As filed with the Commission on November 9, 2000 File No. 333-
-------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
DIGITAL POWER CORPORATION
(Name of small business issuer in its charter)
California 3679 94-1721931
---------- ---- ----------
(State of other jurisdiction (Primarily Standard (I.R.S. Employer
of incorporation or organization) Industrial Identification No.)
Classification Code)
41920 Christy Street
Fremont, California 94538-3158
(510) 657-2635
(Address and telephone number of principal executive offices)
41920 Christy Street
Fremont, California 94538-3158
(510) 657-2635
(Address of principal place of business or intended principal place of business)
Robert O. Smith, Chief Executive Officer
Digital Power Corporation
41920 Christy Street
Fremont, California 94538-3158
(510) 657-2635
(Name, address and telephone number of agent for service)
Copies to:
Daniel B. Eng, Esq.
Bartel Eng Linn & Schroder
300 Capitol Mall, Suite 1100
Sacramento, California 95814
Telephone: (916) 442-0400
Approximate date of proposed sale to the public: As soon as practicable after
the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following blocks and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE> ii
Pursuant to Rule 429, this registration statement relates to 150,000 shares
of common stock previously registered pursuant to Form SB-2 (Commission File No.
333-14199) declared effective on December 16, 1996.
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
===============================================================================================
Proposed Proposed
maximum maximum
Title of each class of Amount to be offering price aggregate Amount of
securities to be registered registered per share offering price registration fee
-----------------------------------------------------------------------------------------------
Common Stock underlying 150,000 (1)
Underwriters' warrants
Common Stock owned by
Selling Stockholder 5,000 $3.56 (2) $ 17,800 $ 5
Common Stock underlying
Warrants 75,000 $3.56 (2) $267,000 $70
===============================================================================================
Total 230,000 $284,800 $75
===============================================================================================
</TABLE>
(1) Represents 150,000 shares of common stock which have been registered on
Form SB-2 (Commission File No. 333-14199) declared effective on
December 16, 1996. The registrant has previously paid a fee of
$2,597.54.
(2) Calculated in accordance with Rule 457(c) of the Securities Act of 1933,
as amended ("Securities Act"). Estimated for the sole purpose of
calculating the registration fee and based upon the average of the high
and low price per common share of the Company on November 3, 2000, as
reported on the American Stock Exchange (AMEX) using a filing fee based
on $264 per $1,000,000.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
<PAGE>
PROSPECTUS Subject to Completion
November 9, 2000
DIGITAL POWER CORPORATION
Common Stock
----------------
Certain stockholders of Digital Power Corporation ("Digital Power" or "we")
are offering up to 225,000 shares of our common stock, including 220,000 shares
of common stock that they will acquire upon the exercise of warrants. Warrants
to purchase 150,000 shares of common stock were issued to the selling
stockholders in connection with our initial public offering in December 1996,
and warrants to purchase 75,000 shares of common stock were issued for financial
consulting services. For more complete information, please refer to the sections
entitled "The Offering" and "Selling Stockholders."
We will not receive any proceeds from the resale of shares of common stock
by the selling stockholders. However, we will receive proceeds upon the exercise
of any warrants by the selling stockholder. Expenses of this offering will be
paid by us.
Our common stock is listed and traded on the American Stock Exchange
("AMEX") under the symbol DPW. On October , 2000, the average of the high and
low quotation for one share of common stock was $_____, as reported on the AMEX.
The warrants are not quoted or traded on any exchange or quotation system.
Investing in our common stock involves a high degree of risk. You should
invest in the common stock only if you can afford to lose your entire
investment. See "Risk Factors" beginning on page 5 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------------------------------
The date of this prospectus is November __, 2000.
<PAGE> 2
Please read this prospectus carefully. You should rely only on the
information contained in this prospectus. We have not authorized anyone to
provide you with different information. You should not assume that the
information provided by the prospectus is accurate as of any date other than the
date on the front of this prospectus.
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . 2
PROSPECTUS SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
PRICE RANGE OF COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . 8
DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 12
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS. . . . . . 24
EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . 25
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . . . 28
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . . . 28
SELLING STOCKHOLDER . . . . . . . . . . . . . . . . . . . . . . . . . . 29
PLAN OF DISTRIBUTION. . . . . . . . . . . . . . . . . . . . . . . . . . 30
DESCRIPTION OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . 31
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
WHERE YOU CAN FIND MORE INFORMATION . . . . . . . . . . . . . . . . . . 33
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . . . F-1
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, as that term is
defined in the Private Securities Litigation Reform Act of 1995. These
statements relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks in the
section entitled "Risk Factors," that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Except as required by applicable law,
including the securities laws of the United States, we do not intend to update
any of the forward-looking statements to conform these statements to actual
results.
