Attached files
file | filename |
---|---|
EX-32 - Ault Global Holdings, Inc. | v178639_ex32.htm |
EX-23.1 - Ault Global Holdings, Inc. | v178639_ex23-1.htm |
EX-31.2 - Ault Global Holdings, Inc. | v178639_ex31-2.htm |
EX-31.1 - Ault Global Holdings, Inc. | v178639_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For the
fiscal year ended December 31, 2009
or
|
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from ___________ to __________
Commission
File Number 1-12711
DIGITAL
POWER CORPORATION
(Name of
registrant as specified in its charter)
California
|
94-1721931
|
|
(State or other jurisdiction of
Incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
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:
Title of Each Class
|
Name of each exchange on which registered
|
|
Common
Stock, no par value
|
NYSE
Amex
|
Securities
registered under Section 12(g) of the Act:
Title of Each Class
|
None
|
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. ¨
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.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
|
Non-accelerated filer ¨ (do not check if a smaller reporting company)
|
Smaller reporting company þ
|
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
June 30, 2009, the aggregate market value of the voting common stock held by
non-affiliates was approximately $14,433,143 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 25, 2010, the number of shares of common stock outstanding was
6,626,468.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
INDEX
Page No.
|
|||
Forward-Looking
Statements
|
1
|
||
PART
I
|
1
|
||
Item
1.
|
Description
of Business.
|
1
|
|
Item
1A.
|
Risk
Factors.
|
9
|
|
Item
1B.
|
Unresolved
Staff Comments.
|
15
|
|
Item
2.
|
Description
of Property.
|
15
|
|
Item
3.
|
Legal
Proceedings.
|
16
|
|
Item
4.
|
Reserved.
|
16
|
|
PART
II
|
16
|
||
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
16
|
|
Item
6.
|
Selected
Financial Data.
|
17
|
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
17
|
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
21
|
|
Item
8.
|
Financial
Statements and Supplementary Data.
|
21
|
|
Item
9.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure.
|
21
|
|
Item
9A.
|
Controls
and Procedures.
|
22
|
|
Item
9B.
|
Other
Information.
|
22
|
|
PART
III
|
23
|
||
Item
10.
|
Directors,
Executive Officers and Corporate Governance.
|
23
|
|
Item
11.
|
Executive
Compensation.
|
26
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
30
|
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
32
|
|
Item
14.
|
Principal
Accounting Fees and Services.
|
32
|
|
PART
IV
|
33
|
||
Item
15.
|
Exhibits
and Financial Statement Schedules.
|
33
|
|
Signatures
|
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.
ITEM 1.
|
DESCRIPTION OF
BUSINESS.
|
General
Digital
Power Corporation is a solution-driven organization that designs, develops,
manufactures and sells high-grade customized and flexible power system solutions
for the most demanding applications in the medical, military, telecom and
industrial markets. We are highly focused on high-grade and 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 and/or military mission critical 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 are 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”). DPL
is located in Salisbury, England, and it designs, manufactures and sells power
products and system solutions mainly for the European marketplace, including
power conversion, power distribution equipment, DC/AC (Direct Current/Active
Current) inverters and UPS (Uninterrupted Power Supply) products. DPL’s defense
business has specialists in the field of naval applications of power
distribution conversion.
We
believe that we are one of the first companies in the power 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 the
telecom/industrial, and increasingly in the 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 among the smallest available for such commercial
products.
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 offer a broad product variety, including a full custom
product design and production, unique high-speed switching power front-end,
modified-standard and value added products, open-frame, Compact-PCI, ATSC
front-ends and PoE (Power over Ethernet) product solutions, providing power
output from 50 to 25,000 watts.
In an
effort to provide short lead-times, high quality products and competitive
pricing to support our markets, we have entered into production agreements with
several contract manufacturers located in Asia, primarily
China. These agreements allow us to better control production costs
and ensure high quality products deliverable in a timely manner to meet market
demand.
We intend
to remain an innovative leader in the development of cutting-edge custom power
solutions and rich features products to meet any customer needs and
requirements, rugged power systems to meet harsh and extreme operation
environmental requirements, and high performance, high efficiency, high-density
and modular power systems. We are focusing today on developing
even more high-grade custom power system solutions for numerous customers in a
broadly diversified range of markets and challenging environments. Each product
development is based on best of class performance criteria, including unique,
advanced feature sets and a special layout to meet our customers’ unique
operating conditions where efficiency, size and time to market are key to their
success. We are taking initiatives to develop and sell high
efficiency “green power” solutions.
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 intellectual
property (“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 into 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.
2
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 200 companies, some of which are served through our partner
channels. We serve the North American power electronics market
primarily through our domestic corporation, Digital Power Corporation; the
European marketplace is served through DPL, 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 2009, we implemented a new sales strategy to
identify and focus on strategic accounts. This strategy allows us to maintain a
close and direct relationship with them, which positions us as the supplier of
choice for these customers’ challenging, innovative and demanding new product
requirements. In striving for additional market share, we
simultaneously strengthen our traditional sales channels of manufacturer
representatives and distributors. We plan to continue to build more channels and
increase our market share through 2010.
Commercial
Customers.
Our commercial customers include medical, telecom, 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:
|
§
|
Medical
(Non-patient Contact)
|
|
§
|
Imaging,
dispensing equipment
|
|
§
|
Ventilators
|
|
§
|
Dialysis,
endoscopy, surgical equipment
|
|
§
|
Ultrasound,
MRI
|
|
§
|
Telecom
|
|
§
|
Switches
|
|
§
|
Routers
|
|
§
|
Servers
|
|
§
|
Broadband
networks and video broadcast
systems
|
|
§
|
Fiber
optic networks
|
|
§
|
Layers
|
|
§
|
Industrial
Process Equipment and Embedded
Controls
|
|
§
|
Packaging
equipment, pumps, CNC machines,
laser
|
|
§
|
Intelligent
/ LED lighting
|
|
§
|
Industrial
printers
|
|
§
|
Laboratory
and diagnostic equipment
|
|
§
|
ATE
(Automatic Test Equipment),
scientific
|
These
product solutions, which include standard, modified-standard or full custom
designs, are designed to meet our customers’ requirements. Customers
who have implemented our power supply product solutions, or customers for whom
we are currently developing products, include: Ericsson, Qualcomm, Elma Group,
Inc., Cisco, Inogen, Aurora Networks, Agilent, GE Healthcare, GE Medical, Goss
International, Arris, Tandberg, Martin Entertainment, Harmonic Inc., and
Motorola, among others.
3
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 compliant with the
regulations of International Traffic in Arms Regulations (“ITAR”) and are an
approved vendor for the U.S. Air Force, Navy and Army.
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, which include the following, function effectively in these severe
military environments:
|
§
|
Missiles
– Ground-to-Air, Air-to-Air and
Sea-to-Air
|
|
§
|
Naval
– Shipboard radar, EW and
communication
|
|
§
|
Mobile
and Ground Communications – Active Protection, Communications and
Navigation
|
|
§
|
Surveillance,
test equipment
|
|
§
|
UAV
(Unmanned Aerial Vehicle) – Very lightweight power
systems
|
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 Telecom Ltd.
(“Telkoor”), our largest shareholder, and DPL, our wholly-owned subsidiary, to
develop some of the MIL-SPEC products.
Products
features for our military/defense customers include:
|
§
|
Full
custom design projects
|
|
§
|
Program
management for each project
|
|
§
|
Quality
assurance and control
|
|
§
|
Compliance
with Mil-Q-9858A and ISO 9001:2000
|
|
§
|
FRACAS
(Failure Reporting, Analysis, and Corrective Action
System)
|
|
§
|
Environmental
testing in accordance with
MIL-STD-810
|
|
§
|
100%
screening, including ESS (Environmental Stress Screening) and ATP
(Acceptance Test Procedure) with random vibration and temperature cycling
tests
|
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 high-grade products that reach a high level of efficiency
and density and can meet rigorous environmental requirements. Our customers
benefit from a direct relationship with us that supports all their needs for
designing and manufacturing power solutions and products. By implementing our
advanced core technology, including process implementation in integrated
circuits, we can provide cost reductions to our customers by replacing their
existing power sources with our custom design cost-effective
products.
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.
4
Our
strategy will continue to focus on expanding our market share by adding new
customers from all of our target market segments. We are developing long term
relationships, and we intend to expand our customer base in our commercial
market segments, including medical, telecom and industrial, while continuing to
maintain our existing customers. In the military and defense market
segment, we will continue to provide advanced rugged products to customers, and
we are striving to expand our business to support the military and defense
industries. We believe that our custom power supply solutions, flexibility
series, high-grade and high-efficiency 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 requirement for 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-efficiency power system
solutions, we believe we provide certain strategic advantages over our
competitors.
Digital
Power Limited (Gresham Power Electronics)
DPL, 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.
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, 2009 and 2008, Gresham contributed approximately
51% and 53%, respectively, to our gross revenues.
Manufacturing
and Testing
Consistent
with our strategy of 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, Shenzhen Watt
Electronics, Ultra Level Tech Co. Ltd, and Acropolis, Energy Recovery
Products.
We sell
certain products that are developed, manufactured and sold to us by Telkoor, an
Israeli company that currently holds 43.7% 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 contract
manufacturers, as well as from our own contract manufacturers in China, in
exchange for the payment of a commission to Telkoor.
5
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 of 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 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 ITAR, which is administered by the U.S. Department
of State. ITAR controls not only the export of certain products specifically
designed, modified, configured or adapted for military systems, but also the
export of related technical data and defense services as well as foreign
production. 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 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 sales force as well as through a
partner network of independent manufacturer 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 5% 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.
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 use the
corporate website to emphasize our capabilities and marketing direction. All
products specifications are uploaded onto our website and accessible to the
marketplace. 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 public
relations for our new products.
