|
5,702,044
|
--
|
23,436
|
|
Yeheskel
Manea
|
5,603,685
|
--
|
121,795
|
|
Terry
Steinberg
|
5,703,044
|
--
|
22,436
|
17
Proposal to ratify appointment of Korst
Forer Gabbay & Kasierer, a member of Ernst & Young Global Limited, as
our independent auditors for the fiscal year ending December 31,
2009:
For: 5,703,044
Against: 4,097
Abstentions: 11,587
Broker
Non-Votes: 0
PART
II
|
ITEM 5.
|
MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
|
|
(a)
|
Market
Information.
|
Our
common stock is listed and traded on the NYSE Amex under the symbol
DPW. The following tables set forth the high and low closing sale
prices, as reported by NYSE Amex, for our common stock for the prior two fiscal
years.
|
Quarter
Ended
|
High
|
Low
|
|
12/31/2008
|
$0.95
|
$0.50
|
|
09/30/2008
|
1.00
|
0.70
|
|
06/30/2008
|
1.65
|
0.85
|
|
03/31/2008
|
1.41
|
0.90
|
|
12/31/2007
|
$1.90
|
$1.25
|
|
09/30/2007
|
$1.84
|
$1.31
|
|
06/30/2007
|
$1.39
|
$1.11
|
|
03/31/2007
|
$1.80
|
$1.26
|
The last
reported sale price of our common stock on the NYSE Amex on March 20, 2009, was
$0.95 per share.
|
(b)
|
Holders
|
As of
March 1, 2009, there were an aggregate of 6,615,708 shares of our common stock
outstanding, held by approximately 82 holders of record.
|
(c)
|
Dividends
|
We have
not declared or paid any cash dividends since our inception, and we do not
intend to pay any cash dividends in the foreseeable future. The
declaration of dividends in the future, if any, will be at the discretion of the
Board of Directors and will depend upon our earnings, capital requirements, and
financial position.
18
|
ITEM
6.
|
SELECTED
FINANCIAL DATA.
|
Not
applicable.
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
General
We are a
solution-driven organization that designs, develops, manufactures and
sells cutting-edge high-grade power system solutions to the
military/defense, telecom/datacom, industrial and medical industries. Our
products serve a global market, with an emphasis on North America and
Europe. Revenues are generated from sales directly by our sales force
and through a network of manufacturers’ representatives and distributors to OEMs
and end users.
During
the year ended December 31, 2008, our products were received well in the
marketplace. We intend to remain an innovative leader in the
development of cutting-edge custom power solutions, rugged power systems to meet
harsh and extreme environmental requirements and high performance, high density
and modular power system. We also intend to continue to pursue our strategy of
controlling production costs and insuring high quality products deliverable in a
timely manner through production agreements with numerous contract manufacturers
in Asia. While we believe our revenues have increased to a sufficient
amount to offset our expenses, we may be subject to net losses in an individual
quarter. We believe that our cash will be sufficient to fund those
losses for at least 12 months.
Foreign
Currency Fluctuations
Our
wholly-owned subsidiary, Gresham, operates using the United Kingdom pound
sterling. Therefore, we are subject to monetary fluctuations between
the U.S. dollar and the United Kingdom pound sterling. For the year
ended December 31, 2008, we recorded a foreign currency translation loss of
$737,000 in Other Comprehensive Income (Loss) in shareholders’
equity. For the year ended December 31, 2007, we recorded a foreign
currency translation profit of $34,000.
19
Results
of Operations
The table
below sets forth certain statements of operations data as a percentage of
revenues for the years ended December 31, 2008 and 2007:
|
Years Ended December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Revenues
|
100.00 | % | 100.00 | % | ||||
|
Cost of
revenues
|
68.42 | 72.83 | ||||||
|
Write-off of excess
inventory
|
1.97 | 1.61 | ||||||
|
Gross
profit
|
29.61 | 25.56 | ||||||
|
Engineering and product
development
|
5.23 | 5.99 | ||||||
|
Sales and
marketing
|
8.73 | 8.02 | ||||||
|
General and
administrative
|
12.36 | 11.11 | ||||||
|
Total operating
expenses
|
26.32 | 25.12 | ||||||
|
Operating income
|
3.29 | 0.44 | ||||||
|
Financial
income
|
1.17 | 0.55 | ||||||
|
Income before tax
benefit
|
4.45 | 0.99 | ||||||
|
Tax benefit
|
0.24 | 0.01 | ||||||
|
Net income
|
4.69 | % | 1.00 | % | ||||
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 Annual Report. We prepared the
financial statements in accordance with U.S. generally accepted accounting
principles, which require management to make estimates, and assumptions that
affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Year Ended December 31,
2008, Compared to Year Ended December 31, 2007
Revenues
For the
year ended December 31, 2008, revenues decreased by 2.1% to $11,900,000 from
$12,157,000 for the year ended December 31, 2007. The decrease in
revenues is mainly due to a decrease in sales of our commercial products in
Europe, as described below.
Revenues derived from our defense
products for the year ended December 31, 2008 were $3,113,000, or approximately
the same as revenues of $3,140,000 from defense products for the year ended
December 31, 2007. Revenues derived from our commercial products for
the year ended December 31, 2008 decreased by 2.6% to $8,787,000, from
$9,017,000 for the year ended December 31, 2007. The decrease in
commercial product revenue in 2008 resulted primarily from the rescheduling of
shipments in the third and fourth quarters of 2008 by two of our larger European
customers, and was not reflective of a broad-based downturn in
business. To lessen any potential impact of similar decisions by
specific customers in the future, we are implementing a new strategy to extend
the distribution network to cover numerous new market segments. In
addition, we are focusing more on full custom power solutions which will enable
us to collaborate more closely with our customers and therefore anticipate the
timing of design cycles, shipments and other customer requirements.
Revenues
from our domestic operations increased by 5.9% to $5,611,000 for the year ended
December 31, 2008, from $5,297,000 for the year ended December 31, 2007. The
increase in product revenues is mainly attributed to increases in sales of our
newer product lines with full custom power solution designs, offset partially by
the decrease in demand for our certain of our legacy product lines as a result
of the maturation of these products.
20
Revenues
from our European operations (Gresham) decreased by 7.9% to $6,289,000 for the
year ended December 31, 2008, from $6,860,000 for the year ended December 31,
2007. The decrease in revenues from Gresham in 2008 is due to a
decline in commercial product revenues resulting primarily from the rescheduling
of shipments by two of our larger European customers during the third and fourth
quarters of 2008.
Gross
Margins
Gross
margins were 29.6% for the year ended December 31, 2008, compared to 25.6% for
the year ended December 31, 2007. The higher gross margins in 2008
were primarily attributable to the continued outsourcing of our production to
contract manufacturers in Asia, cost reductions and variations in our product
mix. We believe that the most important factor in the substantial increase in
gross margins was our strategic shift earlier in 2008 away from a dependence
upon commoditized products to more integrated custom product
solutions. This value-added platform of solutions, where we work in
concert with our strategic customers and their partners, requires a more direct,
consultative selling effort on our part. We believe that some of this
business may be of a seasonal nature and that it most likely will not signify
similar increases in gross margin in the future.
Engineering
and Product Development
Engineering
and product development expenses were 5.23% of revenues for the year ended
December 31, 2008, compared to 5.99% for the year ended December 31,
2007. Actual dollar expenditures decreased by $106,000, to $622,000
in 2008 from $728,000 in 2007. The decrease was primarily due to
lower salary and consulting expenses, including the complete cessation of
consulting contracts and corresponding consulting fees in 2008.
Selling
and Marketing
Selling
and marketing expenses were 8.7% of revenues for the year ended December 31,
2008, compared to 8.0% of revenues for the year ended December 31,
2007. Actual dollar expenditures increased by $64,000, to $1,039,000
in 2008 from $975,000 in 2007, mainly due to investing in Company branding that
included a new website, product labels and packaging and new collateral,
together with an increase in travel and advertising expenses in 2008, partially
offset by a decrease in commissions.
General
and Administrative
General
and administrative expenses were 12.4% of revenues for the year ended December
31, 2008, compared to 11.1% for the year ended December 31,
2007. In actual dollars, general and administrative expenses
increased by $120,000, to $1,471,000 in 2008 from $1,351 in 2007. The increase
in 2008 was primarily due to the accrual of liabilities in relation to the
separation agreement with our former President and Chief Executive
Officer.
Financial
Income, Net
Net financial income was $139,000 for
the year ended December 31, 2008, compared to net financial income of $67,000
for the year ended December 31, 2007. The increase in financial income in
2008 was due to foreign currency fluctuations during the respective periods
offset partially by changes in the fair value of forward
contracts. From time to time, we enter into forward contracts to
hedge certain sales transactions which are denominated in foreign
currencies.
21
Net
Income
Net
income for the year ended December 31, 2008 was $558,000, or 4.7% of revenues,
an increase of $437,000 from the net income of $121,000, or 1.0% of revenues,
for the year ended December 31, 2007. The increase in net income is primarily
due to the significant increase in gross margins in 2008.
Critical
Accounting Policies
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles require management to make estimates and assumptions that
affect the reported assets, liabilities, sales, and expenses in the accompanying
consolidated financial statements. Critical accounting policies are
those that require the most subjective and complex judgments, often employing
the use of estimates about the effect of matters that are inherently
uncertain. The following are considered our most critical accounting
policies that, under different conditions or using different assumption or
estimates, could show materially different results on our financial condition
and results of operations.
Revenue
Recognition
We
recognize revenue from products when the following criteria are
met: persuasive evidence of an arrangement exists, delivery of the
product has occurred, our price to our customer is fixed or determinable, no
further obligation exists and collectibility is reasonably assured (see
Note 2h of Notes to Consolidated Financial Statements).
Inventory
Obsolescence Accruals
We
periodically assess our inventory valuation by reviewing revenue forecasts and
technological obsolescence. We write down the value of obsolescent or
unmarketable inventory to the estimated net realizable value based upon
assumptions about future demand and market conditions. If actual
market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.
During
2008 and 2007, we recorded inventory write-offs of $ 235,000 and
$ 196,000, respectively.
Allowance
for Doubtful Accounts
Our
accounts receivable are derived from sales to customers located primarily in the
U.S. and Europe. We perform ongoing credit evaluations of our
customers’ financial condition and currently require no collateral from our
customers. An allowance for doubtful accounts for estimated losses is
maintained in anticipation of the inability of customers to make required
payments. The allowance for doubtful accounts as of December 31, 2008 and 2007
was $124,000 and $110,000, respectively. When we become aware that a specific
customer is unable to meet its financial obligations, such as the result of
bankruptcy or deterioration of the customer’s operating results or financial
position, we record a specific allowance to reflect the level of credit risk in
the customer’s outstanding receivable balance. We are not able to
predict changes in the financial condition of customers, and if the condition or
circumstances of our customers deteriorates, estimates of the recoverability of
trade receivables could be materially affected and we may be required to record
additional allowances. Alternatively, if our estimates are determined
to be greater than the actual amounts necessary, we may decrease a portion of
such allowance in future periods based on actual collection
experience.
Other
Accrued Liabilities
Our
accrued liabilities are based on a variety of factors including past experience
and, in many cases, require estimates If future experience differs
from these estimates, operating results in future periods would be
impacted.
22
Equity-based
Compensation Expense:
We
account for equity-based compensation in accordance with SFAS No. 123(R),
“Share-Based Payment.” Under the fair value recognition provisions of this
statement, share-based compensation cost is measured at the grant date based on
the fair value of the award and is recognized as an expense over the requisite
service periods. Determining the fair value of share-based awards at the grant
date requires the exercise of judgment, including the amount of share-based
awards that are expected to be forfeited. Estimated forfeitures are based on
historical pre-vesting forfeitures. If actual results differ from these
estimates, equity-based compensation expense, and therefore our results of
operations, could be impacted.
