U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER 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
(Exact name of small business issuer as specified in its charter)
California 94-1721931
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
41920 Christy Street, Fremont, CA 94538-3158
(Address of principal executive offices)
(510) 657-2635
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |_| No |X|
Number of shares of common stock outstanding as of September 30, 1998: 2,761,435
<PAGE>2
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
ASSETS
CURRENT ASSETS:
Cash $ 539,205
Accounts receivable - trade, net of allowance for
doubtful accounts of $200,000 3,503,742
Other receivables 209,490
Inventory, net 6,468,980
Prepaid expenses and deposits 323,839
Deferred income taxes 141,139
------------
Total current assets 11,186,395
PROPERTY AND EQUIPMENT, net 1,421,075
GOODWILL, net 1,479,656
DEPOSITS 24,427
------------
TOTAL ASSETS $ 14,111,553
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current debt $ 1,750,000
Current portion of long-term debt 91,946
Current portion of capital lease obligations 8,989
Accounts payable 1,543,958
Accrued liabilities 2,067,378
------------
Total current liabilities 5,462,271
LONG-TERM DEBT, less current portion 115,313
LONG-TERM DEFERRED INCOME TAX LIABILITY 32,227
------------
Total liabilities 5,609,811
------------
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY:
Series A cumulative redeemable convertible
preferred stock, no par value, 2,000,000
shares authorized; 0 shares issued and outstanding -
Common Stock, no par value, 10,000,000 shares authorized;
2,761,435 shares issued and outstanding 8,776,851
Warrants 96,678
Additional paid-in capital 400,260
Accumulated deficit (906,553)
Unearned employee stock ownership plan shares (207,259)
Foreign currency translation adjustment and other 341,765
------------
Total stockholders' equity 8,501,742
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,111,553
============
See accompanying notes to these condensed consolidated financial statements.
<PAGE>3
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $ 4,677,219 $ 5,185,938 $ 14,307,580 $ 14,008,640
COST OF GOODS SOLD 3,389,856 3,947,611 10,460,360 10,590,416
----------- ----------- ------------ ------------
Gross Margin 1,287,363 1,238,327 3,847,220 3,418,224
----------- ----------- ------------ ------------
OPERATING EXPENSES
Engineering and product development 249,898 232,865 791,017 648,694
Marketing and selling 417,780 180,053 1,131,895 461,141
General and administrative 417,119 165,626 1,111,946 601,552
----------- ----------- ------------ ------------
Total operating expenses 1,084,797 578,544 3,034,858 1,711,387
----------- ----------- ------------ ------------
INCOME FROM OPERATIONS 202,566 659,783 812,362 1,706,837
----------- ----------- ------------ ------------
OTHER INCOME (EXPENSES):
Interest income 11,677 7,325 13,666 38,088
Interest expense (60,511) (14,509) (175,586) (57,859)
Translation loss (17,096) (908) (32,056) (15,015)
----------- ----------- ------------ ------------
Other income (expense) (65,930) (8,092) (193,976) (34,786)
----------- ----------- ------------ ------------
INCOME BEFORE INCOME TAXES 136,636 651,691 618,386 1,672,051
PROVISION FOR INCOME TAXES 53,100 242,905 236,000 661,800
----------- ----------- ------------ ------------
NET INCOME 83,536 408,786 382,386 1,010,251
----------- ----------- ------------ ------------
Other comprehensive income:
Foreign currency translation adjustment 53,843 - 123,937 -
Income tax benefit from exercise of
stock options 19,000 - 19,000 -
----------- ----------- ------------ ------------
Comprehensive income $ 156,379 $ 408,786 $ 525,323 $ 1,010,251
=========== =========== ============ ============
NET INCOME PER SHARE
BASIC $ 0.03 $ 0.16 $ 0.14 $ 0.40
=========== =========== ============ ============
DILUTED $ 0.03 $ 0.11 $ 0.12 $ 0.29
=========== =========== ============ ============
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
<PAGE>4
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 382,386 $ 1,010,251
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 266,672 104,446
Allowance for doubtful accounts (35,000)
Gain on disposal of asset (16,648)
Deferred income taxes (37,234) (67,700)