6
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, 2009 and 2008, we
expended a total of $556,000 and $622,000, 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. We believe that we are
successfully executing our strategic account focus, as evidenced by the award of
second and third generation product development contracts from some of these
customers. Our standard contract for custom power solutions includes
a multi-year high-volume production forecast that could allow 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 continually seek to improve our product
power density, adaptability, and efficiency, while attempting to anticipate
changing market demands for increased functionality, such as PFC (power factor
correction) and improved EMI (electromagnetic interference) filtering. We are
experiencing an increasing demand for ruggedization of commercial products for
military applications. To meet that requirement, our engineering team continues
to ruggedize commercial products, which we sell as commercial off the shelf
products to some of our military customers. We continue to differentiate all of
our products from commodity type products by enhancing,, modifying and
customizing our existing product portfolio, using our Freemont, California
engineering lab.
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 suppliers, 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 with respect to the sale of 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-driven engineering services including custom design and manufacturing,
continuously improving quality and reliability levels, and offering flexible and
reliable delivery schedules.
7
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 adjustable 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 non recurring engineering (“NRE”)
expenses. Because of reduced NRE expenses, we do not generally charge
our OEM customers for NRE related to tailoring a power 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. In addition, we have decided to directly procure certain
long lead-time electronic components in an effort to reduce our
lead-time.
Because
of the global recession, many raw material vendors have reduced capacities,
closed production lines and, in some cases, even discontinued their operations.
As a result, there is a global shortage of certain electronic components, which
has extended our production lead-time and our production costs. For
example, in some cases, finished goods that used to be available in 12 weeks for
a production purchase order are now available only after 22
weeks. Also, some materials are no longer available to support some
of our products, thereby requiring us to search for cross materials or, even
worse, redesign some of our products to support currently-available
materials.
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
seek to obtain patents for 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, 2009, we had 33 employees located in the United States and the
United Kingdom, of whom six were engaged in engineering and product development,
nine in sales and marketing, eleven in general operations and seven 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 trade union. We consider our relations with our employees to be
good.
8
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 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.
We
experienced an operating loss and a net loss during the year ended December 31,
2009, we have historically experienced net losses and we may experience net
losses in the future.
For the
year ended December 31, 2009, we had an operating loss of $102,000 and net loss
of $148,000, compared to an operating income of $391,000 and net income of
$558,000for the year ended December 31, 2008. Although we have
actively taken steps to reduce our costs, we may continue to incur operating and
net losses in the future until we increase revenues by selling current and
custom design products, transitioning to production stage of our custom design
products and decreasing manufacturing costs through a greater use of contract
manufacturers in Asia and other strategic locations.
We
depend on Telkoor to design and manufacture some of our products.
We depend
on Telkoor, our largest shareholder and one of our third party subcontractors,
for design and manufacturing capabilities for some of the products that we sell.
If Telkoor is unable or unwilling to continue designing or manufacturing our
products in required volumes and with a certain level of quality 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
Telkoor’s agreements with other companies, long lead-times and the high cost of
Telkoor’s products. In April 2008, for example, Telkoor signed a
“Private Label” agreement with Murata Power Solutions in Canada to sell
Telkoor’s products under the Murata brand name, which agreement positions Murata
as a direct competitor of ours with respect to the sale of Telkoor’s products in
North America. Also, in 2009, Telkoor’s manufacturing lead-times
increased, which has hindered our ability to respond to our customers’
needs. 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. We are also dependent upon Telkoor’s terms and conditions
with its contract manufacturers for some of our products, which terms and
conditions may not always be in our best interest.
We
are dependent upon our ability, and our contract manufacturers’ ability, to
timely procure electronic components.
Because
of the global recession, many raw material vendors have reduced capacities,
closed production lines and, in some cases, even discontinued their operations.
As a result, there is a global shortage of certain electronic components, which
has extended our production lead-time and our production costs. For
example, in some cases, finished goods that used to be available in 12 weeks for
a production purchase order are now available only after 22
weeks. Also, some materials are no longer available to support some
of our products, thereby requiring us to search for cross materials or, even
worse, redesign some of our products to support currently-available
materials. Such redesign efforts may require certain regulatory and
safety agency re-submittals, which may cause further production
delays. While we have initiated
actions that we believe will limit our exposure to such problems, the dynamic
business conditions in many of our markets may challenge the solutions that have
been put in place, and issues may recur in the future.
In
addition, some of our products are manufactured, assembled and tested by third
party subcontractors and contract manufacturers located in Asia. While we have
had relationships with many of these third parties in the past, we cannot
predict how or whether these relationships will continue in the future. In
addition, changes in management, financial viability, manufacturing demand or
capacity, or other factors, at these third parties could hurt our ability to
have our products manufactured.
9
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 adverse 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 that 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 product
designs. The commercial success of this new technology will depend on a number
of factors, including the successful development of the custom products, 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. If we fail to accomplish all of
the above, our business could be materially and adversely affected.
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, 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 a reduction of orders by OEMs and a 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 effect on our business and results of
operations. 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.
10
We
are dependent on the electronic equipment industry, and accordingly will be
affected by the impact on that industry by 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 and 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, and delays in, or
cancellations or rescheduling of, orders or shipments, any of which would
materially harm our business.
We
outsource, and are dependent upon developer partners for, the development of
some of our custom design products.
We made
an operational decision to outsource some of our custom design products to
numerous developer partners. This business structure will remain in place until
the custom design volume justifies expanding our in house capabilities.
Incomplete product designs that do not fully comply with the customer
specifications and requirements might affect our ability to transition to a
volume production stage of the custom designed product where the revenue goals
are dependent on the high volume of custom product production. Furthermore, we
rely on the design partners’ ability to provide high quality prototypes of the
designed product for our customer approval as a critical stage to approve
production.
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 expect additional price erosion in the
future.
11
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
and high demand for our products, we may not have adequate supplies of inventory
on hand to satisfy our customers' needs. Furthermore, during these periods of
growth, our suppliers may also experience high demand and, therefore, may not
have adequate levels of the components and other materials that we require to
build products so that we can meet our customers' needs. 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, to 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.
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 concerns 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, have 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.
12
Failure
of our information technology infrastructure to operate effectively could
adversely affect our business.
We depend
heavily on information technology infrastructure to achieve our business
objectives. If a problem occurs that impairs this infrastructure, the resulting
disruption could impede our ability to record or process orders, manufacture and
ship in a timely manner, or otherwise carry on business in the normal course.
Any such events could cause us to lose customers or revenue and could require us
to incur significant expense to remediate.
We
are subject to certain governmental regulatory restrictions relating to our
international sales.
Some of
our products are subject to ITAR rules, which are 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 ITAR rules
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 were required to comply with the
regulations governing, the U.S. Foreign Military Financing
program. Any such future sales would be subject to such
regulations.
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 50.8% of net revenues in the
year ended December 31, 2009 and for 55.7% of net revenues in the year ended
December 31, 2008, 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, DPL, 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.
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 control over
financial reporting in order to comply with Securities and Exchange Commission
(“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.
13
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, which
would be costly and would divert our resources from the development of our
business. 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.
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 occurred 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 effect 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.
14
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 us 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,
2009, we have outstanding options to purchase an aggregate of 598,990 shares of
common stock, with a weighted average exercise price of $0.98 per share,
exercisable at prices ranging from $0.48 to $3.03 per share.
ITEM 1B.
|
UNRESOLVED STAFF
COMMENTS.
|
Not
applicable.
ITEM
2.
|
DESCRIPTION OF
PROPERTY.
|
Our
headquarters are located in 6,553 square feet of leased office, engineering, and
development space in Fremont, California. This lease (the “Lease”)
commenced on October 1, 2007 and expires on November 30, 2012. The
annual base rent under the Lease, payable on a monthly basis, increases during
the term of the Lease from approximately $68,000 during the first year to
approximately $74,000 during the final year; our current rent under the Lease is
$5,707 per month. The Lease also provides for one option to renew for
a term of five years.
On
February 1, 2010, we entered into a first amendment to the Lease (the “First
Amendment”), effective March 1, 2010, for the lease of an additional 6,554
square feet of office space. The annual base rent for the expansion
space under the First Amendment, payable on a monthly basis, also increases
during the term of the First Amendment from approximately $45,615 during the
first year to approximately $47,647 during the final year. Our
currently monthly rent under the First Amendment is $3,877, and our current
monthly rent under both the Lease and the First Amendment is
$9,585. The expiration date under the First Amendment remains
November 30, 2012, but the option to renew for a term of five years has been
reduced to one year.
We
currently anticipate that the current leased space will be sufficient to support
our current and foreseen future needs.
Our
wholly-owned subsidiary, DPL, leases a 25,000 square foot facility in Salisbury,
United Kingdom, where it designs, develops, manufactures, markets and
distributes commercial and military power products for the European market.
Sales and service support staff for its European network of distributors are
located within the building together with other functions, such as engineering
and administration. DPL’s rent expense is approximately $13,000 per
month. Although the lease expired on September 26, 2009, DPL
continues to occupy the facility for business purposes, and, since the building
owner did not give notice of termination before the expiration of the lease,
DPL’s right to occupancy automatically continues. The building owner
has confirmed DPL’s tenancy until April 2010.
15
The
lease included certain repairing covenants, such as the requirement to
redecorate and to generally keep in good repair both internal and external
fabric of the building during the term of the lease. DPL
believes that it met all of its obligations under the lease. DPL
intends to enter into a new lease; it has already received an offer of a new
lease from the building owner and is currently in negotiations with the building
owner to finalize the terms of such new lease.
In the
unlikely event that the lease is not renewed, we believe that the only potential
adverse consequence on DPL’s future financial position, results of operations
and cash flows would be the disruption of the business while alternative
premises were sought and relocation was made, along with the costs associated
with such search for new premises and relocation. However, we believe
that such potential adverse consequences are unlikely since DPL is currently in
the process of renewing the lease.