Liquidity
and Capital Resources
On
December 31, 2008, we had cash, cash equivalents, and restricted cash of
$2,552,000, and working capital of $3,412,000. This compares to cash,
cash equivalents, and restricted cash of $1,548,000 and working capital of
$3,500,000, on December 31, 2007. The decrease in working capital in 2008 is
mainly due to a decrease in accounts receivable, decrease in accounts payable
and related parties-trade payables, and an increase in deferred revenue, offset
partially by an increase in cash and cash equivalents.
Net cash
provided by operating activities was $1,444,000 for the year ended December 31,
2008, compared to $88,000 in cash provided by operating activities for the year
ended December 31, 2007. The increase in cash provided by operating
activities in 2008 was mainly due to decrease in trade receivables resulting
from increased collection efforts, an increase in deferred revenues and other
current liabilities, and an increase in accounts payable and related parties –
trade payables, offset partially by an increase in inventories due to a custom
order backlog for 2009.
Net cash
used in investing activities was $79,000 for the year ended December 31, 2008,
compared to $161,000 in cash provided by investing activities for the year ended
December 31, 2007. The decrease in cash used in investing activities
in 2008 was mainly due to reduced purchases of property and equipment during
2008 and a decrease in a short term deposit investment.
No cash
was provided by financing activities in the year ended December 31, 2008,
compared to $5,000 in net cash provided by financing activities for the year
ended December 31, 2007. Cash provided by financing activities in 2007 was due
to proceeds from the exercise of options.
Our liquidity will be affected by many
factors, some of which are based on normal ongoing operations of our business
and some of which arise from fluctuations related to global economics and
markets. As evidenced by the recent turmoil in the financial markets, credit has
tightened. We are reviewing our liabilities and capital structure to
minimize any impact, and will pursue a strategy to mitigate any reductions in
cash flow as a result of an economic slowdown by reducing capital expenditures
and other discretionary spending. We currently believe that our
existing cash balances, together with anticipated cash flows from operations,
will be sufficient to fund our operations through at least the next twelve
months.
|
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
|
Not applicable.
|
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
|
23
DIGITAL
POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED
FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2008
IN
U.S. DOLLARS
INDEX
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Balance Sheets
|
F-3
|
|
Consolidated
Statements of Income
|
F-4
|
|
Statements
of Changes in Shareholders' Equity
|
F-5
|
|
Consolidated
Statements of Cash Flows
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
F-7
- F-22
|
-
- - - - - - -
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Shareholders and board of directors of
DIGITAL
POWER CORPORATION
We have
audited the accompanying consolidated balance sheets of Digital Power
Corporation ("the Company") and its subsidiary as of December 31, 2008 and 2007
and the related consolidated statements of income, shareholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purposes of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company and
its subsidiary at of December 31, 2008 and 2007 and the consolidated results of
their operations and cash flows for the years then ended, in conformity with
U.S. generally accepted accounting principles.
|
Tel-Aviv,
Israel
|
KOST
FORER GABBAY & KASIERER
|
|
March
30, 2009
|
A
Member of Ernst & Young Global
|
F-2
DIGITAL POWER
CORPORATION
CONSOLIDATED
BALANCE SHEETS
U.S.
dollars in thousands (except share and per share data)
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 2,476 | $ | 1,443 | ||||
|
Restricted
cash
|
76 | 105 | ||||||
|
Trade
receivables, net of allowance for doubtful accounts of $ 124 and $110
as of December 31, 2008 and 2007, respectively
|
1,901 | 2,751 | ||||||
|
Prepaid
expenses and other receivables
|
139 | 106 | ||||||
|
Inventories
(Note 3)
|
1,494 | 1,657 | ||||||
|
Total current
assets
|
6,086 | 6,062 | ||||||
|
PROPERTY
AND EQUIPMENT, NET (Note 4)
|
153 | 202 | ||||||
|
LONG-TERM
DEPOSITS
|
41 | 41 | ||||||
|
Total
assets
|
$ | 6,280 | $ | 6,305 | ||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Accounts
payable
|
$ | 1,069 | $ | 727 | ||||
|
Related
parties - trade payables (Note 11)
|
957 | 1,409 | ||||||
|
Deferred
revenue
|
134 | - | ||||||
|
Other
current liabilities (Note 5)
|
514 | 426 | ||||||
|
Total current
liabilities
|
2,674 | 2,562 | ||||||
|
COMMITMENTS
AND CONTINGENT LIABILITIES (Note 6)
|
||||||||
|
SHAREHOLDERS'
EQUITY (Note 7):
|
||||||||
|
Share
capital -
|
||||||||
|
Series
A redeemable, convertible preferred shares, no par value - 500,000 shares
authorized, 0 shares issued and outstanding at December 31, 2008 and
2007
|
- | - | ||||||
|
Preferred
shares, no par value - 1,500,000 shares authorized, 0 shares issued
and outstanding at December 31, 2008 and 2007
|
- | - | ||||||
|
Common
shares, no par value - 30,000,000 shares authorized; 6,615,708 shares
issued and outstanding at December 31, 2008 and 2007
|
- | - | ||||||
|
Additional
paid-in capital
|
13,927 | 13,885 | ||||||
|
Accumulated
deficit
|
(9,784 | ) | (10,342 | ) | ||||
|
Accumulated
other comprehensive income (loss)
|
(537 | ) | 200 | |||||
|
Total
shareholders' equity
|
3,606 | 3,743 | ||||||
|
Total
liabilities and shareholders' equity
|
$ | 6,280 | $ | 6,305 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
F-3
DIGITAL POWER
CORPORATION
CONSOLIDATED STATEMENTS OF
INCOME
U.S.
dollars in thousands (except per share data)
|
Year
ended
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Revenues
(Note 12)
|
$ | 11,900 | $ | 12,157 | ||||
|
Cost
of revenues
|
8,142 | 8,854 | ||||||
|
Write-off
of excess inventory
|
235 | 196 | ||||||
|
Gross
profit
|
3,523 | 3,107 | ||||||
|
Operating
expenses:
|
||||||||
|
Engineering
and product development
|
622 | 728 | ||||||
|
Selling
and marketing
|
1,039 | 975 | ||||||
|
General
and administrative
|
1,471 | 1,351 | ||||||
|
Total operating
expenses
|
3,132 | 3,054 | ||||||
|
Operating
income
|
391 | 53 | ||||||
|
Financial
income, net
|
139 | 67 | ||||||
|
Income
before income taxes
|
530 | 120 | ||||||
|
Tax
benefit
|
28 | 1 | ||||||
|
Net
income
|
$ | 558 | $ | 121 | ||||
|
Basic
net earnings per share
|
$ | 0.084 | $ | 0.018 | ||||
|
Diluted
net earnings per share
|
$ | 0.083 | $ | 0.018 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
F-4
DIGITAL POWER
CORPORATION
STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
U.S.
dollars in thousands (except share data)
|
Other
|
||||||||||||||||||||||||||||
|
Additional
|
accumulated
|
Total
|
Total
|
|||||||||||||||||||||||||
|
Common
shares
|
paid-in
|
Accumulated
|
comprehensive
|
comprehensive
|
shareholders'
|
|||||||||||||||||||||||
|
Number
|
Amount
|
capital
|
deficit
|
income
(loss)
|
income
(loss)
|
equity
|
||||||||||||||||||||||
|
Balance
as of January 1, 2006
|
6,610,708 | $ | - | $ | 13,768 | $ | (10,463 | ) | $ | 166 | $ | 3,471 | ||||||||||||||||
|
Stock
compensation related to options granted to Telkoor's employees and other
non- employee consultant
|
- | - | 54 | - | - | 54 | ||||||||||||||||||||||
|
Stock
compensation related to options granted to employees
|
- | - | 58 | - | - | 58 | ||||||||||||||||||||||
|
Exercise
of options
|
5,000 | - | 5 | - | - | 5 | ||||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Net
income
|
- | - | - | 121 | - | $ | 121 | 121 | ||||||||||||||||||||
|
Foreign
currency translation adjustments
|
- | - | - | - | 34 | 34 | 34 | |||||||||||||||||||||
|
Total
comprehensive income
|
||||||||||||||||||||||||||||
| $ | 155 | |||||||||||||||||||||||||||
|
Balance
as of December 31, 2007
|
6,615,708 | - | 13,885 | (10,342 | ) | 200 | 3,743 | |||||||||||||||||||||
|
Stock
compensation related to options granted to Telkoor's employees and other
non- employee consultant
|
- | - | (12 | ) | - | - | (12 | ) | ||||||||||||||||||||
|
Stock
compensation related to options granted to employees
|
- | - | 54 | - | - | 54 | ||||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||||||
|
Net
income
|
- | - | - | 558 | - | $ | 558 | 558 | ||||||||||||||||||||
|
Foreign
currency translation adjustments
|
- | - | - | - | (737 | ) | (737 | ) | (737 | ) | ||||||||||||||||||
|
Total
comprehensive loss
|
||||||||||||||||||||||||||||
| $ | (179 | ) | ||||||||||||||||||||||||||
|
Balance
as of December 31, 2008
|
6,615,708 | $ | - | $ | 13,927 | $ | (9,784 | ) | $ | (537 | ) | $ | 3,606 | |||||||||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
F-5
DIGITAL POWER
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands
|
Year
ended
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash flows from
operating activities:
|
||||||||
|
Net
income
|
$ | 558 | $ | 121 | ||||
|
Adjustments
required to reconcile net income to net cash provided by operating
activities:
|
||||||||
|
Depreciation
|
94 | 82 | ||||||
|
Stock
compensation related to options granted to employees
|
54 | 58 | ||||||
|
Stock
compensation related to options granted to Telkoor's employees and other
non- employee consultant
|
(12 | ) | 54 | |||||
|
Decrease
(increase) in trade receivables, net
|
474 | (530 | ) | |||||
|
Decrease
(increase) in prepaid expenses and other receivables
|
(54 | ) | 35 | |||||
|
Increase
in inventories
|
(456 | ) | (244 | ) | ||||
|
Inventory
write-offs
|
235 | 196 | ||||||
|
Increase
in accounts payable and related parties - trade payables
|
213 | 420 | ||||||
|
Increase
(decrease) in deferred revenues and other current
liabilities
|
338 | (104 | ) | |||||
|
|
||||||||
|
Net
cash provided by operating activities
|
1,444 | 88 | ||||||
|
|
||||||||
|
Cash flows from
investing activities:
|
||||||||
|
|
||||||||
|
Increase
in long term deposit
|
- | (41 | ) | |||||
|
Purchase
of property and equipment
|
(79 | ) | (120 | ) | ||||
|
|
||||||||
|
Net
cash used in investing activities
|
(79 | ) | (161 | ) | ||||
|
Cash flows from
financing activities:
|
||||||||
|
|
||||||||
|
Proceeds
from exercise of options
|
- | 5 | ||||||
|
|
||||||||
|
Net
cash provided by financing activities
|
- | 5 | ||||||
|
|
||||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
(332 | ) | 17 | |||||
|
|
||||||||
|
Increase
(decrease) in cash and cash equivalents
|
1,033 | (51 | ) | |||||
|
Cash
and cash equivalents at the beginning of the year
|
1,443 | 1,494 | ||||||
|
|
||||||||
|
Cash
and cash equivalents at the end of the year
|
$ | 2,476 | $ | 1,443 | ||||
|
|
||||||||
|
Supplemental
disclosure of cash flows activities:
|
||||||||
|
|
||||||||
|
Income
taxes paid
|
$ | - | $ | 2 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
F-6
DIGITAL POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
|
NOTE
1:-
|
GENERAL
|
|
a.
|
Digital
Power Corporation ("the Company" or "DPC") was incorporated in 1969, under
the General Corporation Law of the State of California. The Company and
Digital Power Limited ("DPL"), a wholly-owned subsidiary located in the
United Kingdom, are currently engaged in the design, manufacture and sale
of switching power supplies and converters. The Company has two reportable
geographic segments - North America (sales through DPC) and Europe (sales
through DPL).
|
|
b.
|
The
Company depends on Telkoor Telecom Ltd. ("Telkoor"), a major shareholder
of the Company and one of DPC's third party subcontractors for
manufacturing capabilities in production of the products which DPC sells.