Compensation recognized upon issuance of
stock or stock options 48,032
Contribution to ESOP 118,164 112,403
Foreign currency translation adjustment 32,056 15,015
Changes in operating assets and liabilities:
Accounts receivable 683,057 (448,456)
Other receivables 67,059 (80,149)
Inventory (882,891) (352,692)
Prepaid expenses (194,589) (14,100)
Other assets (10,116)
Deposits (7,167)
Accounts payable (1,543,150) (157,162)
Accrued liabilities 1,021,537 (354,043)
------------ ------------
Net adjustments (480,102) (1,252,554)
Net cash used in operating activities (97,716) (242,303)
------------- -------------
Cash Flows from Investing Activities:
Acquisition of Gresham Power Electronics (3,370,293)
Purchases of property and equipment (88,752) (338,989)
Proceeds from sale of asset 19,673
----------- ------------
Net cash used in investing activities (3,439,372) (338,989)
------------- -------------
Cash Flows from Financing Activities:
Proceeds from sale of common stock and warrants 951,278
Proceeds from exercise of stock options including
related tax benefits 156,506 85,500
Payments on long-term debt (118,164)
Principal payments on notes payable (247,883)
Payments on capital lease obligations (9,212) (9,955)
Proceeds from line of credit 1,750,000 1,990,000
Principal payments on line of credit (3,187,330)
------------ ------------
Net cash provided by financing activities 1,779,130 (418,390)
------------- -------------
</TABLE>
<PAGE>5
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
1998 1997
---- ----
<S> <C> <C>
Effect of Exchange Rate Changes on Cash 91,881 (15,015)
------------ ------------
Net (Decrease) in cash (1,666,077) (1,014,697)
Cash and cash equivalents, beginning of period 2,205,282 2,955,299
------------- ------------
Cash and cash equivalents, end of period $ 539,205 $ 1,940,602
=========== ============
Supplemental non-cash investing and financing activities:
Acquisition of fixed assets with debt $ 147,857 $ -
=========== ============
Supplemental Cash Flow Information:
Cash payments for:
Interest $ 168,633 $ 66,727
=========== ============
Income taxes $ 290,812 $ 847,402
=========== ============
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
<PAGE>6
DIGITAL POWER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the fiscal year ended December 31, 1997.
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments consisting only of normal recurring accruals
considered necessary to present fairly the Company's financial position at
September 30, 1998, the results of operations for the three month and nine month
periods ended September 30, 1998 and 1997, and cash flows for the nine months
ended September 30, 1998 and 1997. The results for the period ended September
30, 1998, are not necessarily indicative of the results to be expected for the
entire fiscal year ending December 31, 1998.
On January 26, 1998, the Company acquired the assets of Gresham Power
Electronics, a division of Gresham Lion Technology Ltd., a United Kingdom
corporation. The Company paid U.S. $2.7 million cash plus earn-out and
acquisition costs. The cash consideration may be increased by U.S. $1.6284 for
each pound that the net asset value (NAV) exceeds U.K. (pound)1,100,000 and
decreased in the same way. The NAV was determined as of January 26, 1998, and
was equal to the value of fixed assets, accounts receivable, and inventory, less
the value of agreed liabilities. From the transfer date of January 26, 1998, to
June 30, 1998, an accounting was done and additional consideration was paid as
follows: (a) U.S. $1.15 for every pound of earnings before interest, taxes, and
purchaser group charges in excess of U.K. (pound)250,000 up to a maximum payment
of U.S. $300,000; and (b) U.S. $300,000 in the event that the post-compensation
NAV equaled or exceeded U.K. (pound)1,000,000. The additional aggregate
consideration due under the agreement was calculated to be U.S. $371,978. As a
result of the acquisition, the financial statements for the period ended
September 30, 1998, are not comparable to the financial statements for the
period ended September 30, 1997.
The Company has filed a Form 8-K announcing this acquisition. However, the
required audited financial statements and pro forma financial information have
not been filed and will be filed as soon as practicable.