ITEM
3.
|
LEGAL
PROCEEDINGS.
|
Not
applicable.
ITEM 4.
|
RESERVED.
|
PART
II
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
ANDISSUER
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
|
||||||
12/31/2009
|
$ | 1.48 | $ | 1.18 | ||||
09/30/2009
|
2.64 | 1.44 | ||||||
06/30/2009
|
2.36 | 0.95 | ||||||
03/31/2009
|
1.12 | 0.75 | ||||||
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 |
The last
reported sale price of our common stock on the NYSE Amex on March 18, 2010 was
$1.28 per share.
(b) Holders
As of
March 1, 2010, there was an aggregate of 6,626,468 shares of our common stock
outstanding, held by approximately 72 holders of record.
16
(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 our
Board of Directors (the “Board”) and will depend upon our earnings, capital
requirements, and financial position.
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 markets
high-grade, customized and flexible power solutions for demanding applications
in the medical, military, telecom, and industrial markets. Our products serve
global markets worldwide. Revenues are generated from selling
products to our customers directly by our sales force and through manufacturing
representatives and distributors.
During
the year ended December 31, 2009, sales of our products decreased significantly
from the prior year. We intend to remain an innovative leader in the
development of cutting-edge custom power solutions, high-grade, high density,
modular power systems and rugged power solutions to meet harsh and extreme
environmental requirements. We also intend to continue to pursue our strategy to
reduce production costs and deliver high quality products in a timely manner
through production agreements with numerous contract manufacturers in
Asia. Our revenues have decreased and are not sufficient to offset
our expenses, and we may be subject to net losses in a given
quarter. However, we believe that our cash will be sufficient to fund
any such losses for at least 12 months.
Foreign
Currency Fluctuations
Our
wholly-owned subsidiary, DPL, 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, 2009, we recorded foreign
currency translation income of $186,000.
Results
of Operations
The table
below sets forth certain statements of operations data as a percentage of
revenues for the years ended December 31, 2009 and 2008:
Years Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Revenues
|
100.00
|
%
|
100.00
|
%
|
||||
Cost
of revenues
|
65.23
|
68.42
|
||||||
Gross
profit
|
34.77
|
29.61
|
||||||
Engineering
and product development
|
6.42
|
5.23
|
||||||
Sales
and marketing
|
13.23
|
8.73
|
||||||
General
and administrative
|
16.30
|
12.36
|
||||||
Total
operating expenses
|
35.95
|
26.32
|
||||||
Operating
income (loss)
|
(1.18)
|
3.29
|
||||||
Financial
income (expenses)
|
(0.17)
|
1.17
|
||||||
Income
before tax benefit
|
(1.35)
|
4.45
|
||||||
Tax
benefit (expenses)
|
(0.36)
|
0.24
|
||||||
Net
income (loss)
|
(1.71)
|
%
|
4.69
|
%
|
17
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, 2009, Compared to Year Ended December 31, 2008
Revenues
For the
year ended December 31, 2009, revenues decreased by 27.2% to $8,659,000 from
$11,900,000 for the year ended December 31, 2008. The decrease in
revenues is mainly due to a decline in sales of our standard commercial products
as a result of the global economic recession, as described below.
Revenues
derived from our defense products for the year ended December 31, 2009 were
$2,893,000, a decrease of 7% from revenues of $3,113,000 from defense products
for the year ended December 31, 2008. Revenues derived from our
commercial products for the year ended December 31, 2009 decreased by 34.4% to
$5,766,000 from $8,787,000 for the year ended December 31, 2008. The
decrease in commercial product revenue in 2009 resulted primarily from the
decline in sales of our standard commercial products as a result of the global
economic recession.
Revenues
from our domestic operations decreased by 24.1% to $4,257,000 for the year ended
December 31, 2009 from $5,611,000 for the year ended December 31, 2008. The
decrease in product revenues is mainly attributed to a decrease in sales of our
standard commercial products.
Revenues
from our European operations (Gresham) decreased by 30.0% to $4,402,000 for the
year ended December 31, 2009 from $6,289,000 for the year ended December 31,
2008. The decrease in revenues from Gresham in 2009 is due to a
decline in commercial product revenues resulting primarily from the global
recession.
Gross
Margins
Gross
margins were 34.8% for the year ended December 31, 2009, compared to 29.6% for
the year ended December 31, 2008. The higher gross margins in 2009
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 some of our 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 6.4% of revenues for the year ended
December 31, 2009, compared to 5.2% for the year ended December 31,
2008. Actual dollar expenditures decreased by $66,000, to $556,000 in
2009 from $622,000 in 2008. The decrease was primarily due to a
temporary decrease in salary expenses.
Selling
and Marketing
Selling
and marketing expenses were 13.2% of revenues for the year ended December 31,
2009, compared to 8.7% of revenues for the year ended December 31,
2008. Actual dollar expenditures increased by $107,000, to $1,146,000
in 2009 from $1,039,000 in 2008, mainly due to increase in salary expenses
related to increase of sales force headcount and other marketing
expenses.
18
General
and Administrative
General
and administrative expenses were 16.3% of revenues for the year ended December
31, 2009, compared to 12.4% for the year ended December 31,
2008. In actual dollars, general and administrative expenses
decreased by $60,000, to $1,411,000 in 2009 from $1,471,000 in 2008. The
decrease in 2009 was primarily due to a temporary decrease in salary related
expenses.
Financial
expenses, Net
Net
financial expenses was $15,000 for the year ended December 31, 2009, compared to
net financial income of $139,000 for the year ended December 31,
2008. From time to time, we enter into forward contracts to hedge
certain sales transactions which are denominated in foreign currencies. The
change in financial results was due to foreign currency fluctuations during the
respective periods and changes in the fair value of forward
contracts.
Net
loss
The net
loss for the year ended December 31, 2009 was $148,000, compared to a net income
of $558,000, for the year ended December 31, 2008. The loss for the year ended
December 31, 2009 is due primarily to the slowdown in the global economy which
resulted in a significant decrease in our revenues.
Critical
Accounting Policies
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires 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
Revenue
from product sales is recognized in accordance with the provisions of Staff
Accounting Bulletin No. 104 “Revenue Recognition in Financial
Statements”. We recognize revenue when persuasive evidence of an
arrangement exists, delivery has occurred (when risk of loss and title have
transferred to the customer), the sale price is fixed or determinable and
collection is reasonably assured.
We
generally use customer purchase orders and contracts to determine the existence
of an arrangement. Shipping documents and customer acceptance, when applicable,
are used to verify delivery. We assess whether the sales price is fixed or
determinable based on the payment terms associated with the transaction and
whether the price is subject to refund or adjustment. We assess collectability
based primarily on the creditworthiness of the customer as determined by credit
checks and analysis, as well as the customer’s payment
history.
Revenue
on shipments to distributors and resellers is recognized on delivery. Generally,
we do not grant a right of return. However, allowances are provided for stock
rotation rights that are granted to distributors in accordance with their
respective arrangements.
19
Inventory
Obsolescence Accruals
We
periodically assess our inventory valuation by reviewing revenue forecasts and
technological obsolescence. We write down the value of obsolete 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
2009 and 2008, we recorded inventory write-offs of $38,000 and $235,000,
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, 2009 and 2008
was $127,000 and $124,000, 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.
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.
The Company estimates the fair value
of stock options granted under ASC 718 using the Black-Scholes option-pricing
model, which uses the following assumption:
Expected volatility is based on
historical volatility, which 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, 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.
20
Liquidity
and Capital Resources
On
December 31, 2009, we had cash, cash equivalents, and restricted cash of
$3,051,000, and working capital of $3,487,000. This compares to cash,
cash equivalents, and restricted cash of $2,552,000 and working capital of
$3,412,000 on December 31, 2008. The increase in working capital in 2009 is
mainly due to an increase in cash and cash equivalents, an increase in other
accounts receivable and a decrease in accounts payable and related parties-trade
payables, offset partially by a decrease in inventory, a decrease in accounts
receivable and an increase in advances from customers and deferred
revenue.
Net cash
provided by operating activities was $449,000 for the year ended December 31,
2009, compared to $1,444,000 in cash provided by operating activities for the
year ended December 31, 2008. The decrease in cash provided by
operating activities in 2009 was mainly due to a net loss of $148,000 in 2009
and a decrease in accounts payable and related parties-trade payables, offset by
a decrease in inventories and an increase in advances from customers and
deferred revenue.
Net cash
used in investing activities was $59,000 for the year ended December 31, 2009,
compared to $79,000 in cash used in investing activities for the year ended
December 31, 2008. The decrease in cash used in investing activities
in 2009 was mainly due to reduced purchases of property and equipment during
2009 and a decrease in a short-term deposit investment.
Net cash
provided by financing activities in the year ended December 31, 2009 was
$12,000. Cash provided by financing activities in 2009 was due to proceeds from
the exercise of options. No cash was provided by financing activities in the
year ended December 31, 2008.
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.
|
The
financial statements required by this Item 8 are included in this Annual Report
following Item 15 hereof. As a smaller reporting company, we are not
required to provide supplementary financial information.
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND
FINANCIAL DISCLOSURE.
|
None.
21
ITEM9A.
|
CONTROLS AND
PROCEDURES.
|
Evaluation
of Disclosure Controls and Procedures
As of
December 31, 2009, 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, 2009. 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,
2009, 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 control over financial reporting. Management’s
report was not subject to attestation by our independent registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management’s report in this Annual Report.
Evaluation
of Changes in Internal Controls over Financial Reporting
There
were no changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act) during the quarter ended December 31,
2009, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item 9B.
|
Other
Information.
|
None.