If these manufacturers are unable or unwilling to continue manufacturing
the Company's products in required volumes on a timely basis, that could
lead to loss of sales, and adversely affect the Company's operating
results and cash position. The Company also depends on Telkoor's
intellectual property and ability to transfer production to third party
manufacturers. Failure to obtain new products in a timely manner or delay
in delivery of product to customers will have an adverse effect on
Company's ability to meet its customers' expectations. See also Note
11.
|
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES
|
The
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States ("U.S.
GAAP").
|
a.
|
Use
of estimates:
|
The
preparation of the financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
|
b.
|
Financial
statements in U.S. dollars:
|
All of
the revenues of the Company are generated in U.S. dollars ("dollar"). In
addition, a substantial portion of the costs of the Company are incurred in
dollars. The Company's management believes that the dollar is the currency of
the primary economic environment in which the Company operates.
The
financial statements of the foreign subsidiary, whose functional currency has
been determined to be its local currency, have been translated into U.S. dollars
in accordance with Statement of Financial Accounting Standard No. 52, "Foreign
Currency Translation" ("SFAS No. 52"). All balance sheet accounts have been
translated using the exchange rates in effect at the balance sheet date.
Statement of income amounts have been translated using the average exchange rate
for the period. The resulting translation adjustments are reported as a
component of accumulated other comprehensive income (loss) in shareholders'
equity.
F-7
DIGITAL POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
c.
|
Principles
of consolidation:
|
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary. Intercompany transactions and balances have been
eliminated upon consolidation.
|
d.
|
Cash
equivalents:
|
Cash
equivalents are short-term highly liquid investments that are readily
convertible to cash with original maturities of three months or less at
acquisition.
|
e.
|
Restricted
cash:
|
Restricted
cash is held on account of a letter of credit issued by the Company's bank and
in respect of future lease payments and for certain customers until the
guarantee expires. The restricted cash is invested in a deposit.
|
f.
|
Inventories:
|
Inventories
are stated at the lower of cost or market value. Inventory write-offs are
provided to cover risks arising from slow-moving items or technological
obsolescence.
Cost is
determined as follows:
Raw
materials, parts and supplies - using the "first-in, first-out"
method.
Work-in-progress
and finished products - on the basis of direct manufacturing costs with the
addition of indirect manufacturing costs.
The
Company periodically assesses its inventories valuation in respect of dead and
slow moving items by reviewing, revenue forecasts and technological
obsolescence. When inventories on hand exceed the foreseeable demand or become
obsolete, the value of excess inventory, which at the time of the review was not
expected to be sold, is written off.
During
2008 and 2007, the Company recorded inventories write-offs of $ 235 and
$ 196, respectively.
F-8
DIGITAL POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
g.
|
Property
and equipment:
|
Property
and equipment are stated at cost, net of accumulated depreciation. Depreciation
is calculated by the straight-line method over the estimated useful lives, at
the following annual rates:
|
%
|
|
|
Computers,
software and related equipment
|
20
– 33
|
|
Office
furniture and equipment
|
10
– 20
|
|
Leasehold
improvements
|
Over
the term of the lease or the life
of
the asset, whichever is
earlier
|
The
long-lived assets of the Company and its subsidiary are reviewed for impairment
in accordance with Statement of Financial Accounting Standard No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"), whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to the
future undiscounted cash flows expected to be generated by the assets. During
2008 and 2007, no impairment losses have been identified.
|
h.
|
Revenue
recognition:
|
The
Company and its subsidiary generate their revenues from the sale of their
products through a direct and indirect sales force.
Revenues
from products are recognized in accordance with Staff Accounting Bulletin
No. 104, "Revenue Recognition in Financial Statements" ("SAB No. 104"),
when the following criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred, the seller's price to the buyer is fixed or
determinable, no further obligation exists and collectibility is reasonably
assured.
Generally,
the Company does not grant a right of return. However, certain distributors are
allowed, in the sixth month after the initial stock purchase, to rotate stock
that has not been sold for other products. This may be repeated every sixth
month thereafter for 18 months, at no more than 25% of the distributor's
purchase during the previous six months. Revenues subject to stock rotation
rights are deferred until the products are sold to the end customer or until the
rotation rights expire.
Service
revenues are deferred and recognized on a straight-line basis over the term of
the service agreement. Service revenues are immaterial as a proportion of the
Company's revenues.
|
i.
|
Engineering
and product development:
|
Engineering
and product development costs are charged to the statement of operations as
incurred.
F-9
DIGITAL POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
j.
|
Income
taxes:
|
The
Company and its subsidiary account for income taxes in accordance with Statement
of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"). This Statement prescribes the use of the liability method whereby
deferred tax assets and liability account balances are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The Company and its subsidiary
provide a valuation allowance, if necessary, to reduce deferred tax assets to
their estimated realizable value.
On
January 1, 2007, the Company adopted FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109" (FIN 48). FIN 48 contains a two-step approach to
recognizing and measuring uncertain tax positions accounted for in accordance
with SFAS No. 109. The first step is to evaluate the tax position taken or
expected to be taken in a tax return by determining if the weight of available
evidence indicates that it is more likely than not that, on an evaluation of the
technical merits, the tax position will be sustained on audit, including
resolution of any related appeals or litigation processes. The second step is to
measure the tax benefit as the largest amount that is more than 50% likely to be
realized upon ultimate settlement.
|
k.
|
Warranty
costs:
|
The
Company offers a 12-month warranty period for all of its products. The Company
estimates the costs that may be incurred under its warranty and records a
liability in the amount of such costs at the time product revenue is recognized.
Factors that affect the Company's warranty liability include the number of
units, historical rates of warranty claims and cost per claim. The Company
periodically assesses the adequacy of its recorded warranty liability and
adjusts the amounts as necessary.
A table
presenting the reconciliation of the changes in the Company's aggregate product
warranty liability was not provided due to the immateriality.
F-10
DIGITAL POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
l.
|
Accounting
for stock-based compensation:
|
The
Company accounts for stock based compensation in accordance with SFAS No. 123
(revised 2004), "Share-Based Payment" ("SFAS No. 123(R)").
SFAS No.
123(R) requires companies to estimate the fair value of equity-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as an
expense over the requisite service periods in the Company's consolidated income
statements.
The Company estimates the fair value of
stock options granted under SFAS
No. 123(R) using the Black-Scholes option- pricing model that uses the
assumption as follows:
Expected
volatility is based on historical volatility that is representative of future
volatility over the expected term of the options. The expected term of options
granted was determined based on the simplified method in accordance with Staff
Accounting Bulletin No, 110, which is calculated as the midpoint between the
vesting date and the end of the contractual term of the option. The risk free
interest rate is based on the yield of U.S Treasury bonds with equivalent terms.
The dividend yield is based on the Company's historical and future expectation
of dividends payouts. The Company has not paid cash dividends historically and
has no plans to pay cash dividends in the foreseeable future.
The
Company recognizes compensation expense based on awards ultimately expected to
vest, net of estimated forfeitures at the time of grant. Estimated forfeitures
are based on historical pre-vesting forfeitures. SFAS 123(R) requires
forfeitures to be estimated and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates.
The fair
value for options granted in 2008 and 2007 is amortized over their vesting
period using a straight-line recognition method and estimated at the date of
grant with the following assumptions:
|
2008
|
2007
|
|||
|
Dividend
yield
|
0%
|
0%
|
||
|
Expected
volatility
|
88%
–93%
|
100%
–103%
|
||
|
Risk-free
interest
|
1.7%
- 4.0%
|
4.5%
- 4.6%
|
||
|
Forfeiture
rate
|
5%
|
5%
|
||
|
Expected
life of up to
|
7
years
|
7
years
|
F-11
DIGITAL POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
The total
equity-based compensation expense related to all of the Company's equity-based
awards, recognized for the years ended December 31, 2008 and 2007 were comprised
as follows:
|
Year
ended
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Cost
of goods sold
|
$ | 2 | $ | 2 | ||||
|
Research
and development
|
2 | 2 | ||||||
|
Sales
and marketing
|
11 | 17 | ||||||
|
General
and administrative
|
39 | 37 | ||||||
|
Total
equity-based compensation expense
|
$ | 54 | $ | 58 | ||||
A summary
of option activity under the Company's Stock Option Plans as of December 31,
2008 and changes during the year then ended is as follows:
|
Year
ended December 31, 2008
|
||||||||||||||||
|
Amount
of
options
|
Weighted
average
exercise
price
|
Weighted-
average
remaining
contractual
term
(in
years)
|
Aggregate
intrinsic
value
|
|||||||||||||
|
Outstanding
at the beginning of the year
|
930,190 | $ | 1.15 | |||||||||||||
|
Granted
|
110,000 | $ | 0.81 | |||||||||||||
|
Expired
|
(31,155 | ) | $ | 2.31 | ||||||||||||
|
Forfeited
|
(230,000 | ) | $ | 1.29 | ||||||||||||
|
|
||||||||||||||||
|
Outstanding
at the end of the year
|
779,035 | $ | 1.02 | 5.59 | $ | 65 | ||||||||||
|
|
||||||||||||||||
|
Vested
or expected to vest at year end
|
740,035 | |||||||||||||||
|
|
||||||||||||||||
|
Exercisable
options at the end of the year
|
584,035 | $ | 1.01 | 4.51 | $ | 55 | ||||||||||
The
weighted-average grant-date fair value of options granted during the year ended
December 31, 2008 and 2007 was $0.81 and $ 1.60, respectively. The
aggregate intrinsic value in the table above represents the total intrinsic
value (the difference between the Company's closing stock price on December 31,
2008 and the exercise price, multiplied by the number of in-the-money-options)
that would have been received by the option holders had all option holders
exercised their options on December 31, 2008. This amount changes based on
the fair market value of the Company's shares. The total intrinsic value of
options exercised during the year ended December 31, 2007 was $ 1 (no options
were exercised in 2008).
F-12
DIGITAL POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
As of
December 31, 2008, there was $ 150 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the
Company's stock option plans. That cost is expected to be recognized over a
weighted average period of 2.27 years. The total fair value of options vested
during the year ended December 31, 2008 and 2007 was $ 42 and $
45.
The
Company applies SFAS No. 123(R) and Emerging Issues Task Force No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring or in Conjunction with Selling, Goods or Services" ("EITF 96-18"),
with respect to options and warrants issued to non-employees. SFAS No. 123(R)
requires the use of option valuation models to measure the fair value of the
options and warrants at the date of grant.
|
m.
|
Fair
value of financial instruments:
|
On
January 1, 2008, the Company adopted Financial Accounting Standards Board
("FASB") Statement No. 157, "Fair Value Measurements" ("SFAS No. 157")
for all financial assets and liabilities and nonfinancial assets and liabilities
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
This statement does not require any new fair value measurements, but provides
guidance on how to measure fair value by providing a fair value hierarchy used
to classify the source of the information.
SFAS
No. 157 defines fair value as the price that would be received upon the
sale of an asset or paid upon transfer of a liability in an orderly transaction
between market participants at the measurement date and in the principal or most
advantageous market for that asset or liability. The fair value should be
calculated based on assumptions that market participants would use in pricing
the asset or liability, not on assumptions specific to the entity. In addition,
the fair value of liabilities should include consideration of non-performance
risk including the Company's own credit risk.