<PAGE>7
NOTE 2 - EARNINGS PER SHARE
The following represents the calculation of earnings per share:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
BASIC
<S> <C> <C> <C> <C>
Net Income $ 83,536 $ 408,786 $ 382,386 $ 1,010,251
Less - preferred stock dividends - - - -
------------ ------------ ------------ -------------
Net income applicable to common shareholders $ 83,536 $ 408,786 $ 382,386 $ 1,010,251
Weighted average number of common shares 2,734,837 2,596,054 2,712,778 2,540,996
------------ ------------ ------------ -------------
Basic earnings per share $ 0.03 $ 0.16 $ 0.14 $ 0.40
============ ============ ============ =============
DILUTED
Net income applicable to common shareholders $ 83,536 $ 408,786 $ 382,386 $ 1,010,251
Preferred stock dividend - - - -
------------ ------------ ------------ -------------
Net income available to common shareholders
plus assumed conversion $ 83,536 $ 408,786 $ 382,386 $ 1,010,251
------------ ------------ ------------ -------------
Weighted average number of common shares 2,734,837 2,596,054 2,712,778 2,540,996
Common stock equivalent shares representing
shares issuable upon exercise of stock options 252,763 529,218 350,730 490,410
Common stock equivalent shares representing
shares issuable upon exercise of warrants - 447,923 3,161 380,997
------------ ------------ ------------ -------------
Weighted average number of shares used in
Calculation of diluted income per share 2,987,600 3,573,195 3,066,669 3,412,403
------------ ------------ ------------ -------------
Diluted earnings per share $ 0.03 $ 0.11 $ 0.12 $ 0.29
============ ============ ============ =============
</TABLE>
<PAGE>8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
With the exception of historical facts stated herein, the matters discussed in
this report are "forward looking" statements that involve risks and
uncertainties that could cause actual results to differ materially from
projected results. Such "forward looking" statements include, but are not
necessarily limited to, statements regarding anticipated levels of future
revenues and earnings from operations of the Company. Factors that could cause
actual results to differ materially include, in addition to other factors
identified in this report, a high degree of customer concentration, dependence
on the computer and other electronic equipment industry, competition in the
power supply industry, dependence on the Guadalajara, Mexico facility, and other
risks factors detailed in the Company's Securities and Exchange Commission
("SEC") filings including the "Certain Considerations" section in the Company's
Form 10-KSB for the year ended December 31, 1997. Readers of this report are
cautioned not to put undue reliance on "forward looking" statements which are,
by their nature, uncertain as reliable indicators of future performance. The
Company disclaims any intent or obligation to publicly update these "forward
looking" statements, whether as a result of new information, future events, or
otherwise.
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998, COMPARED TO SEPTEMBER 30,
1997
REVENUES
Revenues decreased by 9.8% to $4,677,219 for the three months ended September
30, 1998, from $5,185,938 for the three months ended September 30, 1997.
Revenues from the Company's United Kingdom's operations of Digital Power Ltd.
were $1,679,703 for the third quarter ended September 30, 1998. However,
revenues attributed to the United States operations decreased by 42.2% from the
same quarter during the prior year. The decrease in revenues during the three
months ended September 30, 1998, can be attributed to the loss of the Company's
largest customer at the end of 1997. Although this customer had some minor
purchases during the first quarter of 1998, no purchases were recorded during
the three months ended September 30, 1998. As previously reported, this same
large OEM customer cancelled a contract in late 1997. This customer was billed
cancellation charges for the cost of unique materials assemblies. After
negotiations between the Company and the OEM, the Company and the OEM agreed to
an amount of cancellation charges which are included in revenues. These
non-reoccurring cancellation charges amounted to approximately 9.2% of revenues
for the three months ended September 30, 1998. In addition, the electronics
industry is experiencing some softness in the demand for the Company's products
which adversely affected the Company's revenues during the third quarter.
For the nine months ended September 30, 1998, revenues increased by 2.1% to
$14,307,580 from $14,008,640 for the nine months ended September 30, 1997. The
increase in revenues during the nine months ended September 30, 1998, can be
attributed to the acquisition of Gresham Power in the United Kingdom on January
26, 1998. For the nine months ended September 30, 1998, Gresham Power
contributed $5,185,152 to the Company's revenues.
GROSS MARGINS
Gross margins were 27.5% for the three months ended September 30, 1998, compared
to 23.9% for the three months ended September 30, 1997. The increase in gross
margins can be attributed to greater shipments of higher margin products and to
the non-reoccurring cancellation charges previously discussed. Although gross
margins related to the cancellation charges are higher than other products, they
<PAGE>9
do not reflect engineering costs, vendor cancellation fees, and other carrying
costs associated with the contract which were previously expensed.