22
PART
III
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE.
|
The
following table sets forth the positions and offices presently held by each of
our current directors and executive officers and their ages:
Name
|
Age
|
Positions Held
|
||
Amos
Kohn
|
50
|
President,
Chief Executive officer and Director
|
||
Ben-Zion
Diamant
|
60
|
Chairman
of the Board and Director
|
||
Israel
Levi
|
70
|
Director
(1)
|
||
Yeheskel
Manea
|
65
|
Director
(1)
|
||
Terry
Steinberg
|
55
|
Director
(1)
|
||
Assaf
(Assi) Itshayek
|
|
38
|
|
Chief
Financial Officer
|
(1) Member
of the Audit and Compensation Committees.
Each of
the directors named above will serve until the next annual meeting of our
shareholders or until his respective successor is elected and
qualified. Subject to the terms of applicable employment
agreements, our executive officers serve at the discretion of our
Board.
Amos
Kohn
Amos Kohn
has served as a member of our Board of Directors since 2003 and as our President
and Chief Executive Officer since June 2008. Mr. Kohn’s 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. His background includes
serving as the Chief Executive Officer 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
United States and international patents. We believe that Mr.
Kohn’s extensive executive-level management experience in the
telecommunications, cable television, broadcast and wireless platform solutions
industries, as well as his service on our Board since 2003, give him the
qualifications and skills to serve as one of our directors.
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 Chief
Executive Officer of Telkoor Telecom Ltd. since August 2008; from 1994 through
July 2008, he served as Chairman of the Board of Directors 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. We believe that Mr. Diamant’s business development and
executive-level experience, as well as his service as Chairman of our Board
since 2001, give him the qualifications and skills to serve as one of our
directors.
23
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 Master’s Degree in Electrical Engineering and is named as an inventor on
five patents. We believe that Mr. Levi’s executive-level experience,
his spearheading of industry-first products and technology developments that
have helped build the broadband infrastructure and his service on our Board
since 2008, give him the qualifications and skills to serve as one of our
directors.
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; he has been employed with Bank
Hapoalim since 1972. He holds a Bachelor of Arts degree in Economy
and Business Administration from Ferris College, University of
Michigan. We believe that Mr. Manea’s extensive experience in
the banking industry, as well as his service on our Board since 2002, give him
the qualifications and skills to serve as one of our directors.
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 Chief Executive Officer 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 Bachelor of Science Degree in Applied Mathematics/Computer Science
and a Master of Business Administration in Finance from McGill
University. We believe that Mr. Steinberg’s executive-level
experience, his experience in the areas of business consultation, corporate
finance and mergers and acquisitions and his service on our Board since 2008,
give him the qualifications and skills to serve as one of our
directors.
24
Assaf
(Assi) Itshayek
Assaf (Assi) Itshayek has served as our
Chief Financial Officer since January 2010. Mr. Itshayek was formerly
our Vice President of Finance, which position he held since joining the Company
in June 2009. Prior to joining the Company, Mr. Itshayek was a
Corporate Controller at Metalink Ltd. in Israel, a NASDAQ listed company, from
2006 through 2008, where, among other things, he prepared financial statements
in conformity with United States Generally Accepted Accounting Principles (“U.S.
GAAP”). Prior to that, he was a Senior Audit Manager at Deloitte
Brightman Almagor & Co. Certified Public Accountants in Israel from 2005
through 2006, where, among other things, he managed and audited high-tech and
industrial companies, and prepared financial statements in conformity with U.S.
GAAP. Mr. Itshayaek earned a Master of Business Administration in
Financial Management from Tel Aviv University in 2007, he earned a Bachelor of
Arts in Business Administration and Accountancy from The College for Management
in 1999 and he is currently a licensed Certified Public Accountant in Israel.
Family
Relationships
Two of
Mr. Manea's children are married to two of Mr. Diamant's children. Mr. Diamant’s
son, Ran Diamant, who is also Mr. Manea’s son-in-law, serves as 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.
Other than those relationships, there are no family relationships among any of
our directors or executive officers.
Board and Committee
Membership
Our Board
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. 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 auditors 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. 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.
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.
25
Nominating and Governance
Committee
Messrs.
Manea, Levi and Steinberg currently comprise the Nominating and Governance
Committee of our Board. 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.
The
Nominating and Governance Committee considers diversity when identifying Board
candidates. In particular, it considers such criteria as a
candidate’s broad-based business and professional skills, experiences and global
business and social perspective.
In
addition, the Committee seeks directors who exhibit personal integrity and a
concern for the long-term interests of shareholders, as well as those who have
time available to devote to Board activities and to enhancing 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 Form 5 with the SEC. Executive officers,
directors and 10% 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,
2009, 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.
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, 2009 and 2008, by our (i)
Chief Executive Officer and (ii) executive officers, other than the Chief
Executive Officer, whose salaries for the 2009 fiscal year as determined by
Regulation S-K, Item 402, exceeded $100,000 (the individuals falling within
categories (i) and (ii) are collectively referred to as the “Named Executive
Officers”).
26
SUMMARY
COMPENSATION TABLE
Name and
Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Nonequity
Incentive
Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
Compensation
($)
|
|||||||||||||||||||||||||
Amos
Kohn
|
2009
|
$ | 173,350 | - | - | $ | 17,951 | - | - | $ | 20,031 | $ | 216,030 | |||||||||||||||||||||
Chief
Executive
|
||||||||||||||||||||||||||||||||||
Officer
(1) (2)
|
2008
|
$ | 101,250 | - | - | $ | 5,216 | - | - | $ | 13,758 | $ | 159,336 |
(1)
The amounts in “All Other 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 non-employee member of
our Board since 2003. The 2009 compensation set forth above for Mr.
Kohn includes consulting fees of approximately $4,698 paid to TechLead, a
company for which Mr. Kohn serves as CEO. Mr. Kohn’s 2008
compensation includes compensation for serving as a non-employee member of our
Board through May 2008, composed of $4,167 in cash and options to purchase an
aggregate of 40,000 shares of our common stock, and includes consulting fees of
approximately $39,112 paid to TechLead.
Director
Compensation
Independent
directors receive $10,000 annually for serving on our Board. The director
designated by the Board as the Audit Committee financial expert receives an
additional annual fee of $5,000 for serving as the financial
expert.
Upon
joining our Board, each independent director also receives a grant of an option
under our 2002 Digital Power Incentive Share Option Plan to purchase 10,000
shares of our common stock. In addition, subject to Board approval, each
independent director may be granted, on an annual basis, an option to purchase
an additional 10,000 shares of our common stock. Options vest over a four-year
period, 25% per year. Each option has an exercise price equal to the fair market
value of our common stock on the grant date and a maximum term of ten years,
subject to earlier termination upon the cessation of service as a
director.
The
table below sets forth, for each non-employee director, the total amount of
compensation related to his service during the year ended December 31,
2009:
Director Compensation
|
||||||||||||||||||||||||||||
Name
|
Fees Earned
or Paid in
Cash ($)
|
Stock
Awards ($)
|
Option
Awards ($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings ($)
|
All Other
Compensation
($)
|
Total ($)
|
|||||||||||||||||||||
Yeheskel
Manea
|
$ | 15,000 | - | $ | 6,094 | - | - | - | $ | 21,094 | ||||||||||||||||||
Israel
Levi
|
$ | 10,000 | - | $ | 1,248 | - | - | - | $ | 11,248 | ||||||||||||||||||
Terry
Steinberg
|
$ | 10,000 | - | $ | 1,201 | - | - | - | $ | 11,201 |
Employment
Agreement with Amos Kohn
Effective
June 1, 2008, the Company entered into an employment agreement with Amos Kohn,
its President and Chief Executive Officer (the “Employment
Agreement”). Pursuant to the Employment Agreement, Mr. Kohn was
entitled to receive an initial annual base salary of $175,000 and was granted a
stock option to purchase 50,000 shares of the Company’s common stock at a price
equivalent to the fair market value of the Company’s shares on the date that the
option grant was approved by the Company’s Board pursuant to the Company’s 2002
Digital Power Incentive Share Option Plan.
27
The
Employment Agreement also provides that Mr. Kohn was to be granted an option to
purchase 100,000 shares of the Company’s common stock at a price equivalent to
the fair market value of the Company’s shares on the date that such option grant
was approved by the Board, if (1) certain performance goals of the Company were
met during the year ended December 31, 2008 and (2) Mr. Kohn served continuously
as the Company’s President and Chief Executive Officer through June 30,
2009. While Mr. Kohn did serve continuously as the Company’s
President and Chief Executive Officer through June 30, 2009, and continues to
serve in such capacity, certain of the stated performance goals for the Company
for 2008 were not achieved. On August 11, 2009, the Compensation
Committee of the Board (the “Compensation Committee”) determined that, since the
shortfall from the performance goals was not material, Mr. Kohn should be
granted an option to purchase 50,000 shares of the Company’s common stock in
lieu of the 100,000 shares of the Company’s common stock provided for in the
Employment Agreement. The option vests in equal annual installments
over a four-year period. The Compensation Committee also determined
that, in the event certain performance goals for the Company for the year ending
December 31, 2009 were met, Mr. Kohn would be entitled to receive an option
grant with respect to the remaining 50,000 shares. Such performance
goals for the Company for 2009 were not satisfied.
In
addition, the Employment Agreement provides that if Mr. Kohn serves continuously
as the Company’s President and Chief Executive Officer and (i) if certain
performance objectives were met during 2008, his base salary during 2009 would
increase to $200,000 or he would receive a bonus in the amount of $87,500; (ii)
if certain performance objectives were met during 2009, he would receive a bonus
equal to his then base salary times a fraction, the numerator of which is the
Company’s gross profit for 2009 and the denominator of which is the Company’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 the Company’s gross profit for 2010 and the
denominator of which is the Company’s gross revenue for
2010. Effective January 1, 2009, Mr. Kohn’s base salary was increased
to $200,000; although, as discussed above, the performance goals for the Company
during 2008 were not met, the Compensation Committee determined that, since the
shortfall from the performance goals was not material, Mr. Kohn would receive an
increase in his base salary to $200,000. As indicated above, the
performance goals for the Company for 2009 were not satisfied.