F-13
DIGITAL POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
In
addition to defining fair value, SFAS No. 157 expands the disclosure
requirements around fair value and establishes a fair value hierarchy for
valuation inputs. The hierarchy prioritizes the inputs into three levels based
on the extent to which inputs used in measuring fair value are observable in the
market. Each fair value measurement is reported in one of the three levels
which are determined by the lowest level input that is significant to the fair
value measurement in its entirety. These levels are:
|
1.
|
Level
1 - inputs are based upon unadjusted quoted prices for identical
instruments traded in active
markets.
|
|
2.
|
Level
2 - inputs are based upon quoted prices for similar instruments in active
markets, quoted prices for identical or similar instruments in markets
that are not active, and model-based valuation techniques for which all
significant assumptions are observable in the market or can be
corroborated by observable market data for substantially the full term of
the assets or liabilities.
|
|
3.
|
Level
3 - inputs are generally unobservable and typically reflect management's
estimates of assumptions that market participants would use in pricing the
asset or liability. The fair values are therefore determined using
model-based techniques that include option pricing models, discounted cash
flow models, and similar
techniques.
|
The
valuation methodology the Company uses to measure derivatives is based
observable inputs including interest rate curves and both forward and spot
prices for currencies. These derivatives are included in Level 2 (see also Note
5).
The
carrying amounts of financial instruments carried at cost, including cash and
cash equivalents, restricted cash, short term bank deposits, trade receivables
and trade payables approximate their fair value due to the short-term maturities
of such instruments.
|
n.
|
Basic
and diluted net earnings per
share:
|
Basic net
earnings per share is computed based on the weighted average number of Common
shares outstanding during each year. Diluted net earnings per share is computed
based on the weighted average number of Common shares outstanding during each
year, plus dilutive potential Common shares considered outstanding during the
year, in accordance with Statement of Financial Accounting Standard No. 128,
"Earnings per Share" ("SFAS No. 128").
The total number of shares related to
the outstanding options and warrants excluded from the calculations of diluted
net earnings per share because these securities are anti-dilutive, was 644,035
options and 435,368 options for the years ended December 31, 2008 and 2007,
respectively.
F-14
DIGITAL POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
o.
|
Concentrations
of credit risks:
|
Financial
instruments that potentially subject the Company and its subsidiary to
concentrations of credit risk consist principally of cash and cash equivalents,
restricted cash, long term deposites and trade receivables.
Cash and
cash equivalents and restricted cash are invested in banks in the U.S. and in
the U.K. Such deposits in the United States may be in excess of insured limits
and are not insured in other jurisdictions.
Trade
receivables of the Company and its subsidiary are mainly derived from sales to
customers located primarily in the U.S. and in Europe. The Company performs
ongoing credit evaluations of its customers and to date has not experienced any
material losses. An allowance for doubtful accounts is determined with respect
to those amounts that the Company and its subsidiary have determined to be
doubtful of collection.
|
p.
|
Derivatives
and hedging:
|
Financial Accounting Standard Board
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), as amended, requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
are either offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value is immediately
recognized in earnings. The Company uses derivatives to hedge certain cash flow
foreign currency exposures in order to further reduce the Company's exposure to
foreign currency risks.
The
Company entered into a forward contract to hedge certain sales transactions with
a customer denominated in foreign currencies. The Company's forward contract did
not qualify a hedging instrument under SFAS 133.
Changes in the fair value of forward
contracts are reflected in the consolidated statements of operations as
financial income or expense.
|
q.
|
Comprehensive
income:
|
The Company accounts for comprehensive
income in accordance with SFAS No. 130, “Reporting Comprehensive Income.”
This Statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income generally represents all changes in
stockholders’ equity during the period except those resulting from investments
by, or distributions to, stockholders. The Company determined that its items of
comprehensive income relate to unrealized losses and gains from foreign currency
translation adjustments.
F-15
DIGITAL POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
r.
|
Recently
issued accounting
pronouncements:
|
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"). SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any non
controlling interest in the acquiree and the goodwill acquired. SFAS 141R
also establishes disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. SFAS 141R is effective
for fiscal years beginning after December 15, 2008. Earlier adoption is
prohibited. The Company does not expect the adoption of SFAS 141R will have
an impact on its consolidated financial statements.
In March
2008, the FASB issued Statement 161 “Disclosures about Derivative Instruments
and Hedging Activities” ("SFAS 161") an amendment to FASB No.
133. This statement changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required
to provide enhanced disclosures about (a) how and why and entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. This statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. Early application is
encouraged. The Company does not expect the adoption of SFAS 161 to
have a material impact on its financial position, results of operations or cash
flows.
In December 2007, the FASB issued
SFAS 160, ‘‘Noncontrolling Interests in Consolidated Financial Statements’’
(‘‘SFAS 160’’). SFAS 160 amends ARB 51, ‘‘Consolidated Financial Statements’’,
to establish accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies
that a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS 160 also changes the way the consolidated income
statement is presented by requiring consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the
noncontrolling interest. It also requires disclosure, on the face of the
consolidated statement of income, of the amounts of consolidated net income
attributable to the parent and to the noncontrolling interest. SFAS 160 requires
that a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated and requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the
parent owners and the interests of the noncontrolling owners of a subsidiary.
SFAS 160 is effective for fiscal periods, and interim periods within those
fiscal years, beginning on or after December 15, 2008. The adoption of
SFAS 160 is not expected to have a material effect on accounting for current
subsidiaries.
F-16
DIGITAL POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles". SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. It is effective 60 days following the SEC's approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, "The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles". The Company is currently evaluating the impact of SFAS No. 162 on
its consolidated financial statements, and the adoption of this statement is not
expected to have a material effect on the Company's consolidated financial
statements.
|
NOTE
3:-
|
INVENTORIES
|
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Raw
materials, parts and supplies
|
$ | 228 | $ | 176 | ||||
|
Work
in progress
|
308 | 298 | ||||||
|
Finished
products
|
958 | 1,183 | ||||||
| $ | 1,494 | $ | 1,657 | |||||
|
NOTE
4:-
|
PROPERTY
AND EQUIPMENT
|
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Cost:
|
||||||||
|
Computers,
software and related equipment
|
$ | 998 | $ | 1,083 | ||||
|
Office
furniture and equipment
|
175 | 209 | ||||||
|
Leasehold
improvements
|
454 | 543 | ||||||
| 1,627 | 1,835 | |||||||
|
Accumulated
depreciation
|
||||||||
|
Computers,
software and related equipment
|
960 | 1,053 | ||||||
|
Office
furniture and equipment
|
172 | 202 | ||||||
|
Leasehold
improvements
|
342 | 378 | ||||||
| 1,474 | 1,633 | |||||||
|
Depreciated
cost
|
$ | 153 | $ | 202 | ||||
Depreciation
expense was $94 and $ 82 for the years ended December 31, 2008 and 2007,
respectively.
F-17
DIGITAL POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
|
NOTE
5:-
|
OTHER
CURRENT LIABILITIES
|
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Accrued
payroll and payroll taxes
|
$ | 81 | $ | 104 | ||||
|
Warranty
accrual
|
61 | 86 | ||||||
|
Government
authorities
|
10 | 2 | ||||||
|
Accrued
expenses and other
|
247 | 234 | ||||||
|
Forward
contract
|
115 | - | ||||||
| $ | 514 | $ | 426 | |||||
|
NOTE
6:-
|
COMMITMENTS
AND CONTINGENT LIABILITIES
|
Lease
commitments:
The
Company and its subsidiary rent their facilities under various operating lease
agreements, which expire on various dates, the latest of which is in 2012 (with
an option for renewal for an additional five years). The Company's subsidiary
has a lease agreement in respect of the U.K. facility which expires on September
2009 and has certain repairing covenants.
Future
rental commitments under non-cancelable leases are as follows:
|
Year
ended December
31,
|
||||
|
|
||||
|
2009
|
$ | 177 | ||
|
2010
|
71 | |||
|
2011
|
72 | |||
|
2012
|
68 | |||
| $ | 388 | |||
Total
rent expense for the years ended December 31, 2008 and 2007 was approximately
$ 253 and $ 305, respectively.
|
NOTE
7:-
|
SHAREHOLDERS'
EQUITY
|
|
a.
|
Preferred
shares:
|
There are
authorized Preferred shares in the amount of 500,000 shares of Series A
cumulative redeemable convertible Preferred shares ("Series A"), and an
additional 1,500,000 Preferred shares that have been authorized, but the rights,
preferences, privileges and restrictions on these shares have not been
determined. DPC's Board of Directors is authorized to create a new series of
Preferred shares and determine the number of shares, as well as the rights,
preferences, privileges and restrictions granted to or imposed upon any series
of Preferred shares. As of December 31, 2008, there were no Preferred shares
issued or outstanding.
F-18
DIGITAL POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
|
NOTE
7:-
|
SHAREHOLDERS'
EQUITY (Cont.)
|
|
b.
|
Common
shares:
|
Common
shares confer upon the holders the rights to receive notice to participate and
vote in the general meeting of shareholders of the Company, to receive
dividends, if and when declared, and to participate in a distribution of surplus
of assets upon liquidation of the Company.
|
c.
|
Share
Option Plans:
|
|
1.
|
Under
the Company's stock option plans ("the plan"), options may be granted to
employees, officers, consultants, service providers and directors of the
Company or its subsidiary.
|
|
2.
|
As
of December 31, 2008, the Company has authorized in the 1996, 1998, and
2002 Incentive Share Option Plans the grant of options to officers,
management, other key employees and others of up to 513,000, 240,000 and
1,519,000, respectively of the Company's Common shares. For all three
Incentive Share Option Plans the maximum terms of the options is ten years
from the date of grant. As of December 31, 2008, an aggregate of 745,870
of the Company's options are still available for future
grant.
|
|
3.
|
The
options granted generally become fully vested after four years. Any
options that are forfeited or cancelled before expiration become available
for future grants.
|
The
options outstanding as of December 31, 2008, have been classified by exercise
price, as follows:
|
Options
|
Weighted
|
Options
|
Weighted
|
|||||||||||||||||||
|
outstanding
|
average
|
Weighted
|
exercisable
|
average
|
||||||||||||||||||
|
as
of
|
remaining
|
average
|
as
of
|
exercise
price
|
||||||||||||||||||
|
Exercise
|
December
31,
|
contractual
|
exercise
|
December
31,
|
of
options
|
|||||||||||||||||
|
price
|
2008
|
term
|
price
|
2008
|
exercisable
|
|||||||||||||||||
|
Years
|
||||||||||||||||||||||
| $ |
0.48- $ 0.71
|
265,000 | 3.70 | $ | 0.68 | 255,000 | $ | 0.68 | ||||||||||||||
| $ |
0.80- $ 1.05
|
|
269,000 | 6.89 | $ | 0.96 | 169,000 | $ | 1.04 | |||||||||||||
| $ |
1.16-
$ 1.813
|
|
206,035 | 7.10 | $ | 1.27 | 121,035 | $ | 1.23 | |||||||||||||
| $ |
2.31- $ 3.03
|
|
39,000 | 1.52 | $ | 2.36 | 39,000 | $ | 2.36 | |||||||||||||
| 779,035 | 5.59 | $ | 1.15 | 584,035 | $ | 1.01 | ||||||||||||||||
F-19
DIGITAL POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
|
NOTE
7:-
|
SHAREHOLDERS'
EQUITY (Cont.)
|
|
d.
|
Warrants
and options issued to service providers and
consultants:
|
The
Company's outstanding warrants and options to consultants and service providers
as of December 31, 2008, are as follows:
|
Issuance
date
|
Options
for
Common
shares
|
Exercise
price
per
share
|
Options
exercisable
|
|||||||||
|
May
2002
|
40,000 | $ | 1.00 | 40,000 | ||||||||
|
August
2002
|
10,000 | $ | 0.55 | 10,000 | ||||||||
|
November
2002
|
10,000 | $ | 1.00 | 10,000 | ||||||||
|
February
2005
|
20,000 | $ | 1.19 | 15,000 | ||||||||
|
March
2006
|
100,000 | $ | 1.16 | 50,000 | ||||||||
| 180,000 | 125,000 | |||||||||||
All
options are exercisable for ten years from the date of grant.
In 2005
and 2006, the Company granted 30,000 options to Telkoor's employees and 100,000
options to a non-employee consultant. The Company accounted for its options to
non-employees under the fair value method of SFAS No. 123(R) and EITF 96-18.