Gross margins were 26.9% for the nine months ended September 30, 1998, compared
to 24.4% for the nine months ended September 30, 1997. The improvement in gross
margins can be attributed to greater shipments of high margin products and the
non-reoccurring cancellation charges discussed above.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were 17.9% of revenues for the
three months ended September 30, 1998, compared to 6.7% for the three months
ended September 30, 1997. Selling, general and administrative expenses were
15.7% of revenues for the nine months ended September 30, 1998, compared to 7.6%
for the nine months ended September 30, 1997. The increase is due, in part, to
the inclusion of selling, general and administrative expenses related to the
acquisition of Gresham Power in January 1998. In addition, during the third
quarter ended September 30, 1998, the Company further reduced the number of
workers at its plant located in Guadalajara, Mexico, and, near the end of the
quarter, reduced work hours at the Fremont, CA facility to bring operating
expenses in line with the current revenue levels.
ENGINEERING AND PRODUCT DEVELOPMENT
Engineering and product development expenses were 5.3% of revenues for the three
months ended September 30, 1998, and 4.5% for the three months ended September
30, 1997. Engineering and product development expenses were 5.5% of revenues for
the nine months ended September 30, 1998, compared to 4.6% for the nine months
ended September 30, 1997. The increase in engineering and product development is
a result of an effort by the Company to develop new products for its customers.
The increase is due primarily to the engagement of engineering consultants to
help develop new products.
INTEREST EXPENSE
Interest expense, net of interest income, was $48,834 for the three months ended
September 30, 1998, compared to $7,184 for the three months ended September 30,
1997. Interest expense, net of interest income, was $161,920 for the nine months
ended September 30, 1998, compared to $19,771 for the nine months ended
September 30, 1997. The increase in interest expense related to the increase in
borrowing used to acquire Gresham Power.
INCOME BEFORE INCOME TAXES
For the three months ended September 30, 1998, the Company had an income before
income taxes of $136,636 compared to income before income taxes of $651,691 for
the three months ended September 30, 1997. For the nine months ended September
30, 1998, the Company had an income of before income taxes of $618,386 compared
to $1,672,051 for the nine months ended September 30, 1997.
INCOME TAX
Provision for income tax decreased from $242,905 for the three months ended
September 30, 1997, to $53,100 for the three months ended September 30, 1998,
and from $661,800 for the nine months ended September 30, 1997, to $236,000 for
<PAGE>10
the nine months ended September 30, 1998, as a result of a lower pre-tax income
during the three and nine months ended September 30, 1998.
NET INCOME
Net income for the three months ended September 30, 1998, was $83,536 compared
to $408,786 for the three months ended September 30, 1997, a decrease of 79.6%.
Net income for the nine months ended September 30, 1998, was $382,386, compared
to $1,010,251 for the nine months ended September 30, 1997, a decrease of 62.1%.
The decrease in net income was due to decreased revenues during the third
quarter ended September 30, 1998, primarily related to the Company's United
States operations, and an increase in expenses related to severance payments
made to laid-off workers in Mexico.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 1998, the Company had cash of $539,205 and working capital of
$5,724,124. This compares with cash of $1,940,602 and working capital of
$6,184,782 at September 30, 1997. The decrease in working capital was due to an
increase in inventory and decrease of accounts payable, offset by a decrease in
accounts receivable and increase in bank line of credit borrowings, resulting in
a decrease in cash and cash equivalents, although the decrease in cash is
related to cash used to acquire Gresham Power. Cash used in operating activities
for the Company totaled $78,716 and $242,303 for the nine months ended September
30, 1998 and 1997.
Cash used in investing activities was $3,439,372 for the nine months ended
September 30, 1998, compared to $338,989 for the nine months ended September 30,
1997. During the nine months ended September 30, 1998, the Company completed the
acquisition of Gresham Power. Net cash provided by (used in) financing
activities was $1,760,130 for the nine months ended September 30, 1998, compared
to ($418,390). During the nine months ended September 30, 1998, the Company
borrowed $1,750,000 from the bank in connection with the acquisition of Gresham
Power.