Also
pursuant to the Employment Agreement, if on or after January 1, 2009, (i) Mr.
Kohn is terminated by the Company without cause or (ii) a change in control of
the Company (as defined in the Employment Agreement) occurs, and Mr. Kohn
resigns with good reason within six months following such change in control, Mr.
Kohn will be entitled to the following benefits: four to eight months of
his then base salary, depending on whether certain performance goals have been
achieved; health benefits for up to four months following termination; and
acceleration of one year’s worth of vesting of any outstanding stock
options.
Separation
Agreement with Jonathan Wax
We
entered into a separation agreement and release of claims with Jonathan Wax, our
former President and Chief Executive Officer. See the discussion of this
agreement located below in “Item 13. Certain Relationships and Related
Transactions.”.
28
Outstanding
Equity Awards at Fiscal Year-End
The
following tables provide information on outstanding equity awards during the
year ended December 31, 2009 to the Named Executive Officers:
Option Awards
|
Stock Awards
|
||||||||||||||||||||||||||||||||
Name
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
|
Option
Exercise
Price ($)
|
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 ($)
|
||||||||||||||||||||||||
Amos
Kohn
|
10,000 | - | - | $ | 0.96 |
8/5/2013
|
- | - | - | - | |||||||||||||||||||||||
10,000 | - | - | $ | 1.19 |
2/28/2015
|
- | - | - | - | ||||||||||||||||||||||||
7,500 | 2,500 | - | $ | 1.16 |
3/9/2016
|
- | - | - | - | ||||||||||||||||||||||||
5,000 | 5,000 | - | $ | 1.66 |
3/9/2017
|
- | - | - | - | ||||||||||||||||||||||||
12,500 | 37,500 | - | $ | 0.84 |
7/3/2018
|
- | - | - | - | ||||||||||||||||||||||||
2,500 | 7,500 | - | $ | 0.79 |
9/19/2018
|
- | - | - | - | ||||||||||||||||||||||||
50,000 | - | $ | 1.79 |
8/11/2019
|
- | - | - | - |
Employee
Stock Ownership Plan
We
adopted an Employee Stock Ownership Plan, or ESOP, in conformity with ERISA
requirements. As of December 31, 2009, 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 and Mr. Kohn are the current
trustees of the ESOP.
Stock
Option Plans
Our stock
option plans currently consist of the Digital Power 2002, 1998, and 1996
Incentive Share Option Plans (the “Stock Option Plans”). The purpose of the
Stock Option 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 Stock Option Plans provide for the grant of
either incentive or non-statutory stock options. The exercise price of any stock
option granted under the Stock Option 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 Stock Option
Plans is exercisable for ten years. The Stock Option 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 Stock Option 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.
29
As of
December 31, 2009, of the 2,272,000 shares of our common stock authorized under
the Stock Option Plans, a total of 1,514,145 shares were reserved for issuance,
and of this number, options to purchase 825,240 shares of common stock were
issued and outstanding.
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 by 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.
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
|
Security
Ownership
Except as
otherwise indicated below, the following table sets forth certain information
regarding beneficial ownership of our common stock as of March 25, 2010 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 SEC; and (4) all of our directors
and executive officers as a group. As of December 31, 2009, there were 6,626,468
shares of our common stock outstanding.
Beneficial
ownership is determined in accordance with the rules of the SEC 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 March 25, 2010 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 SEC as of March 25, 2010. Unless otherwise
indicated below, the address of each beneficial owner listed below is c/o
Digital Power Corporation, 41324 Christy Street, Fremont, California
94538.
30
Name and Address
of Beneficial owner
|
Number of Shares
Beneficially Owned
|
Approximate Percent
of Class
|
||||||
Telkoor
Telecom Ltd.
5
Giborei Israel
Netanya
42293
Israel
|
2,897,110 | 43.7 | % | |||||
Ben-Zion
Diamant
|
3,264,614 | (1) | 47.8 | % | ||||
Yeheskel
Manea
|
40,000 | (2) | * | |||||
Amos
Kohn
|
220,004 | (3) | * | |||||
Israel
Levi
|
2,500 | (4) | * | |||||
Terry
Steinberg
|
2,500 | (5) | * | |||||
Barry
W. Blank
P.O.
Box 32056
Phoenix,
AZ 85064
|
618,375 | 9.3 | % | |||||
All
directors and executive officers as a group (5
persons)
|
3,529,618 | (6) | 51 | % |
* Less
than one percent.
(1) Mr.
Diamant serves as a director of Telkoor. Includes (a) options to
purchase 200,000 shares, owned by Mr. Diamant, that are currently exercisable or
exercisable within 60 days of March 25, 2010; (b) 167,504 shares of
common stock owned by the Digital Power ESOP, for which Mr. Diamant serves as a
trustee; and (c) 2,897,110 shares beneficially owned by Telkoor. Mr. Diamant
disclaims beneficial ownership of the shares held by Telkoor, except to the
extent of his proportionate pecuniary interest therein.
(2) Includes
options to purchase 40,000 shares of common stock that are currently exercisable
or exercisable within 60 days of March 25, 2010.
(3) Includes
(a) 167,504 shares of common stock owned by the Digital Power ESOP, for which
Mr. Kohn serves as a trustee and (b) options to purchase 52,500 shares of common
stock that are currently exercisable or exercisable within 60 days of March 25,
2010.
(4) Includes
options to purchase 2,500 shares of common stock that are currently exercisable
or exercisable within 60 days of March 25, 2010.
(5) Includes
options to purchase 2,500 shares of common stock that are currently exercisable
or exercisable within 60 days of March 25, 2010.
(6) See
Notes (1) - (5) above.
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table sets forth information as of December 31, 2009 with respect to
compensation plans under which our common shares are authorized for issuance,
aggregated as follows:
|
·
|
All
compensation plans previously approved by security holders;
and
|
|
·
|
All
compensation plans not previously approved by security
holders.
|
31
EQUITY
COMPENSATION PLAN INFORMATION
Name
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
|
Weighted-average exercise
price of outstanding
options, warrants and
rights
(b)
|
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities in
column (a))
(c)
|
|||||||||
Equity
compensation plans approved by security holders
|
1,005,240 | $ | 1.05 | 688,905 | ||||||||
Equity
compensation plans not approved by security holders
|
- | - | - | |||||||||
Total
|
1,005,240 | $ | 1.05 | 688,905 |
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 entitled “Employment Agreement with Amos
Kohn.”
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.
Relationship
with Telkoor Power Supplies Ltd.
In the
fiscal years ended December 31, 2009 and 2008, we purchased approximately
$2,531,000 and $4,571,000, respectively, of products from Telkoor Power Supplies
Ltd., a wholly-owned subsidiary of our largest shareholder, Telkoor, of which
Ben-Zion Diamant is the Chief Executive Officer. 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 (“Kost
Forer”), 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, 2010.
32
Kost
Forer 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 Kost Forer.
Fees
and Services
The
following table shows the aggregate fees billed to us for professional services
by Kost Forer for the fiscal years ended December 31, 2009 and
2008:
2009
|
2008
|
|||||||
Audit
Fees
|
$
|
123,000
|
$
|
123,000
|
||||
Audit-Related
Fees
|
$
|
31,000
|
$
|
-0-
|
||||
Tax
Fees
|
$
|
5,000
|
$
|
-0-
|
||||
All
Other Fees
|
$
|
-0-
|
$
|
-0-
|
||||
Total
|
$
|
159,000
|
$
|
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, 2009
and 2008, for the reviews of the financial statements included in our quarterly
reports on Form 10-Q during fiscal 2009 and 2008, 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.
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.
PART
IV
ITEM
15.
|
EXHIBITS AND
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)
|
33
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
Digital Power Incentive Share Option (1)
|
|
10.6
|
Gresham
Power Asset Purchase Agreement (3)
|
|
10.7
|
1998
Digital Power Incentive Share Option Plan (5)
|
|
10.8
|
2002
Digital Power Incentive Share Option Plan (8)
|
|
10.9
|
Technology
Transfer Agreement with KDK Electronics (4)
|
|
10.10
|
Loan
Commitment and Letter Agreement (5)
|
|
10.11
|
Promissory
Note (5)
|
|
10.12
|
Employment
Agreement with Robert O. Smith (6)
|
|
10.13
|
Securities
Purchase Agreement between the Company and Telkoor Telecom, Ltd. (now
Telkoor Power Ltd.) (7)
|
|
10.14
|
Securities
Purchase Agreement between the Company and Telkoor Telecom,
Ltd. (now Telkoor Power Ltd.) (8)
|
|
10.15
|
Employment
Letter with David Amitai (9)
|
|
10.16
|
Employment
Agreement with Jonathan Wax (9)
|
|
10.17
|
Convertible
Note with Telkoor Power Ltd. (10)
|
|
10.18
|
Lease,
dated as of August 21, 2007, between the Company and SDC Fremont Business
Center, Inc. (11)
|
|
10.19
|
Employment
Agreement with Amos Kohn (12)
|
|
23.1
|
Consent
of Kost Forer Gabbay & Kasierer, a member of Ernst & Young
Global
|
|
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 Proxy Statement filed on September 5,
2002.
|
(9)
|
Previously
filed with the Commission with its Form 8-K filed on January 14,
2004.
|
(10)
|
Previously
filed with the Commission with its Form 10-KSB for the year ended December
31, 2003.
|
(11)
|
Previously
filed with the Commission with its Form 8-K filed on
February 9, 2005.
|
(12)
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed on October
22, 2007.
|
(13)
|
Previously
filed with the Commission with its Form 8-K filed on
July 10, 2008.
|
34
DIGITAL
POWER CORPORATION AND SUBSIDIARY
CONSOLIDATED
FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2009
IN
U.S. DOLLARS
INDEX
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets
|
F-3
|
Consolidated
Statements of Operations
|
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-25
|
-
- - - - - - -
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 subsidiary as of December 31, 2009 and 2008 and
the related consolidated statements of operations, 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
subsidiary at of December 31, 2009 and 2008 and the consolidated results of
their operations and their cash flows for the years then ended, in conformity
with U.S. generally accepted accounting principles.