Those options vest primarily over four years. The fair value for these options
was estimated using a Black-Scholes option-pricing model with the following
assumptions for 2008: risk-free interest rates of 1.7%-1.9%, dividend yield of
0%, volatility of 92%, and the contractual term of the options of 6.2-7.2
years.
Compensation
income of $ 12 and compensation expense of $ 54 were recognized for the years
ended December 31, 2008 and 2007, respectively.
|
e.
|
Employee
stock ownership plan:
|
The
Company has an employee stock ownership plan ("ESOP") covering eligible
employees. The ESOP provides for the Employee Stock Ownership Trust ("ESOT") to
distribute the Company's Common shares as retirement benefits to the
participants. The Company has not distributed shares since 1998. As of December
31, 2008, the outstanding Common shares held by the ESOT amount to 167,504
shares.
|
f.
|
Dividends:
|
In the
event that cash dividends are declared in the future, such dividends will be
paid in U.S. dollars. The Company does not intend to pay cash dividends in the
foreseeable future.
F-20
DIGITAL POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
|
NOTE
8:-
|
TAXES
ON INCOME
|
|
a.
|
Deferred
income taxes:
|
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets are as follows:
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Operating
loss carryforward
|
$ | 1,629 | $ | 1,822 | ||||
|
Reserves
and allowances
|
223 | 242 | ||||||
|
|
||||||||
|
Net
deferred tax asset before valuation allowance
|
1,852 | 2,064 | ||||||
|
Valuation
allowance
|
(1,852 | ) | (2,064 | ) | ||||
|
|
||||||||
|
Net
deferred tax asset
|
$ | - | $ | - | ||||
As of
December 31, 2008 and 2007, the Company and its subsidiary provided a valuation
allowance of $ 2,064 and $1,852, respectively, in respect of deferred tax
asset resulting from short-term temporary differences and depreciation charged
in advance of a capital allowance taken, as well as from carryforward losses.
During 2008 and 2007, the Company decreased the tax valuation by $ 212 and $
75.
Management
currently believes that since the Company and its subsidiary have a history of
losses, it is more likely than not that the deferred tax assets regarding the
remainder of the tax loss carryforward and other temporary differences will not
be realized in the foreseeable future.
|
b.
|
Net
operating tax losses
carryforward:
|
As of
December 31, 2008, the Company had approximately $ 3,543 in federal net
operating loss carryforward for income tax purposes, which can be carried
forward and offset against taxable income for 20 years and expire in
2020-2027.
Utilization
of U.S. net operating losses may be subject to substantial annual limitation,
due to the "change in ownership" provisions of the Internal Revenue Code of 1986
and similar state provisions. The annual limitation may result in the expiration
of net operating losses before utilization. The Company believes that, as a
result of having undergone an "Ownership change" in 2002 within the meaning of
section 382 of the Internal Revenue Code, its ability to use its net operating
loss carryforward and other tax attributes to offset future U.S. taxable income,
and thereby reduce its tax liability, is severely limited.
As of
December 31, 2008 and 2007, DPL had accumulated losses for income tax purposes
in the amount of approximately $ 1,071 and $ 1,110, respectively. These net
operating losses may be carried forward and offset against taxable income in the
future for an indefinite period.
F-21
DIGITAL POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
|
NOTE
8:-
|
TAXES
ON INCOME
|
|
c.
|
The
main reconciling items between the statutory tax rate of the Company and
its subsidiary and the effective tax rate, are the non-recognition of tax
benefits resulting from the Company's accumulated net operating losses
carryforward due to the uncertainty of the realization of such tax
benefits.
|
|
d.
|
Income
before income taxes:
|
The
Company adopted the provisions of FIN 48 on January 1, 2007. The adoption of FIN
48 did not result in a change to the Company's accumulated deficit. There is no
provision in respect of FIN48 for the years ended December 31, 2008 and 2007.
Net income (loss) before income taxes consists of the following:
|
Year
ended
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Domestic
(U.S.)
|
$ | 199 | $ | (5 | ) | |||
|
Foreign
(U.K.)
|
331 | 125 | ||||||
| $ | 530 | $ | 120 | |||||
The
Company is required to calculate and account for income taxes in each
jurisdiction in which the Company or its subsidiary operate. Significant
judgment is required in determining its worldwide provision for income taxes and
recording the related assets and liabilities. In the ordinary course of the
Company's business, there are many transactions and calculations where the
ultimate tax determination is uncertain.
|
NOTE
9:-
|
NET
EARNINGS PER SHARE
|
The
following table sets forth the computation of the basic and diluted net earnings
per share:
|
a.
|
Numerator:
|
|
Year
ended
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Net
income available to Common shareholders
|
$ | 558 | $ | 121 | ||||
|
b.
|
Denominator:
|
|
Denominator
for basic net earnings per Common share
|
6,615,708 | 6,611,530 | ||||||
|
Effect
of dilutive securities:
|
||||||||
|
Stock
options
|
72,883 | 261,786 | ||||||
|
|
||||||||
|
Denominator
for diluted net earnings per Common share
|
6,688,591 | 6,873,316 |
F-22
DIGITAL POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
|
NOTE
10:-
|
FINANCIAL
INCOME, NET
|
|
Year
ended
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Financial
income:
|
||||||||
|
Interest
|
$ | 42 | $ | 61 | ||||
|
Foreign
currency transaction differences
|
446 | 13 | ||||||
| 488 | $ | 74 | ||||||
|
Financial
expenses:
|
||||||||
|
Foreign
currency transaction differences
|
$ | 202 | $ | 7 | ||||
|
Forward
contract transaction
|
147 | - | ||||||
| $ | 349 | $ | 7 | |||||
|
Financial
income, net
|
$ | 139 | $ | 67 | ||||
|
NOTE
11:-
|
RELATED
PARTY TRANSACTIONS
|
The
results of operations from transactions with Telkoor, a major shareholder, were
as follows:
|
Year
ended
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Purchases
of products from Telkoor
|
$ | 4,571 | $ | 5,142 | ||||
Transactions
with Telkoor are derived mainly from purchase of power supplies from
Telkoor.
The
Company believes that the transactions described above, are on a basis no less
favorable than could be obtained from an independent third party. Although it is
not practical to determine the amounts that the Company would have incurred had
it operated as an unaffiliated entity, management believes that the amounts
chargeable for the above transactions provided by these agreements are
reasonable. All future transactions between the Company and Telkoor will be on
terms no less favorable than could be obtained from an independent third
party.
|
NOTE
12:-
|
SEGMENTS
CUSTOMERS AND GEOGRAPHICAL
INFORMATION
|
|
a.
|
The
Company has two reportable geographic segments, see Note 1a for a brief
description of the Company's business. The data is presented in accordance
with Statement of Financial Accounting Standard No.131, "Disclosure about
Segments of an Enterprise and Related Information" ("SFAS No.
131").
|
F-23
DIGITAL POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
The
following data presents the revenues, expenditures and other operating data of
the Company's geographic operating segments:
|
Year
ended December 31, 2008
|
||||||||||||||||
|
DPC
|
DPL
|
Eliminations
|
Total
|
|||||||||||||
|
Revenues
|
$ | 5,611 | $ | 6,289 | $ | - | $ | 11,900 | ||||||||
|
Intersegment
revenues
|
278 | 27 | (305 | ) | - | |||||||||||
|
Total
revenues
|
$ | 5,889 | $ | 6,316 | $ | (305 | ) | $ | 11,900 | |||||||
|
Depreciation
expense
|
$ | 29 | $ | 65 | $ | - | $ | 94 | ||||||||
|
Operating
income
|
$ | 43 | $ | 348 | $ | - | $ | 391 | ||||||||
|
Financial
income, net
|
139 | |||||||||||||||
|
Tax
benefit
|
28 | |||||||||||||||
|
Net
income
|
$ | 558 | ||||||||||||||
|
Expenditures
for segment assets as of
December 31, 2008
|
$ | 12 | $ | 67 | $ | - | $ | 79 | ||||||||
|
Identifiable
assets as of December 31,
2008
|
$ | 2,979 | $ | 3,301 | $ | - | $ | 6,280 | ||||||||
F-24
DIGITAL POWER CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands (except share and per share data)
|
NOTE
12:-
|
SEGMENTS
CUSTOMERS AND GEOGRAPHICAL INFORMATION
(Cont.)
|
|
Year
ended December 31, 2007
|
||||||||||||||||
|
DPC
|
DPL
|
Eliminations
|
Total
|
|||||||||||||
|
Revenues
|
$ | 5,297 | $ | 6,860 | $ | - | $ | 12,157 | ||||||||
|
Intersegment
revenues
|
136 | 33 | (169 | ) | - | |||||||||||
|
Total
revenues
|
$ | 5,433 | $ | 6,893 | $ | (169 | ) | $ | 12,157 | |||||||
|
Depreciation
expense
|
$ | 21 | $ | 61 | $ | - | $ | 82 | ||||||||
|
Operating
income (loss)
|
$ | (217 | ) | $ | 270 | $ | - | $ | 53 | |||||||
|
Financial
income, net
|
67 | |||||||||||||||
|
Tax
benefit
|
1 | |||||||||||||||
|
Net
income
|
$ | 121 | ||||||||||||||
|
Expenditures
for segment assets as of
December 31, 2007
|
$ | 82 | $ | 38 | $ | - | $ | 120 | ||||||||
|
Identifiable
assets as of December 31,
2007
|
$ | 2,259 | $ | 4,046 | $ | - | $ | 6,305 | ||||||||
|
b.
|
Major
customers' data as percentage of total
revenues:
|
|
Year
ended
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Customer
A
|
12 | % | 5 | % | ||||
|
c.
|
Total
revenues from external customers divided on the basis of the Company's
product lines are as follows:
|
|
Year
ended
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Revenues:
|
||||||||
|
Commercial
products
|
$ | 8,787 | $ | 9,017 | ||||
|
Defense
products
|
3,113 | 3,140 | ||||||
| $ | 11,900 | $ | 12,157 | |||||
-
- - - - - - -
F-25
|
ITEM
9.
|
IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
None.
|
ITEM
9A.
|
CONTROLS
AND PROCEDURES.
|
Evaluation of Disclosure Controls and
Procedures
As of
December 31, 2008, we have carried out an evaluation, under the supervision of,
and with the participation of, our management, including our Chief Executive
Officer and principal financial officer, of the effectiveness of the design and
operation of our controls and procedures pursuant to Rule 13a-15(b) under the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Based upon that evaluation, our Chief Executive Officer and
principal financial officer concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) under the Exchange Act) were effective
as of the end of the period covered by the report to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified by the SEC's rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and principal financial officer, as appropriate, to allow timely
decisions regarding required financial disclosure.
Management’s Annual Report on Internal
Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Our internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated
Framework. Our management has concluded that, as of December 31,
2008, our internal control over financial reporting was effective.
This Annual Report does not include an
attestation report of our independent registered public accounting firm
regarding internal controls over financial reporting. Management’s
report was not subject to attestation by our independent registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this Annual
Report.
24
Evaluation of Changes in Internal
Controls over Financial Reporting
There
were no changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act) during the quarter ended December 31,
2008, that have materially affected, or are reasonably likely to materially
affect our internal control over financial reporting.
|
Item
9B.
|
Other
Information.
|
None.
25
PART
III
|
ITEM
10.
|
DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE.
|
The names
of our executive officers and directors and their ages and positions as of
December 31, 2008 are as follows:
|
Name
|
Age
|
Positions
Held
|
|
Amos
Kohn
|
48
|
President,
CEO and a Director
|
|
Ben
Zion Diamant
|
58
|
Chairman
of the Board and a Director
|
|
Israel
Levi
|
68
|
Director
(1)
|
|
Yeheskel
Manea
|
63
|
Director
(1)
|
|
Terry
Steinfeld
|
53
|
Director
(1)
|
|
Uri
Friedlander
|
46
|
CFO
and Secretary
|
(1) Member
of the Audit and Compensation Committees.