On September 3, 1998, the Company entered into a Technology Transfer Agreement
with KDK Electronics, Inc. ("KDK"). Under the terms of the Technology Transfer
Agreement, the Company acquired from KDK the technology and right to sell in the
future, products that may be derived from a design acquisition agreement dated
November 10, 1987, and agreement dated June 29, 1990, between KDK and the
Company. For the acquisition of the technology and future sales rights, the
Company issued 35,000 shares of its common stock and will pay $140,000 in $7,000
monthly payments, beginning in October 1998.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's, or
its suppliers' and customers' computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations causing
disruptions of operations including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company has recently acquired new software and has been informed by its
suppliers that such software used by the Company is Year 2000 compliant. The
software from these suppliers is used in major areas of the Company's operations
such as for financial, sales, warehousing and administrative purposes. The
<PAGE>11
Company has no internally generated software. In connection with the acquisition
of Gresham Power, the Company has determined that Gresham Power's existing
software will not be Year 2000 compliant, and has acquired hardware and software
to address the Year 2000 Issue at a cost of approximately $200,000. The Company
anticipates that Gresham Power will complete the installation of the hardware
and software during the first part of 1999. Other than Gresham Power, and after
reasonable investigation, the Company has not yet identified any other Year 2000
problem but will continue to monitor the issue. However, there can be no
assurances that the Year 2000 problem will not occur with respect to the
Company's computer systems.
During the third quarter of 1998, the Company initiated formal communications
with significant suppliers and large customers to determine the extent to which
those third parties' failure to remedy their own Year 2000 Issues would
materially effect the Company and its subsidiaries. The Company has not received
any indication from its suppliers and large customers that the Year 2000 Issue
may materially effect their ability to conduct business.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported on Form 10-QSB for the quarter ended March 31, 1998, the
Company is involved in certain litigation. During the quarter ended September
30, 1998, the Company settled the complaint filed in the Superior Court of
California In and For the County of Santa Clara (Case No. CV773108) by KDK
Electronics, Inc. ("KDK"). On September 3, 1998, the Company and KDK settled the
lawsuit. Under the terms of the settlement agreement, the Company paid KDK
$10,000 and each party bore its own expenses.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
10.7 Technology Transfer Agreement with KDK Electronics, Inc.
27.1 Financial Data Schedule
<PAGE>12
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIGITAL POWER CORPORATION
(Registrant)
Date: November 13, 1998 ROBERT O. SMITH
Robert O. Smith
Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1998 PHILIP G. SWANY
Philip G. Swany
Chief Financial Officer
(Principal Financial Officer)
TECHNOLOGY TRANSFER AGREEMENT
1. Parties. The parties ("the Parties") to this technology
transfer agreement ("this Agreement") are Digital Power
Corporation ("Digital") on the one hand, and Ki Dong Kang
("Kang") and KDK Electronics, Inc. ("KDK"), on the other.
2. Effective Date. This Agreement is effective September 3,
1998 ("the Effective Date").
3. Recitals.
3.1. Digital has entered into certain agreements with Kang
and KDK ("the Agreements"), consisting of,
a) a certain design acquisition agreement dated
November 10, 1987 between Digital and Kang, a copy
of which is attached hereto as Exhibit 1.
b) a certain agreement dated June 29, 1990 between
KDK and Digital, a copy of which is attached
hereto as Exhibit 2.
c) all other agreements between or among Digital,
Kang, and KDK on or before September 2, 1998.
3.2. Digital wishes to acquire, from Kang and KDK, the clear
right, in perpetuity, to use, without the payment of
any further royalties or other consideration of any
kind, other than that provided under this Agreement,
certain technology received from Kang and KDK.
3.3. Digital believes that the technology to be acquired by
this Agreement will have substantial value to it over a
period of at least five years.
3.4. As a result of the foregoing, and for valuable
consideration, including the mutual covenants in this
Agreement, the Parties agree as follows:
4. Covenants.
4.1. Payment. Digital will pay a total of one hundred forty
thousand dollars ($140,000) to KDK and will issue a
total of thirty five thousand shares of its common
stock (the "Stock") to Kang and Soonho Kim Kang. The
one hundred forty thousand dollars ($140,000) will be
paid as follows:
<PAGE>
a) $7,000 due September 15, 1998,
b) $7,000 due November 1, 1998,
c) $10,000 due January 1, 1999, and
d) $7,000, or such lesser amount as may be necessary
to pay the entire balance, due on the first of
each month thereafter until the entire one hundred
forty thousand dollars ($140,000) is paid.
There will be a three day grace period after each due date
during which the payment may be made without penalty or
interest. Thereafter, Digital will incur simple interest of
ten percent per annum on any overdue amounts.