Tel-Aviv,
Israel
|
KOST
FORER GABBAY & KASIERER
A
Member of Ernst & Young Global
|
March
25, 2010
|
F-2
DIGITAL
POWER CORPORATION
CONSOLIDATED
BALANCE SHEETS
U.S.
dollars in thousands (except share and per share data)
December 31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 2,967 | $ | 2,476 | ||||
Restricted
cash
|
84 | 76 | ||||||
Trade
receivables (net of allowance for doubtful accounts of $ 127 and $ 124 as
of December 31, 2009 and 2008, respectively)
|
1,522 | 1,901 | ||||||
Prepaid
expenses and other receivables
|
243 | 139 | ||||||
Inventories
(Note 3)
|
1,056 | 1,494 | ||||||
Total
current assets
|
5,872 | 6,086 | ||||||
PROPERTY
AND EQUIPMENT, NET (Note 4)
|
231 | 153 | ||||||
LONG-TERM
DEPOSITS
|
41 | 41 | ||||||
Total
assets
|
$ | 6,144 | $ | 6,280 | ||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 891 | $ | 1,069 | ||||
Related
parties - trade payables (Note 11)
|
531 | 957 | ||||||
Advances
from customers and deferred revenue
|
471 | 134 | ||||||
Other
current liabilities (Note 5)
|
492 | 514 | ||||||
Total
current liabilities
|
2,385 | 2,674 | ||||||
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, 2009 and
2008
|
- | - | ||||||
Preferred
shares, no par value - 1,500,000 shares authorized, 0 shares issued
and outstanding at December 31, 2009 and 2008
|
- | - | ||||||
Common
shares, no par value - 30,000,000 shares authorized;
6,626,468 and 6,615,708 shares issued and outstanding at
December 31, 2009 and 2008, respectively
|
- | - | ||||||
Additional
paid-in capital
|
14,042 | 13,927 | ||||||
Accumulated
deficit
|
(9,932 | ) | (9,784 | ) | ||||
Accumulated
other comprehensive loss
|
(351 | ) | (537 | ) | ||||
Total
shareholders' equity
|
3,759 | 3,606 | ||||||
Total
liabilities and shareholders' equity
|
$ | 6,144 | $ | 6,280 |
The
accompanying notes are an integral part of the consolidated financial
statements.
F-3
DIGITAL
POWER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S.
dollars in thousands (except per share data)
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Revenues
(Note 12)
|
$ | 8,659 | $ | 11,900 | ||||
Cost
of revenues
|
5,648 | 8,377 | ||||||
Gross
profit
|
3,011 | 3,523 | ||||||
Operating
expenses:
|
||||||||
Engineering
and product development
|
556 | 622 | ||||||
Selling
and marketing
|
1,146 | 1,039 | ||||||
General
and administrative
|
1,411 | 1,471 | ||||||
Total operating
expenses
|
3,113 | 3,132 | ||||||
Operating
income (loss)
|
(102 | ) | 391 | |||||
Financial
income (expenses), net
|
(15 | ) | 139 | |||||
Income
(loss) before income taxes
|
(117 | ) | 530 | |||||
Tax
benefit (expenses)
|
(31 | ) | 28 | |||||
Net
income (loss)
|
$ | (148 | ) | $ | 558 | |||
Basic
net earnings (loss) per share
|
$ | (0.022 | ) | $ | 0.084 | |||
Diluted
net earnings (loss) per share
|
$ | (0.022 | ) | $ | 0.083 |
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, 2008
|
6,615,708 | $ | - | $ | 13,885 | $ | (10,342 | ) | $ | 200 | $ | 3,743 | ||||||||||||||||
Stock
compensation related to options granted to Telkoor's employees and other
non-employee consultants
|
- | - | (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 | ||||||||||||||||||||
Stock
compensation related to options granted to Telkoor's employees and other
non- employee consultant
|
- | - | 15 | - | - | - | 15 | |||||||||||||||||||||
Stock
compensation related to options granted to employees
|
- | - | 88 | - | - | - | 88 | |||||||||||||||||||||
Exercise
of options granted to employees
|
10,760 | - | 12 | - | - | - | 12 | |||||||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||||||
Net
loss
|
- | - | - | (148 | ) | - | $ | (148 | ) | (148 | ) | |||||||||||||||||
Foreign
currency translation adjustments
|
- | - | - | - | 186 | 186 | 186 | |||||||||||||||||||||
Total
comprehensive income
|
||||||||||||||||||||||||||||
$ | 38 | |||||||||||||||||||||||||||
Balance
as of December 31, 2009
|
6,626,468 | $ | - | $ | 14,042 | $ | (9,932 | ) | $ | (351 | ) | $ | 3,759 |
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 (except share and per share data)
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Cash flows from operating
activities:
|
||||||||
Net
income (loss)
|
$ | (148 | ) | $ | 558 | |||
Adjustments
required to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||
Depreciation
|
97 | 94 | ||||||
Stock
compensation related to options granted to employees
|
88 | 54 | ||||||
Stock
compensation related to options granted to Telkoor's employees and other
non-employee consultants
|
15 | (12 | ) | |||||
Decrease
in trade receivables, net
|
457 | 474 | ||||||
Increase
in prepaid expenses and other receivables
|
(98 | ) | (54 | ) | ||||
Decrease
(increase) in inventories
|
438 | (221 | ) | |||||
Increase
(decrease) in accounts payable and related parties - trade
payables
|
(674 | ) | 213 | |||||
Increase
in advances from customers, deferred revenues and other current
liabilities
|
274 | 338 | ||||||
Net
cash provided by operating activities
|
449 | 1,444 | ||||||
Cash flows from investing
activities:
|
||||||||
Purchase
of property and equipment
|
(59 | ) | (79 | ) | ||||
Net
cash used in investing activities
|
(59 | ) | (79 | ) | ||||
Cash flows from financing
activities:
|
||||||||
Proceeds
from exercise of options
|
12 | - | ||||||
Net
cash provided by financing activities
|
12 | - | ||||||
Effect
of exchange rate changes on cash and cash equivalents
|
89 | (332 | ) | |||||
Increase in cash and cash equivalents
|
491 | 1,033 | ||||||
Cash and cash equivalents at the beginning of the year
|
2,476 | 1,443 | ||||||
Cash
and cash equivalents at the end of the year
|
$ | 2,967 | $ | 2,476 | ||||
Supplemental disclosure of cash flows
activities:
|
||||||||
Income
taxes paid
|
$ | 7 | $ | - | ||||
Supplemental disclosure of non-cash
activities:
|
The
accompanying notes are an integral part of the consolidated financial
statements.
F-6
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
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 the
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 consolidated financial statements in conformity with U.S.
GAAP requires management to make estimates, judgments and assumptions. The
Company's management
believes that the estimates, judgments and assumptions made are reasonable based
upon information available at the time they are made. These estimates, judgments
and assumptions can affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
b. Financial
statements in U.S. dollars:
A
substantial portion 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.
F-7
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands (except share and per share data)
NOTE 2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
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 Accounting Codification Statement (“ASC”) 830 (formerly: FASB
No. 52 “Foreign Currency Translation” (“ASC830”). All balance sheet accounts
have been translated using the exchange rates in effect at the balance sheet
date. Statement of operations amounts have been translated using the
average exchange rate for the period. The resulting translation adjustments are
reported as a component of accumulated other comprehensive income (loss) in
shareholders' equity.
c.
|
Principles
of consolidation:
|
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary. Intercompany transactions and balances have been
eliminated upon consolidation.
d.
|
Cash
equivalents:
|
Cash
equivalents are short-term highly liquid investments that are readily
convertible to cash with original maturities of three months or less 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 obsolete
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
2009 and 2008, the Company recorded inventories write-offs of $38 and $235,
respectively.
F-8
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
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
of property, plant and equipment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the future undiscounted cash flows expected to be
generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. As of December 31,
2009 and 2008, 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 collectability 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 15-18 months, at no more than a fixed percentage 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.
F-9
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands (except share and per share data)
NOTE 2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
i.
|
Engineering
and product development:
|
Engineering
and product development costs are charged to the statement of operations as
incurred.
j.
|
Income
taxes:
|
The
Company and its subsidiary account for income taxes in accordance with ASC 740
(Formerly: Statement of Financial Accounting Standards No. 109), “Income Taxes”
(“ASC 740”). 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.
ASC 740
contains a two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with ASC 740. 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. No
liability for unrecognized tax benefits was recorded as a result of the
implementation of ASC 740 as well as of December 31, 2009 and 2008.
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
sold, 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.
l.
|
Accounting
for stock-based compensation:
|
The
Company accounts for stock-based compensation in accordance with ASC 718
(Formerly SFAS No. 123 (revised 2004)), “Share-Based Payment” (“ASC
718”).
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.