Biographies
of Directors
Amos
Kohn
Amos Kohn
has served as a member of our Board of Directors since 2003 and as President and
Chief Executive Officer since June 2008. His extensive executive-level
management experience includes more than 20 years in convergence technology
development, business management, corporate operations, and product management
for diverse industries including telecommunications, cable television,
broadcast, and wireless platform solutions. Mr. Kohn’s background includes
serving as the CEO of TechLead, a company specializing in professional services
and consulting services to telecommunications, cable television, broadcast, OTT,
CDN and wireless industries (since 2003); Vice President of Business Development
at Scopus Video Networks, Inc., a Princeton, New Jersey company which develops,
markets and supports digital video networking products (2006 through 2007);
Senior Vice President of Solutions Engineering at ICTV Inc., a leading provider
of network-based streaming media technology solutions for digital video
streaming and web-driven programming, located in Los Gatos, California (2003
through 2006); Chief Architect at Liberate Technologies, a software company
located in San Carlos, California, which specializes in telecommunications
technologies for advanced media processing (2000 through 2003); and Senior Vice
President of Engineering and Technology at Golden Channel, the largest cable
television multiple-systems operator (MSO) in Israel, where he had executive
responsibility for developing and implementing the entire nationwide cable TV
system (1989 through 2000). Mr. Kohn holds a degree in Electrical and
Electronics Engineering and is named as an inventor of several US and
international patents.
26
Ben-Zion
Diamant
Ben-Zion
Diamant has served as a member of our Board of Directors and has been Chairman
of our Board since 2001. From March 2008 through July 2008, he also served as
our Interim President and Chief Executive Officer. He has served as CEO of
Telkoor Telecom Ltd. since August 2008; from 1994 through July 2008, he served
as Chairman of the Board of Telkoor. From 1992 through 1994, he was a partner
and business development manager at Phascom, and from 1989 to 1992, he was a
partner and manager at Rotel Communication. Mr. Diamant holds a B.A. degree in
political science from Bar-Ilan University.
Israel
Levi
Israel
Levi has served as a member of our Board of Directors since July 2008. From 1989
to 2007, Mr. Levi served as an officer and held senior management positions,
including Senior Vice President of Worldwide Operations, Senior Vice President
of Systems and Technology and Senior Vice President of Research and Development,
with Harmonic, Inc., a Sunnyvale, California-based provider of video delivery
solutions to cable, satellite, telco, terrestrial, and wireless operators
worldwide. Mr. Levi led numerous industry-first product and technology
developments applied to analog/digital video and data transmission over HFC
(hybrid fiber coax) networks. Among those developments are the first
Fiber Node, the first DWDM (Dense Wavelength Division Multiplexing), SCM (Sub
Carrier Multiplexed) Transmitter, and Digitized Return Path Transceiver, all of
which gained wide industry acceptance and helped build the broadband
infrastructure for the transmission of voice, video and data over cable. Mr.
Levi holds a Masters Degree in Electrical Engineering and is named as an
inventor on five patents.
Yeheskel
Manea
Yeheskel
Manea has served as a member of our Board of Directors since 2002. Since 1996,
Mr. Manea has been a Branch Manager of Bank Hapoalim, one of the leading banks
in Israel. Mr. Manea has been employed with Bank Hapoalim since
1972. He holds a B.A. degree in Economy and Business Administration
from Ferris College, University of Michigan.
Terry
Steinberg
Terry
Steinberg has served as a member of our Board of Directors since November 2008.
He has extensive experience in high-growth enterprises, directing expansion
efforts organically as well as through mergers and acquisitions, with
significant international expertise. Since 2003, Mr. Steinberg has served as
Executive Vice President of Provengo, LLC, an Oceanside, New York - based
company focusing on synchronizing and streamlining the procurement process for
its Department of Defense customers. He was the Executive Vice President of
SpiderFuel, Inc., an e-business enablement software company located in New York,
from 2001 to 2003, where he designed and implemented business development and
roll-up acquisition strategies. From 1999 to 2001, he served as Executive Vice
President and then President of FotoLinks, LLC, an online photo-sharing,
e-commerce based website company in New York, where he directed the company’s
business development and financings, including the acquisition of a digital
imaging software developer and value-added reseller. Mr. Steinberg was President
and CEO of PC Etcetera, Inc. (later merged with Sivan, an Israeli-based high
tech vocational training company and renamed “Mentortech, Inc.”), an
international provider of high quality personal computer training services to
Fortune 1000 companies, from 1985 to 1999. He received a Bachelors of Science
Degree in Applied Mathematics/Computer Science and an MBA - Finance from McGill
University.
27
Biography
of Executive Officer
.
Uri
Friedlander – Chief Financial Officer and Secretary
Uri
Friedlander has served as our Chief Financial Officer since 2007, a position
that he also held from November 2001 through August 2002. Mr.
Friedlander has also served as the Chief Financial Officer of Telkoor since
1997. From 1991 through 1996, he was a controller at International Technology
Lasers, Ltd. and Quality Power Supplies, Ltd., members of Clal Group. From 1987
through 1990, Mr. Friedlander was an auditor for Luboshitz Kasierer (currently
Ernst & Young), public accountants. Mr. Friedlander holds a B.A.
degree in Accounting and Economics from Tel Aviv University.
Family
Relationships
Two of Mr. Manea's children are married
to two of Mr. Diamant's children. Mr. Diamant’s son, Ran Diamant, who is also
Mr. Menea’s son-in-law, serves as the Corporate Secretary and Controller of
Telkoor Power Supplies Ltd., a key supplier to Digital Power and a wholly-owned
subsidiary of our largest shareholder, Telkoor Telecom Ltd. Other than those
relationships, there are no family relationships among any of our directors or
executive officers.
Board Meetings and
Committees
Our Board
of Directors is currently composed of five members and maintains the following
three standing committees: (1) the Audit Committee; (2) the Compensation
Committee; and (3) the Nominating and Governance Committee. The membership and
the function of each of the committees are described below. Our Board may from
time to time establish a new committee or dissolve an existing committee
depending on the circumstances. Current copies of the charters for the Audit
Committee, the Compensation Committee and the Nominating and Governance
Committee can be found on our website at www.digipwr.com.
Audit
Committee
Messrs.
Manea, Levi and Steinberg currently comprise the Audit Committee of our Board of
Directors. Mr. Kohn was a member of and the Chair of this Committee until June
2008, when he was appointed to serve as our President and Chief Executive
Officer. Mr. Levi took Mr. Kohn’s place on the Audit Committee. Our Board has
determined that each of the current members of the Audit Committee satisfies the
requirements for independence and financial literacy under the standards of the
SEC and the NYSE Amex. Our Board has also determined that Mr. Manea qualifies as
an “audit committee financial expert” as defined in SEC regulations and
satisfies the financial sophistication requirements set forth in the NYSE Amex
Rules.
The Audit
Committee is responsible for, among other things selecting and hiring our
independent auditors, and approving the audit and pre-approving any non-audit
services to be performed by our independent auditors; reviewing the scope of the
annual audit undertaken by our independent auditors and the progress and results
of their work; reviewing our financial statements, internal accounting and
auditing procedures, and corporate programs to ensure compliance with applicable
laws; and reviewing the services performed by our independent auditor to
determine if the services rendered are compatible with maintaining the
independent auditors’ impartial opinion.
Compensation
Committee
Messrs.
Manea, Levi and Steinberg currently comprise the Compensation Committee of our
Board of Directors. Mr. Kohn was a member of and the Chair of this Committee
until June 2008, when he was appointed to serve as our President and Chief
Executive Officer. Mr. Levi took Mr. Kohn’s place on the Compensation Committee.
Our Board has determined that each of the current members of the Compensation
Committee meets the requirements for independence under the standards of the SEC
and the NYSE Amex.
28
The
Compensation Committee is responsible for, among other things reviewing and
approving executive compensation policies and practices; reviewing and approving
salaries, bonuses and other benefits paid to our officers, including our Chief
Executive Officer and Chief Financial Officer; and administering our stock
option plans and other benefit plans.
Nominating and Governance
Committee
Messrs.
Manea, Levi and Steinberg currently comprise the Nominating and Governance
Committee of our Board of Directors. Mr. Kohn was a member of and the Chair of
this Committee until June 2008, when he was appointed to serve as our President
and Chief Executive Officer. Mr. Levi took Mr. Kohn’s place on the Nominating
and Governance Committee. Our Board has determined that each of the current
members of the Nominating and Governance Committee meets the requirements for
independence under the standards of the SEC and the NYSE Amex.
The
Nominating and Governance Committee is responsible for, among other things
assisting our Board in identifying prospective director nominees and
recommending nominees for each annual meeting of shareholders to the Board;
developing and recommending governance principles applicable to our Board;
overseeing the evaluation of our Board and management; and recommending
potential members for each Board committee to our Board.
Board
candidates are considered according to various criteria such as their
broad-based business and professional skills, experiences, personal integrity
and judgment, global business and social perspective, and concern for the
long-term interests of our shareholders. In addition, directors must have time
available to devote to Board activities and to enhance their knowledge of the
power-supply industry. Accordingly, we seek to attract and retain highly
qualified directors who have sufficient time to attend to their substantial
duties and responsibilities.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires our executive officers and directors and
persons who own more than ten percent of a registered class of our equity
securities to file an
initial report of ownership on Form 3 and changes in ownership on Form 4 or 5
with the SEC. Executive officers, directors and greater than ten
percent shareholders are also required by SEC rules to furnish us with copies of
all Section 16(a) forms they file. Based solely upon our review of
Forms 3, 4 and 5 received by us, or written representations from certain
reporting persons, we believe that during the year ended December 31, 2008, all
such filing requirements applicable to our officers, directors and ten percent
shareholders were fulfilled.
Code of Ethics
We have adopted the Code of Ethical
Conduct that applies to our principal executive officer, principal
financial officer, principal accounting officer, controller or person performing
similar functions (collectively,
the “Financial Managers”). The Code of Ethical Conduct is designed to
deter wrongdoing and to promote honest and ethical conduct and compliance with
applicable laws and regulations. The full text of our Code of Ethical Conduct is
published on our website at www.digipwr.com. We
will disclose any substantive
amendments to the Code of Ethical Conduct or any waivers, explicit or implicit,
from a provision of the Code on our website or in a current report on
Form 8-K.
29
|
ITEM 11.
|
EXECUTIVE
COMPENSATION.
|
Summary
Compensation Table
The
following Summary Compensation Table sets forth all compensation earned in all
capacities during the fiscal years ended December 31, 2007 and 2008, by our (i)
Chief Executive Officer and (ii) executive officers, other than the Chief
Executive Officer, whose salaries for the 2008 fiscal year as determined by
Regulation S-K, Item 402, exceeded $100,000 (the individuals falling within
categories (i) and (ii) are collectively referred to as the “Named Executive
Officers”)..
|
Long Term
Compensation
|
|||||||||||||||||||||||||||||
|
Annual
Compensation
|
Awards
|
Payouts
|
|||||||||||||||||||||||||||
|
Name and
|
Restricted
|
||||||||||||||||||||||||||||
|
Principal
|
Other
Annual
|
Stock
|
Option
|
LTIP
|
|||||||||||||||||||||||||
|
Position
|
Salary
|
Compensation
|
Award(s)
|
Awards
|
Payouts
|
All Other
|
Total
|
||||||||||||||||||||||
|
Year
|
($)
|
($)
|
($)
|
($)
|
($)
|
Compensation
|
|
Compensation
|
|||||||||||||||||||||
|
Amos Kohn
|
2008
|
$ | 101,250 | $ | 9,591 | - | 5,216 | - | $ | 4,167 | $ | 120,224 | |||||||||||||||||
|
Chief
Executive
|
|||||||||||||||||||||||||||||
|
Officer (1)
(2)
|
2007
|
$ | - | $ | 10,000 | - | 5,314 | - | - | $ | 15,314 | ||||||||||||||||||
|
Jonathan
Wax
|
2008
|
$ | 203,078 | $ | 27,071 | - | 12,996 | - | - | $ | 243,145 | ||||||||||||||||||
|
Chief
Executive
|
|||||||||||||||||||||||||||||
|
Officer (1)
(3)
|
2007
|
$ | 162,323 | $ | 19,167 | - | 14,103 | - | - | $ | 195,593 | ||||||||||||||||||
(1) The
amounts in “Other Annual Compensation” consist primarily of health insurance
benefits, and also include long-term and short-term disability insurance
benefits.