The Stock will be issued to Kang and Soonho Kim Kang as
community property as of the Effective Date. The
certificates will be issued within one hundred twenty (120)
days of the Effective Date. The Parties agree that, for
accounting and tax purposes, the value of the Stock will be
the closing price as reported in the Wall Street Journal as
of the Effective Date.
4.2. Technology Transfer. Digital, its successors, and its
assigns shall forever have the right to produce, sell,
incorporate, and otherwise use all products, designs,
technology, and intellectual property that it may have
received from Kang or KDK, pursuant to the Agreements
or otherwise, in any way that it wishes, without
limitation and without any obligation of any kind to
Kang, KDK, or anyone else. All contrary provisions of
the Agreements are hereby revoked and superseded.
Without limitation, under no circumstances will Digital
be obligated to pay any royalty, grant any option, or
transfer any stock to Kang or KDK other than any
payment or transfer that may be required under this
Agreement. All obligations of Digital of any kind to
Kang or KDK other than those in this Agreement are
hereby canceled, revoked, and superseded.
4.3. Restricted Securities. In order to enable Digital to
comply with the federal Securities Act of 1933 and
applicable state laws, Digital may require Kang and
Soonho Kim Kang, as a condition of the issuance of the
Stock, to give written assurances satisfactory to
Digital, and Kang does hereby represent, that the
Shares are being acquired for their own account, for
investment only, with no view to the distribution of
the same, and that any disposition of all or any
portion of the shares shall not be made, unless and
until:
<PAGE>
(a) There is then in effect a registration
statement under the Securities Act covering such
proposed disposition and such disposition is made in
accordance with such registration statement; or
(b)(i) Kang has notified Digital of the proposed
disposition and he has furnished Digital with a
detailed statement of the circumstances surrounding the
proposed disposition, and (ii) Kang has furnished
Digital with an opinion of counsel, reasonably
satisfactory to Digital, that such disposition will not
require registration of such securities under the
Securities Act and applicable state law.
Kang acknowledges that the Shares will be restricted
securities, that it understands the provisions of Rule
144 of the Securities and Exchange Commission, and that
the certificate or certificates evidencing such shares
of Common Stock will bear a legend substantially
similar to the following:
"The Shares represented by this certificate have not
been registered under the Securities Act of 1933, as
amended, or under the securities laws of any state.
They may not be sold,~transferred, or otherwise
disposed of in the absence of an effective registration
statement covering these securities under the said Act
or laws, or an opinion of counsel satisfactory to
Digital and its counsel that registration is not
required thereunder."
4.4. Adjustment for Changes in Capitalization. This
Agreement shall not affect Digital's right to effect
adjustments, recapitalizations, reorganizations, or
other changes in its or any other corporation's capital
structure or business, any merger or consolidation, any
issuance of bonds, debentures, preferred or prior
preference stock ahead of or affecting the Shares, the
dissolution or liquidation of Digital's or any other
corporation's assets or business, or any other
corporate act, whether similar to the events described
above or otherwise. If, before the certificate for the
Shares is issued to Kang and Soonho Kim Kang, the
outstanding shares of Digital's common stock are
increased or decreased in number or changed into or
exchanged for a different number or kind of securities
of Digital or any other corporation by reason of a
recapitalization, reclassification, stock split,
reverse stock split, combination of shares, stock
dividend, or other similar event, an appropriate
<PAGE>
adjustment of the number of the Shares issued under
this Agreement will be made to preserve the
proportional beneficial interest in the assets of
Digital represented, as of the Effective Date, by the
Shares.
5. Representations and Warranties.
5.1. Authority. The Parties represent and warrant that
they, through the signatories indicated below, are duly
authorized to enter into this Agreement, to make its
warranties and representations, to perform its
covenants, and to fulfill its conditions, and that none
of the rights, claims, or obligations being transferred
under this Agreement, have been conveyed, assigned, or
otherwise transferred to anyone who is not a Party to
this Agreement.
5.2. Reading. Each of the Parties represents that it has
carefully read and understood this entire Settlement
Agreement before executing it.
5.3. Legal Representation. Each of the Parties acknowledges
and agrees that it has been represented in the
preparation of this Agreement by legal counsel of its.
choosing. Each of the Parties further acknowledges the
receipt of the advice of independent legal counsel
prior to the execution of this Agreement, that the
legal nature and effect of this Agreement has been
fully explained to it by counsel, and that it fully
understands the terms and provisions of this Agreement,
its nature, and its effect. Each of the Parties
further represents that it is relying solely on the
advice of its own counsel in executing this Agreement
and has neither received nor relied upon any
representation or opinion of any of the other Parties
or of the counsel of any of the other Parties, except
for the representations contained in this Agreement.