F-10
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands (except share and per share data)
NOTE 2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
ASC 718
requires companies to estimate the fair value of equity-based payment awards on
the date of grant using an option-pricing model. The Company
estimates the fair value of stock options granted under ASC 718 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, 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. ASC 718 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 2009 and 2008 is amortized over their vesting
period using a straight-line recognition method and estimated at the date of
grant with the following assumptions:
2009
|
2008
|
|||
Dividend
yield
|
0%
|
0%
|
||
Expected
volatility
|
89%-93%
|
88%
–93%
|
||
Risk-free
interest
|
2.7%-2.89%
|
1.7%
- 4.0%
|
||
Forfeiture
rate
|
5%
|
5%
|
||
Expected
life
|
6.25
years
|
7
years
|
The total
equity-based compensation expense related to all of the Company's equity-based
awards, recognized for the years ended December 31, 2009 and 2008 were comprised
as follows:
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Cost
of goods sold
|
$ | 3 | $ | 2 | ||||
Research
and development
|
2 | 2 | ||||||
Sales
and marketing
|
22 | 11 | ||||||
General
and administrative
|
61 | 39 | ||||||
Total
equity-based compensation expense
|
$ | 88 | $ | 54 |
F-11
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands (except share and per share data)
NOTE 2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
A summary
of option activity under the Company's Stock Option Plans (as hereinafter
defined) as of December 31, 2009 and changes during year then ended are as
follows:
Year ended December 31, 2009
|
||||||||||||||||
Amount of
options
|
Weighted
average
exercise
price
|
Weighted-
average
remaining
contractual
term (in
years)
|
Aggregate
intrinsic
value
|
|||||||||||||
Outstanding
at the beginning of the year
|
779,035 | $ | 1.03 | 5.59 | $ | 65 | ||||||||||
Granted
|
120,000 | $ | 1.50 | |||||||||||||
Exercised
|
(10,760 | ) | $ | 1.13 | ||||||||||||
Expired
|
(1,035 | ) | $ | 1.81 | ||||||||||||
Forfeited
|
(62,000 | ) | $ | 1.48 | ||||||||||||
Outstanding
at the end of the year
|
825,240 | $ | 1.05 | 5.26 | $ | 309 | ||||||||||
Vested
or expected to vest at year end
|
779,990 | |||||||||||||||
Exercisable
options at the end of the year
|
598,990 | $ | 0.98 | 3.95 | $ | 623 |
The
weighted-average grant-date fair value of options granted during the year ended
December 31, 2009 and 2008 were $ 1.50 and $ 0.81, 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,
2009 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, 2009. 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, 2009 was less than $ 1 (no
option exercised in 2008).
As of
December 31, 2009, there was $ 180 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 1.87 years. The total fair value of options vested
during the year ended December 31, 2009 and 2008 was $ 78 and $
42.
The
Company applies ASC 718 and ASC 505-50, formerly EITF No. 96-18, with respect to
options and warrants issued to non-employees. ASC 718 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:
|
The Company measures its
financial instruments at fair value. Fair value is an exit price, representing
the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. As such, fair
value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or a
liability. A three-tier fair value hierarchy is established as a basis for
considering such assumptions and for inputs used in the valuation methodologies
in measuring fair value:
F-12
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands (except share and per share data)
NOTE 2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
Level
1 -
|
inputs
are based upon unadjusted quoted prices for identical instruments traded
in active markets.
|
|
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.
|
|
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 (forward contract)
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 2(P) and Note 5).
The
carrying amounts of financial instruments carried at cost, including cash and
cash equivalents, restricted cash long-term 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 ASC 260 (Formerly Statement of Financial Accounting
Standard No. 128, "Earnings per Share") ("ASC 260").
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 1,005,240 options and 644,035 options for the years ended
December 31, 2009 and 2008, respectively.
o.
|
Concentrations
of credit risks:
|
Financial
instruments that potentially subject the Company and its subsidiary to
concentrations of credit risk consist principally of cash and cash equivalents,
restricted cash, long term deposits and trade receivables.
F-13
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands (except share and per share data)
NOTE 2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
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:
|
ASC 815
(Formerly Financial Accounting Standard Board Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities") ("ASC
815"), 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 ASC 815.
As of
December 31, 2008 and 2009, the Company had outstanding forward contracts that
did not meet the requirement for hedge accounting, in the amount of $115 and
$17, respectively. These contracts were for a period of up to nine months. The
Company measured the fair value of the contracts in accordance with ASC No. 820
at level 2. The net gains (losses) recognized in "financial income, net" during
2008 and 2009 were a loss of $147 and a gain of $63, respectively.
q.
|
Comprehensive
income:
|
The
Company accounts for comprehensive income in accordance with ASC 220 (Formerly
SFAS No. 130, "Reporting Comprehensive Income.") (“ASC 220”). 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
relates to unrealized losses and gains from foreign currency translation
adjustments.
F-14
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands (except share and per share data)
NOTE 2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
r.
|
Operating
lease:
|
The
Company and its subsidiary have operating lease agreements for the lease of
their building facilities in the US and UK. The rent in connection with the
leases is charged to expense over the lease term. If rental payments are not
made on a straight line basis, rental expenses are nevertheless recognized on a
straight line basis.
s.
|
Recently
issued accounting pronouncements:
|
In June
2009, the FASB issued SFAS 168, "The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles". SFAS No. 168,
which is incorporated in ASC Topic 105, Generally Accepted Accounting
Principles, identifies the accounting standard codification (ASC) as the
authoritative source of generally accepted accounting principles in the United
States. Rules and interpretive releases of the SEC under federal securities laws
are also sources of authoritative GAAP for SEC registrants. Throughout the notes
to the consolidated financial statements, references that were previously made
to former authoritative U.S. GAAP pronouncements have been changed to coincide
with the appropriate section of the ASC.
For
accounting periods ending after June 15, 2009, new authoritative accounting
guidance became effective under ASC Topic 855 (formerly SFAS No. 165) which
modifies the definition of what qualifies as a subsequent event—those events or
transactions that occur following the balance sheet date, but before the
financial statements are issued, or are available to be issued—and requires
companies to disclose the date through which it has evaluated subsequent events
and the basis for determining that date. The adoption of ASC Topic 855 did not
have a material impact on our financial position or results of operations and
financial condition.
In
October 2009, the FASB issued Accounting Standards Update, 2009-13, Revenue
Recognition (Topic 605) Multiple Deliverable Revenue Arrangements-A Consensus of
the FASB Emerging Issues Task Force. This update provides application guidance
on whether multiple deliverables exist, how the deliverables should be separated
and how the consideration should be allocated to one or more units of
accounting. This update establishes a selling price hierarchy for determining
the selling price of a deliverable. The selling price used for each deliverable
will be based on vendor-specific objective evidence, if available, third-party
evidence if vendor-specific objective evidence is not available, or estimated
Selling price if neither vendor-specific or third-party evidence is available.
The Company will be required to apply this guidance prospectively for revenue
arrangements entered into or materially modified after January 1, 2011; however,
earlier application is permitted. The Company is currently evaluating
the impact of the adoption of this new guidance on its financial
statements.
F-15
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands (except share and per share data)
NOTE
3:-
|
INVENTORIES
|
December 31,
|
||||||||
2009
|
2008
|
|||||||
Raw
materials, parts and supplies
|
$ | 232 | $ | 228 | ||||
Work
in progress
|
285 | 308 | ||||||
Finished
products
|
539 | 958 | ||||||
$ | 1,056 | $ | 1,494 |
NOTE 4:-
|
PROPERTY
AND EQUIPMENT
|
December 31,
|
||||||||
2009
|
2008
|
|||||||
Cost:
|
||||||||
Computers,
software and related equipment
|
$ | 1,153 | $ | 998 | ||||
Office
furniture and equipment
|
187 | 175 | ||||||
Leasehold
improvements
|
519 | 454 | ||||||
1,859 | 1,627 | |||||||
Accumulated
depreciation
|
||||||||
Computers,
software and related equipment
|
1,014 | 960 | ||||||
Office
furniture and equipment
|
183 | 172 | ||||||
Leasehold
improvements
|
431 | 342 | ||||||
1,628 | 1,474 | |||||||
Depreciated
cost
|
$ | 231 | $ | 153 |
Depreciation
expense was $97 and $94 for the years ended December 31, 2009 and 2008,
respectively.
NOTE
5:-
|
OTHER
CURRENT LIABILITIES
|
December 31,
|
||||||||
2009
|
2008
|
|||||||
Accrued
payroll and payroll taxes
|
$ | 120 | $ | 81 | ||||
Warranty
accrual
|
103 | 61 | ||||||
Government
authorities
|
7 | 8 | ||||||
Professional
fees accrual
|
136 | 109 | ||||||
Accrued
expenses and other
|
109 | 140 | ||||||
Forward
contract
|
17 | 115 | ||||||
$ | 492 | $ | 514 |
F-16
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands (except share and per share data)
NOTE 6:-
|
COMMITMENTS AND CONTINGENT
LIABILITIES
|
Lease
commitments:
The
Company has an operating lease agreement in the US, which expires in 2012. The
Company's subsidiary, DPL, had a lease agreement in respect of the U.K.
facility, which expired on September 2009. However, DPL continues to
occupy the facility, as the building owner has confirmed a tenancy until April
2010. The lease agreement included certain repairing covenants, such
as the requirement to redecorate the internal and external structure/foundation
of the building at intervals during the term of that lease and to generally keep
the building in good repair. DPL believes that it has satisfied all of the
repairing covenants to date. DPL intends to remain in the building
and to enter into a new lease agreement with the building owner after April
2010.
Future
rental commitments under non-cancelable leases are as follows:
Year ended December 31,
|
||||
2010
|
$ | 109 | ||
2011
|
119 | |||
2012
|
111 | |||
$ | 339 |
Total
rent expense for the years ended December 31, 2009 and 2008 was approximately
$ 225 and $ 253, respectively.
Subsequent
to the balance sheet date, the Company signed an amendment to its current lease
agreement in the US to expand its office space. The amendment also reduced the
option to renew for a five-year period under the original lease agreement to a
one-year period.
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, 2009, there were no Preferred shares
issued or outstanding.