(2) Mr.
Kohn became our President and Chief Executive Officer in June
2008. Prior to that date, he had served as a member of our Board of
Directors since 2003. The 2008 compensation set forth above for Mr.
Kohn includes compensation for serving as a non-employee member of our Board of
Directors through May 2008, composed of $4,167 in cash and options to purchase
an aggregate of 40,000 shares of our common stock. The 2008
compensation excludes consulting fees of approximately $39,112 paid to TechLead,
a company for which Mr. Kohn served as CEO, for consulting services prior to his
employment as CEO. The 2007 compensation set forth above for Mr. Kohn
represents solely his compensation for serving as a non-employee Board member
during that year.
(3) Mr
Wax resigned as our President and Chief Executive Officer in March
2008. The 2008 compensation set forth above for Mr. Wax includes
amounts paid to him pursuant to a separation agreement. See
“Employment Agreements – Separation Agreement With Jonathan Wax”
below.
Director
Compensation
Independent
directors receive $10,000 annually for serving on the Board of Directors. The
director designated by the Board as the Audit Committee financial expert
receives an additional annual fee of $5,000 for serving as the financial
expert.
Upon
joining our Board of Directors, each independent director also receives a grant
of an option under our 2002 Stock Option Plan to purchase 10,000 shares of our
common stock. In addition, subject to Board approval, each independent director
may be granted, on an annual basis, an option to purchase an additional 10,000
shares of our common stock. Options vest over a four-year period, 25% per year.
Each option has an exercise price equal to the fair market value of our common
stock on the grant date and a maximum term of ten years, subject to earlier
termination upon the cessation of service as a director.
30
The table below sets forth, for each
non-employee director, the total amount of compensation related to his service
during the year ended December 31, 2008:
|
DIRECTOR
COMPENSATION
|
||||||||||||||||||||||||||||
|
Name
|
Fees
|
Stock
|
Option
|
Non-Equity
|
Change in
|
All Other
|
Total
|
|||||||||||||||||||||
|
Earned
|
Awards
|
Awards
|
Incentive
Plan
|
Pension
|
Compensation
|
|||||||||||||||||||||||
|
or
|
($)
|
($)
|
Compensation
|
Value and
|
($)
|
|||||||||||||||||||||||
|
Paid in
|
($)
|
Nonqualified
|
||||||||||||||||||||||||||
|
Cash
|
Deferred
|
|||||||||||||||||||||||||||
|
($)
|
Compensation
|
|||||||||||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
|||||||||||||||||||||
|
Amos Kohn
(1)
|
$ | 4,167 | $ | - | $ | 5,959 | $ | - | $ | - | $ | - | $ | 10,126 | ||||||||||||||
|
Yeheskel
Manea
|
$ | 15,000 | $ | - | $ | 6,844 | $ | - | $ | - | $ | - | $ | 21,844 | ||||||||||||||
|
Benjmin
Kiryati
|
$ | 7,500 | $ | - | $ | 4,645 | $ | - | $ | - | $ | - | $ | 12,145 | ||||||||||||||
|
Israel Levi
|
$ | 5,000 | 884 | $ | - | $ | - | $ | - | $ | 5,884 | |||||||||||||||||
|
Terry
Steinberg
|
$ | 2,500 | 59 | $ | - | $ | - | $ | - | $ | 2,559 | |||||||||||||||||
(1) Represents
that portion of Mr. Kohn’s 2008 compensation related to his service as a
Director prior to his employment as our President and Chief Executive Officer in
June 2008.
Employment
Agreements
Employment
Agreement with Amos Kohn
We
entered into an employment agreement effective June 1, 2008, with Mr. Amos Kohn,
our President and Chief Executive Officer. Under this agreement, Mr. Kohn will
receive an initial annual base salary of $175,000. He will also receive a stock
option to purchase 50,000 shares of our common stock at a price equivalent to
the fair market value of our shares on the date that the option grant is
approved by the Board pursuant to our 2002 Stock Option Plan. If certain
performance objectives are met and if Mr. Kohn serves continuously as our
President and Chief Executive Officer through June 1, 2009, he will be granted
an additional option to purchase 100,000 shares of our common stock at a price
equivalent to the fair market value of our shares on the date that such option
grant is approved by the Board; such option will vest in equal installments over
a four-year period. Mr. Kohn is eligible to participate in our standard employee
group benefits.
If Mr.
Kohn serves continuously as our President and Chief Executive Officer and (i) if
certain performance objectives are met during 2008, his base salary during 2009
will increase to $200,000 or he will receive a bonus in the amount of $87,500;
(ii) if certain performance objectives are met during 2009, he will receive a
bonus equal to his then base salary times a fraction, the numerator of which is
Digital Power’s gross profit for 2009 and denominator of which is Digital
Power’s gross revenue for 2009; and (iii) if certain performance objectives are
met during 2010, he will receive a bonus equal to his then base salary times a
fraction, the numerator of which is Digital Power’s gross profit for 2010 and
denominator of which is Digital Power’s gross revenue for 2010.
If on or
after January 1, 2009, (i) Mr. Kohn is terminated by Digital Power without cause
or (ii) a change in control of Digital Power (as defined in the agreement)
occurs and Mr. Kohn resigns with good reason within six months following such
change in control, Mr. Kohn would be entitled to the following benefits: four to
eight months of his then base salary, depending on whether certain performance
goals have been achieved; health benefits for up to four months following
termination; and acceleration of one year’s worth of vesting of any outstanding
stock options.
Separation
Agreement with Jonathan Wax
We
entered into a separation agreement and release of claims with Jonathan Wax, our
former President and Chief Executive Officer. See the discussion of this
agreement located below in Item 13, “Certain Relationships and Related
Transactions.”
31
Outstanding
Equity Awards at Fiscal Year-End
The
following tables provide information on outstanding equity awards during the
year ended December 31, 2008 to the Named Executive Officers:
|
OUTSTANDING EQUITY AWARDS AT
FISCAL YEAR-END
|
|||||||||||||||||||||||||||||||||
|
Name
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Iptions
(#)
Unexercisable
|
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number
of Shares
or Units
of Stock
That Have
Not
Vested
(#)
|
Market
Value of
Shares or
Units of
Stock
That Have
Not
Vested
($)
|
Equity Incentive
Plan Awards:
Number
of
Unearned
Shares
Units or
Other
Rights
That Have
Not
Vested
(#)
|
Equity
Incentive
Plan
Awards
Market or
Payout
Value
of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
($)
|
||||||||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
||||||||||||||||||||||||
|
Amos Kohn
|
10,000 | - | - | $ | 0.96 |
8/5/2013
|
- | - | - | - | |||||||||||||||||||||||
| 10,000 | $ | 1.19 |
2/28/2015
|
||||||||||||||||||||||||||||||
| 10,000 | $ | 1.16 |
3/9/2016
|
5,000 | $ | 4,500 | |||||||||||||||||||||||||||
| 10,000 | $ | 1.66 |
3/9/2017
|
7,500 | $ | 6,750 | |||||||||||||||||||||||||||
| 50,000 | $ | 0.84 |
7/3/2018
|
50,000 | $ | 45,000 | |||||||||||||||||||||||||||
| 10,000 | $ | 0.79 |
9/19/2018
|
10,000 | $ | 9,000 | |||||||||||||||||||||||||||
32
|
Stock
Awards - Fiscal Year 2008
|
||||||||||
|
Name
|
Number
of
Shares
or Units
of
Stock that
Have
Not Vested
|
Market
Value of
Shares
or Units
of
Stock That
Have
Not Vested
|
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
($)
|
|||||
|
Amos
Kohn
|
-
|
-
|
-
|
-
|
||||||
Employee
Stock Ownership Plan
We
adopted an Employee Stock Ownership Plan, or ESOP, in conformity with ERISA
requirements. As of December 31, 2008, the ESOP owned, in the aggregate, 167,504
shares of our common stock. All eligible employees participate in the ESOP based
on the employee’s level of compensation and length of service. Participation in
the ESOP is subject to vesting over a six-year period. We have not distributed
shares to participants since 1998. Our shares of common stock owned by the ESOP
are voted by the ESOP trustees. Mr. Diamant is the current trustee of the
ESOP.
Stock
Option Plans
Our stock
option plans currently consist of the Digital Power 2002, 1998, and 1996 Stock
Option Plans (the “Plans”). The purpose of the Plans is to encourage stock
ownership by employees, officers, and directors by giving them a greater
personal interest in the success of the business and by providing them an added
incentive to advance in their employment or service to Digital Power. The Plans
provide for the grant of either incentive or non-statutory stock options. The
exercise price of any stock option granted under the Plans may not be less than
100% of the fair market value of our common stock on the date of
grant.
To the
extent that an incentive stock option may be exercised in any given year for
more than $100,000, the option will be deemed to be a non-statutory stock
option. Generally, our stock option agreements permit cashless exercises where
options are exercised and the underlying common stock is sold on the same day.
Unless otherwise provided by the Board, an option granted under the Plans is
exercisable for ten years. The Plans are administered by the Compensation
Committee, which has discretion to determine optionees, the number of shares to
be covered by each option, the exercise schedule and other terms of the options.
The Plans may be amended, suspended, or terminated by the Board, but no such
action may impair rights under a previously granted option. Each incentive stock
option is exercisable, during the lifetime of the optionee, only so long as the
optionee remains employed with us. In general, no option is transferable by the
optionee other than by will or by the laws of descent and
distribution.
As of
December 31, 2008, a total of 2,272,000 shares of our common stock were reserved
for issuance under the Plans, and of this number, options to purchase 779,035
shares of common stock were issued and were outstanding at that
date.
401(k)
Plan
We have
adopted a tax-qualified employee savings and retirement plan, or 401(k) plan,
which generally covers all of our full-time employees. Pursuant to the 401(k)
plan, employees may make voluntary contributions to the plan up to a maximum of
6% of eligible compensation. The 401(k) plan permits, but does not require,
matching contributions by Digital Power on behalf of plan participants. We match
contributions at the rate of $0.25 for each $1.00 contributed, up to 6% of the
base salary. We are also permitted under the plan to make discretionary
contributions. The 401(k) plan is intended to qualify under Sections 401(k) and
401(a) of the Internal Revenue Code of 1986, as amended. Contributions to such a
qualified plan are deductible to Digital Power when made, and neither the
contributions nor the income earned on those contributions is taxable to plan
participants until withdrawn. All 401(k) plan contributions are credited to
separate accounts maintained in trust.
33
|
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
|
Except as
otherwise indicated below, the following table sets forth certain information
regarding beneficial ownership of our common stock as of December 31, 2008 by:
(1) each of our current directors; (2) each of the named executive officers
listed in the Summary Compensation Table; (3) each person known to us to be the
beneficial owner of more than 5% of the outstanding shares of our common stock
based upon Schedules 13G or 13D filed with the Securities and Exchange
Commission; and (4) all of our directors and executive officers as a group. As
of December 31, 2008, there were 6,615,708 shares of our common stock
outstanding.