5.4. No Other Representations. The Parties represent that
none of the other Parties to this Agreement or their
representatives have given them any legal, factual, or
other representations or opinions relating to this
Agreement other than those expressly contained in it.
<PAGE>
6. Notice. Except as may be provided otherwise elsewhere in
this Agreement, any election, delivery, notice, or
communication required or permitted under this Agreement
shall be in writing and shall be deemed to have been given
if placed in the United States mail to the following
addresses, or such other addresses as the Parties may later
specify in writing. Except as may be provided otherwise
elsewhere in this Agreement, notwithstanding any defect in
the method of delivery that prevents it from being effective
upon mailing, such an election, delivery, notice, or other
communication, if it is in writing, shall be deemed given if
and when it is actually received by such of the Parties as
are entitled to receive it.
If to Digital, to:
Bob Smith
Digital Power Corporation
41920 Christy Street
Fremont, CA 94538-3158
With a copy to:
Daniel B. Eng
Bartel Eng Linn & Schroder
300 Capitol Mall, Suite 1100
Sacramento, California 95814
If to KDK, to:
Ki Dong Kang
15520 On Orbit Drive
Saratoga, California 95070
with a copy to:
Harold W. Fryday
Attorney at Law
P.O. Box 637
Santa Clara, CA 95052-0637
7. Integration. This Agreement constitutes the entire
agreement among the Parties concerning its subject matter
and supersedes all prior or contemporaneous contracts,
agreements, understandings, negotiations, and discussions of
the Parties, whether oral or written, concerning its subject
matter.
8. Expenses of Matters Settled. Each of the Parties shall bear
its own costs of suit, attorneys' fees, and other expenses
related to the matters being settled, and no Party shall
make any payment or reimbursement, or provide any
consideration, other than what may be described in this
Agreement.
<PAGE>
9. No Other Agreements. The Parties affirm that other than
this Agreement, any contracts, agreements, or understandings
among the Parties, on any subject whatever, including but
not limited to promissory notes, employment contracts, and
other contracts that may have been entered into on or before
September 1, 1998 are terminated. Any agreements entered
into on or after September 3, 1998 will survive.
10. No Oral Modification. No amendment, supplement,
modification, waiver, or termination of this Agreement shall
be binding unless it contained in a writing signed by the
party against whom the amendment, supplement, modification,
waiver, or termination is being asserted.
11. Successors and Assigns. This Agreement shall be binding on
and inure to the benefit of the heirs, executors,
administrators, trustees, successors, assigns, and
transferees of the respective Parties.
12. Drafting. Each of the Parties represents that this
Agreement has been negotiated through its counsel and
jointly drafted and agrees that any ambiguity in it shall
not be construed against any of them.
13. Expenses of Enforcement. In any litigation arising out of
or relating to this Agreement, the prevailing party shall be
entitled to its reasonable expenses, attorneys' fees, and
costs, in addition to any other remedy that may be
available.
14. Counterparts. This Agreement may be executed in
counterparts, and each executed counterpart shall be deemed
to be a duplicate original of this Agreement.
DIGITAL POWER CORPORATION
DATED: 9/8/98 By: /s/ Robert Smith
Robert Smith
Chief Executive Officer
<PAGE>
KDK ELECTRONICS, INC.
DATED: 9/3/98 By: /s/ Ki Dong Kang
Ki Dong Kang
President
DATED: 9/3/98 By: /s/ Ki Dong Kang
Ki Dong Kang
Individually
Approved as to form:
BARTEL ENG LINN & SCHRODER
A Law Corporation
DATED: 9/3/98 By: /s/ Vincent DiCarlo
Vincent DiCarlo
Attorneys for Digital Power
Corporation
DATED: 9/3/98 By: /s/ Harold W. Fryday
Harold W. Fryday
Attorney for KDK Electronics, Inc.
CAMERLENGO & JOHNSON
DATED: 9/3/98 By: /s/ George F. Camerlengo
George F. Camerlengo
Attorneys for KDK Electronics, Inc.
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
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<RECEIVABLES> 3,703,742
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<INVENTORY> 6,468,980
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0
0
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