F-17
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
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 Digital 2002, 1998 and 1996 Incentive Share Option Plans
(the “Stock Option Plans”), options may be granted to employees, officers,
consultants, service providers and directors of the Company or its
subsidiary.
|
2.
|
As
of December 31, 2009, the Company has authorized in the Stock 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 Stock Option Plans, the maximum
term of the options is ten years from the date of grant. As of December
31, 2009, an aggregate of 688,905 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, 2009 have been classified by exercise
price, as follows:
Weighted
|
||||||||||||||||||||
Options
|
average
|
Options
|
Weighted
|
|||||||||||||||||
outstanding
|
remaining
|
Weighted
|
Exercisable
|
average
|
||||||||||||||||
as of
|
contractual
|
average
|
as of
|
exercise price
|
||||||||||||||||
Exercise
|
December 31,
|
term
|
exercise
|
December 31,
|
of options
|
|||||||||||||||
Price
|
2009
|
Years
|
Price
|
2009
|
exercisable
|
|||||||||||||||
$0.48-
$0.71
|
265,000 |
2.70
|
$ | 0.60 | 257,500 | $ | 0.68 | |||||||||||||
$0.79 -
$1.05
|
257,000 |
6.06
|
$ | 0.96 | 177,000 | $ | 1.01 | |||||||||||||
$1.16
- $1.813
|
279,240 |
7.36
|
$ | 1.38 | 140,490 | $ | 1.23 | |||||||||||||
$2.31-
$ 3.03
|
24,000 |
0.66
|
$ | 2.36 | 24,000 | $ | 2.36 | |||||||||||||
825,240 |
5.26
|
$ | 1.05 | 598,990 | $ | 0.98 |
4.
|
Warrants
and options issued to service providers and consultants under the Stock
Option Plans:
|
F-18
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands (except share and per share data)
NOTE
7:-
|
SHAREHOLDERS'
EQUITY (Cont.)
|
The
Company's outstanding warrants and options to consultants and service providers
under the Stock Option Plans as of December 31, 2009, 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 | 20,000 | ||||||||
March
2006
|
100,000 | $ | 1.16 | 75,000 | ||||||||
180,000 | 155,000 |
All
options are exercisable for ten years from the date of grant.
In 2005
and 2006, the Company granted 70,000 options to Telkoor's employees and 100,000
options to a non-employee consultant. Of the 70,000 options granted to Telkoor’s
employees, 10,000 and 40,000 options were forfeited in 2007 and 2008,
respectively, due to termination of employment. 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 2009:
risk-free interest rates of 2.5%-2.9%, dividend yield of 0%, volatility of
89.1%-93.9%, and the contractual term of the options of 5.2-5.7
years.
Compensation
expense of $15 and compensation income of $ 12 were recognized for the years
ended December 31, 2009 and 2008, respectively, in accordance with accelerated
method.
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, 2009, 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-19
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
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,
|
||||||||
2009
|
2008
|
|||||||
Net
operating loss carryforward
|
$ | 1,745 | $ | 1,831 | ||||
Reserves
and allowances
|
380 | 348 | ||||||
Credit
carryforward
|
112 | 81 | ||||||
Depreciation
and amortization
|
143 | (207 | ) | |||||
Net
deferred tax asset before valuation allowance
|
2,380 | 2,053 | ||||||
Valuation
allowance
|
(2,380 | ) | (2,053 | ) | ||||
Net
deferred tax asset
|
$ | - | $ | - |
As of
December 31, 2009 and 2008, the Company and its subsidiary provided a valuation
allowance of $ 2,158 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.
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, 2009, the Company had approximately $ 3,650 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 between 2020
and 2030.
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.
F-20
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands (except share and per share data)
NOTE
8:-
|
TAXES
ON INCOME (Cont.)
|
As of
December 31, 2009, DPL had accumulated losses for income tax purposes in the
amount of approximately $1,056. These net operating losses may be
carried forward and offset against taxable income in the future for an
indefinite period.
c.
|
Income
before income taxes:
|
There is
no provision in respect of unrecognized tax benefits for the years ended
December 31, 2009 and 2008. Net income (loss) before income taxes consists of
the following:
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Domestic
(U.S.)
|
$ | (153 | ) | $ | 199 | |||
Foreign
(U.K.)
|
36 | 331 | ||||||
$ | (117 | ) | $ | 530 |
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.
d.
|
A
reconciliation between the theoretical tax expense, assuming all income is
taxed at the statutory tax rate applicable to income of the Company and
the actual tax expense as reported in the statements of operations is as
follows:
|
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Total
|
Total
|
|||||||
Income
(loss) before taxes expenses (benefit)
|
$ | (117 | ) | $ | 530 | |||
Theoretical
tax at U.S. statutory tax rate (34%)
|
$ | (40 | ) | $ | 180 | |||
Taxes
in respect of prior years
|
31 | (28 | ) | |||||
State
taxes, net of federal benefit
|
(3 | ) | - | |||||
Tax
adjustment in respect of foreign subsidiary
|
(5 | ) | 5 | |||||
Nondeductible
expenses
|
1 | 20 | ||||||
Operating
carryforward losses and temporary differences for which valuation
allowance was provided
|
46 | (212 | ) | |||||
Other
|
1 | 7 | ||||||
Tax
expenses (benefit)
|
$ | 31 | $ | (28 | ) |
F-21
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands (except share and per share data)
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,
|
||||||||
2009
|
2008
|
|||||||
Net
income (loss) available to Common shareholders
|
$ | (148 | ) | $ | 558 |
b.
|
Denominator:
|
Denominator
for basic net earnings per Common share
|
6,620,695 | 6,615,708 | ||||||
Effect
of dilutive securities:
|
||||||||
Stock
options
|
- | 72,883 | ||||||
Denominator
for diluted net earnings per Common share
|
6,620,695 | 6,688,591 |
NOTE 10:-
|
FINANCIAL
INCOME, NET
|
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Financial
income:
|
||||||||
Interest
|
$ | 1 | $ | 50 | ||||
Foreign
currency transaction differences
|
230 | 446 | ||||||
Forward
contract transaction
|
63 | - | ||||||
294 | 496 | |||||||
Financial
expenses:
|
1 | 8 | ||||||
Bank
charges and other translation
|
10 | 8 | ||||||
Foreign
currency transaction differences
|
299 | 202 | ||||||
Forward
contract transaction
|
- | 147 | ||||||
309 | 357 | |||||||
Financial
income (expense), net
|
$ | (15 | ) | $ | 139 |
F-22
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands (except share and per share data)
NOTE 11:-
|
RELATED
PARTY TRANSACTIONS
|
Purchases
of products from Telkoor, a major shareholder, were as follows:
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Purchases
of products from Telkoor
|
$ | 2,531 | $ | 4,571 |
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 purchased from an unaffiliated entity, management believes that the amounts
chargeable for the above transactions provided by these purchase orders 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 ASC 280 (Formerly Statement of Financial Accounting Standard No.
131), "Disclosure about Segments of an Enterprise and Related Information"
("ASC 280").
|
The
following data presents the revenues, expenditures and other operating data of
the Company's geographic operating segments:
Year ended December 31, 2009
|
||||||||||||||||
DPC
|
DPL
|
Eliminations
|
Total
|
|||||||||||||
Revenues
|
$ | 4,257 | $ | 4,402 | $ | - | $ | 8,659 | ||||||||
Intersegment
revenues
|
233 | 55 | (288 | ) | - | |||||||||||
Total
revenues
|
$ | 4,490 | $ | 4,457 | $ | (288 | ) | $ | 8,659 | |||||||
Depreciation
expense
|
$ | 30 | $ | 67 | $ | - | $ | 97 | ||||||||
Operating
income (loss)
|
$ | (226 | ) | $ | 124 | $ | - | $ | (102 | ) | ||||||
Financial
expenses, net
|
(15 | ) | ||||||||||||||
Tax
expense
|
(31 | ) | ||||||||||||||
Net
loss
|
$ | (148 | ) | |||||||||||||
Expenditures
for segment assets as of December 31, 2009
|
$ | 13 | $ | 46 | $ | - | $ | 59 | ||||||||
Identifiable
assets as of December 31, 2009
|
$ | 2,971 | $ | 3,173 | $ | - | $ | 6,144 |
F-23
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands (except share and per share data)
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, 2009
|
$ | 12 | $ | 67 | $ | - | $ | 79 | ||||||||
Identifiable
assets as of December 31, 2009
|
$ | 2,979 | $ | 3,301 | $ | - | $ | 6,280 |
b.
|
Major
customers' data as percentage of total
revenues:
|
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Customer
A
|
( | *) | 12 | % | ||||
Customer
B
|
10 | % | ( | *) |
F-24
DIGITAL
POWER CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands (except share and per share data)
NOTE
12:-
|
SEGMENTS
CUSTOMERS AND GEOGRAPHICAL INFORMATION
(Cont.)
|
c.
|
Total
revenues from external customers divided on the basis of the Company's
product lines are as follows:
|
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Revenues:
|
||||||||
Commercial
products
|
$ | 5,766 | $ | 8,787 | ||||
Defense
products
|
2,893 | 3,113 | ||||||
$ | 8,659 | $ | 11,900 |
(*) Less
than 10%
F-25
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: March
25, 2010
DIGITAL
POWER CORPORATION
By:
|
/s/
Amos Kohn
|
||
Amos
Kohn
|
|||
President
and Chief Executive Officer
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Dated:
March 25, 2010
|
/s/
Ben-Zion Diamant
|
|
Ben-Zion
Diamant, Chairman of the Board
|
||
Dated:
March 25, 2010
|
/s/
Amos Kohn
|
|
Amos
Kohn,
|
||
President
and Chief Executive Officer
|
||
Dated:
March 25, 2010
|
/s/
Israel Levi
|
|
Israel
Levi, Director
|
||
Dated:
March 25, 2010
|
/s/
Yeheskel Manea
|
|
Yeheskel
Manea, Director
|
||
Dated:
March 25, 2010
|
/s/
Terry Steinberg
|
|
Terry
Steinberg, Director
|
||
Dated:
March 25, 2010
|
/s/
Assaf (Assi) Itshayek
|
|
Assaf
(Assi) Itshayek, Chief Financial
Officer
(Principal Financial and Accounting
|
||
Officer)
|