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and includes voting or investment power with respect to the
securities. Common stock subject to options or warrants that are currently
exercisable or exercisable within 60 days of December 31, 2008 are deemed to be
outstanding and to be beneficially owned by the person or group holding such
options or warrants for the purpose of computing the percentage ownership of
such person or group, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person or group. Unless
otherwise indicated by footnote, to our knowledge the persons named in the table
have sole voting and sole investment power with respect to all common stock
shown as beneficially owned by them, subject to applicable community property
laws. The table below is based upon information supplied by officers, directors
and principal shareholders and Schedules 13D and 13G and Forms 3 and 4 filed
with the Securities and Exchange Commission as of December 31, 2008. Unless
otherwise indicated below, the address of each beneficial owner listed below is
c/o Digital Power Corporation, 41324 Christy Street, Fremont, California
94538.
|
Shares
Beneficially
Owned
|
||||||||
|
Name &
Address of Beneficial Owner
|
Number
|
Percent
|
||||||
|
Telkoor
Telecom Ltd.
5
Giborei Israel
Netanya
42293
Israel
|
2,897,110 | 43.8 | % | |||||
|
Ben-Zion
Diamant
|
3,264,614 | (1) | 47.9 | % | ||||
|
Yeheskel
Manea
|
50,000 | (2) | * | |||||
|
Amos
Kohn
|
100,000 | (3) | * | |||||
|
Israel
Levi
|
-- | -- | ||||||
|
Terry
Steinberg
|
-- | -- | ||||||
|
Barry
W. Blank
P.O.
Box 32056
Phoenix,
AZ 85064
|
618,375 | 9.4 | % | |||||
|
All
directors and executive officers as a group
(6
persons)
|
3,428,364 | (4) | 49.7 | % | ||||
34
Footnotes
to Table
* Less
than one percent.
|
|
(1)
|
Mr. Diamant serves as a director
and CEO of Telkoor Telecom Ltd. Includes (i) options to purchase 200,000
shares, owned by Mr. Diamant, that are currently exercisable or
exercisable within 60 days of December 31, 2008; (ii) 167,504 shares of
common stock owned by the Digital Power ESOP, for which Mr. Diamant serves
as trustee; and (iii) 2,897,110 shares beneficially owned by Telkoor
Telecom Ltd. Mr. Diamant disclaims beneficial ownership of the shares held
by Telkoor Telecom Ltd., except to the extent of his proportionate
pecuniary interest therein.
|
|
|
(2)
|
Includes
options to purchase 32,500 shares of common stock, exercisable within 60
days of December 31, 2008.
|
|
|
(3)
|
Includes options to purchase
32,500 shares of common stock, exercisable within 60 days of December 31,
2008.
|
|
|
(4)
|
See
Notes (1) - (3) above. Also includes options to purchase 13,750 shares of
common stock held by an executive officer and exercisable within 60 days
of December 31, 2008.
|
|
Number of securities to
be issued upon exercise of
out-standing options,
warrants and rights
|
Weighted-average
exercise price of outstanding
options, warrants and
rights
|
Number of securities
remaining
available for future issuance under equity comp. plans (excluding securities in column
(a))
|
||||
|
Name
|
(a)
|
(b)
|
(c)
|
|||
|
Equity
compensation
|
||||||
|
plans approved by
sec-
|
959,035
|
|
$1.03
|
745,870
|
||
|
urity
holders
|
||||||
|
TOTAL
|
959,035
|
|
$1.03
|
745,870
|
|
ITEM 13.
|
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
|
Employment
Agreement with Amos Kohn
We
entered into an employment agreement, effective June 1, 2008, with our President
and Chief Executive Officer, Amos Kohn. See the discussion of this agreement
located above in the section titled “Executive Compensation - Employment
Agreements”.
Separation
Agreement with Jonathan Wax
We
entered into a separation agreement and release of claims, effective as of
February 29, 2008, with Jonathan Wax, our former President and Chief Executive
Officer. Under this agreement, we are to pay Mr. Wax: (a) his base salary
through the date of the agreement and any vacation pay and other cash
entitlements accrued by Mr. Wax as of the date of the agreement; and (b)
$165,000 (less deductions required by law) payable in four equal quarterly
installments on April 1, 2008, July 1, 2008, October 1, 2008 and January 1,
2009. We will continue to pay until the earlier of (a) the date on which Mr. Wax
obtains health care coverage from another employer or source or (b) one year
from the date of the agreement, the same portion of the costs associated with
providing group, medical, dental and vision insurance coverage to Mr. Wax as was
paid by Digital Power during February 2008. If Mr. Wax dies before all of these
payments have been made, we will make the remaining payments to the Wax Family
Trust.
35
Relationship
with Telkoor Power Supplies Ltd.
In the
fiscal years ended December 31, 2008 and 2007, we purchased approximately
$4,571,000 and $5,142,000, respectively, of products from Telkoor Power Supplies
Ltd., a wholly-owned subsidiary of our largest shareholder, Telkoor Telecom Ltd.
We have no written agreement for the purchase of these products, other than
purchase orders that are placed in the ordinary course of business when the
products are needed.
|
ITEM
14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES.
|
Kost
Forer Gabbay & Kasierer, a member of Ernst & Young Global Limited
(“E&Y”), has served as our independent registered public accounting firm
since 2002 and has been appointed by the Audit Committee to continue as our
independent registered public accounting firm for the fiscal year ending
December 31, 2009.
E&Y
also serves as the independent auditors of Telkoor. The auditing of our
financial statements and Telkoor’s financial statements are handled by separate
teams within E&Y.
Fees
and Services
The
following table shows the aggregate fees billed to us for professional services
by E&Y for the fiscal years ended December 31, 2008 and 2007:
|
2008
|
2007
|
|||||||
|
Audit
Fees
|
$ | 123,000 | $ | 123,000 | ||||
|
Audit-Related
Fees
|
$ | -0- | $ | -0- | ||||
|
Tax
Fees
|
$ | -0- | $ | -0- | ||||
|
All
Other Fees
|
$ | -0- | $ | -0- | ||||
|
Total
|
$ | 123,000 | $ | 123,000 | ||||
Audit Fees. This category
includes the aggregate fees billed for professional services rendered for the
audits of our financial statements for the fiscal years ended December 31, 2008
and 2007, for the reviews of the financial statements included in our quarterly
reports on Form 10-QSB during fiscal 2008 and 2007, and for other services that
are normally provided by the independent auditors in connection with statutory
and regulatory filings or engagements for the relevant fiscal
years.
Audit-Related Fees. This
category includes the aggregate fees billed in each of the last two fiscal years
for assurance and related services by the independent auditors that are
reasonably related to the performance of the audits or reviews of the financial
statements and are not reported above under "Audit Fees," and generally consist
of fees for other engagements under professional auditing standards, accounting
and reporting consultations, internal control-related matters, and audits of
employee benefit plans.
Tax Fees. This category
includes the aggregate fees billed in each of the last two fiscal years for
professional services rendered by the independent auditors for tax compliance,
tax planning and tax advice.
36
All Other Fees. This category
includes the aggregate fees billed in each of the last two fiscal years for
products and services provided by the independent auditors that are not reported
above under "Audit Fees," "Audit-Related Fees," or "Tax Fees."
The Audit
Committee’s policy is to pre-approve all services provided by our independent
auditors. These services may include audit services, audit-related services, tax
services and other services. The Audit Committee may also pre-approve particular
services on a case-by-case basis. Our independent auditors are required to
report periodically to the Audit Committee regarding the extent of services they
provide in accordance with such pre-approval.
37
PART
IV
|
ITEM
15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES.
|
|
(a)
|
Exhibits
|
|
3.1
|
Amended and Restated Articles of Incorporation of Digital Power
Corporation(1)
|
|
|
3.2
|
Amendment
to Articles of Incorporation(1)
|
|
|
3.3
|
Bylaws
of Digital Power Corporation(1)
|
|
|
4.1
|
Specimen
Common Stock Certificate(2)
|
|
|
4.2
|
Specimen
Warrant(1)
|
|
|
4.3
|
Representative's
Warrant(1)
|
|
|
10.1
|
Revolving
Credit Facility with San Jose National Bank(1)
|
|
|
10.2
|
KDK
Contract(1)
|
|
|
10.3
|
Agreement
with Fortron/Source Corp.(1)
|
|
|
10.4
|
Employment
Agreement With Robert O. Smith(2)
|
|
|
10.5
|
1996
Stock Option Plan(1)
|
|
|
10.6
|
Gresham
Power Asset Purchase Agreement(3)
|
|
|
10.7
|
1998
Stock Option Plan
|
|
|
10.8
|
Technology
Transfer Agreement with KDK Electronics(4)
|
|
|
10.9
|
Loan
Commitment and Letter Agreement(5)
|
|
|
10.10
|
Promissory
Note(5)
|
|
|
10.11
|
Employment
Agreement with Robert O. Smith (6)
|
|
|
10.12
|
Securities
Purchase Agreement between the Company and Telkoor Telecom, Ltd. (now
Telkoor Power Ltd.) (7)
|
|
|
10.11
|
Securities
Purchase Agreement between the Company and Telkoor Telecom,
Ltd. (now Telkoor Power Ltd.) (8)
|
|
|
10.12
|
Employment
Letter with David Amitai (9)
|
|
|
10.13
|
Employment
Agreement with Jonathan Wax (9)
|
|
|
10.14
|
Convertible
Note with Telkoor Power Ltd. (10)
|
|
|
10.15
|
Lease,
dated as of August 21, 2007, between the Company and SDC Fremont Business
Center, Inc. (11)
|
|
|
10.16
|
Employment
Agreement with Amos Kohn (12)
|
|
|
21.1
|
The
Company's sole subsidiary is Digital Power Limited, a corporation formed
under the laws of the United Kingdom.
|
|
|
23.1
|
Consent
of Ernst & Young
|
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act
|
|
|
32
|
Certification
of Chief Executive
Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley
Act
|
|
(1)
|
Previously
filed with the Commission on October 16,
1996, to the Company's Registration Statement on Form
SB-2.
|
|
(2)
|
Previously filed with the
Commission on December 3, 1996, to the
Company's Pre-Effective Amendment No.
1 to Registration Statement on Form
SB-2.
|
|
(3)
|
Previously
filed with the Commission on February 2,
1998, to the Company's Form 8-K.
|
|
(4)
|
Previously
filed with the Commission with its Form 10-QSB for
the quarter ended September 30,
1998.
|
|
(5)
|
Previously
filed with the Commission with its Form 10-KSB for the year ended December
31, 1998.
|
|
(6)
|
Previously
filed with the Commission with its Form 10-KSB for the year ended December
31, 1999.
|
|
(7)
|
Previously
filed with the
Commission with its Form 8-K
filed on November 21, 2001.
|
|
(8)
|
Previously
filed with the Commission with its Form 8-K filed on January 14,
2004.
|
|
(9)
|
Previously
filed with the Commission with its Form 10-KSB for the year ended December
31, 2003.
|
|
(10)
|
Previously
filed with the
Commission with its Form 8-K
filed on February 9, 2005.
|
|
(11)
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed on October
22, 2007.
|
|
(12)
|
Previously
filed with the
Commission with its Form 8-K
filed on July 10, 2008.
|
38
.
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
30, 2009
DIGITAL
POWER CORPORATION
|
By:
|
/s/ Amos Kohn
|
||
|
Amos
Kohn
|
|||
|
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.
|
Dated:
March 30, 2009
|
/s/
Ben Zion Diamant
|
|
|
Ben
Zion Diamant, Chairman
|
||
|
Dated:
March 30, 2009
|
/s/
Amos Kohn
|
|
|
Amos
Kohn,
|
||
|
President
and Chief Executive Officer
|
||
|
Dated:
March 30, 2009
|
/s/
Israel Levi
|
|
|
Israel
Levi, Director
|
||
|
Dated:
March 30, 2009
|
/s/
Yeheskel Manea
|
|
|
Yeheskel
Manea, Director
|
||
|
Dated:
March 30, 2009
|
/s/
Terry Steinberg
|
|
|
Terry
Steinberg, Director
|
||
|
Dated:
March 30, 2009
|
/s/
Uri Friedlander
|
|
|
Uri
Friedlander, Chief Financial Officer
|
||
|
(Principal
Accounting and Financial
Officer)
|
39