As used in this prospectus, the terms "we," "us," "our," and "Digital
Power" mean Digital Power Corporation and its subsidiaries, unless otherwise
indicated.
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this prospectus. This summary is not complete and does not contain
all of the information you should consider before investing in the common stock.
You should read the entire prospectus carefully, including the "Risk Factors"
section.
Digital Power
We design, develop, manufacture, and sell power supplies to original
equipment manufacturers (OEMs) of computers and other electronic equipment.
Power supplies are critical components of electronic equipment that supply,
convert, distribute, and regulate electrical power of the various subsystems
within electronic equipment. Electronic components and subsystems require
protection from harmful surges and drops in electrical power that commonly occur
over power lines. Power supplies achieve such protection by converting
alternating current (AC) electricity into direct current (DC) by dividing a
single input voltage into distinct and isolated output voltages, and by
regulating and maintaining such output voltages within a narrow range of values.
In addition, through our operations in the United Kingdom, we design,
manufacture and sell uninterruptible power supplies, power conversion and
distribution equipment for naval and military applications and DC/AC inverters
primarily for the telecommunications industry in Europe under the label Gresham
Power Electronics. Our United Kingdom operations also allows us to market our
power supplies designed in the United States to customers located in Europe.
Our objective is to be the supplier of choice to OEMs in the
telecommunications, networking and switching industries. Our strategy for
achieving this objective includes:
o focusing on designing power supplies with high power density or high
power-to-volume ratio;
o designing base model products that can be quickly and inexpensively
modified and adapted to the specific power supply need of any OEM; and
o offering "value-added services" which incorporate an OEM's electronic
components, enclosures and cable assemblies into our power supply products to
produce a power assembly tailored for a specific need.
Our principal offices are located at 41920 Christy Street, Fremont,
California 94538-3158 and our telephone number is 510/657-2635.
<PAGE> 4
Risk Factors
For a discussion of considerations relevant to an investment in the common
stock, see the section entitled "RISK FACTORS" beginning on page 5.
The Offering
The selling stockholders listed in the prospectus may resell some, all, or
none of their common stock. The selling stockholders will obtain their common
stock through the exercise of warrants issued in connection with our initial
public offering in December 1996 and warrants issued for consulting services.
Although we will receive proceeds upon the exercise of warrants, we will not
receive any proceeds from the sale of common stock by the selling stockholders.
Summary Consolidated Financial Data
This summary of consolidated financial data has been derived from our
annual and interim consolidated financial statements included elsewhere in this
prospectus. You should read this information in conjunction with those financial
statements, and notes thereto, along with the section entitled "Management's
Discussion and Analysis of Financial Condition."
<TABLE>
<S> <C> <C> <C> <C>
Six months
Year Ended December 31, ended June 30,
----------------------- --------------
1998 1999 1999 2000
---- ---- ---- ----
Consolidated Statement of Operations Data: (Unaudited) (Unaudited)
Revenue $18,733,470 $15,354,018 $ 7,549,411 $ 8,525,708
Income (Loss) from operations (576,570) 320,665 41,405 282,086
Net Income (Loss) (570,588) 27,191 (95,035) 107,373
Net Income (Loss) per Share
Basic $ (0.21) $ 0.01 $ (0.03) $ 0.04
Diluted $ (0.21) $ 0.01 $ (0.03) $ 0.03
Consolidated Balance Sheet Data:
Working Capital $ 5,001,316 $ 5,367,917 $ 4,919,002 $ 5,476,763
Total Assets 12,990,819 11,160,833 12,022,113 11,483,539
Long-term debt 69,443 - 40,986 -
Total Liabilities 5,472,048 3,508,626 4,722,053 3,884,214
Shareholders' Equity $ 7,518,771 $ 7,652,207 $ 7,300,060 $ 7,599,326
</TABLE>
<PAGE> 5
RISK FACTORS
In addition to the other information presented in this prospectus, the
following risk factors should be considered carefully in evaluating us and our
business before purchasing the common stock offered hereby. This prospectus
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those Risk Factors discussed below and elsewhere in this
prospectus.
We are dependent on a limited number of customers
Traditionally, we have relied on a limited number of customers for growth
in sales. For the year ended December 31, 1999, one OEM customer accounted for
11.0% of our total revenue. We cannot assure you that we will be able to retain
current customers and, the loss of any major OEM customer may have an adverse
effect on our revenues.
We have entered into a $3 million credit facility which is secured by all our
assets
We have a $3,000,000 line of credit pursuant to a promissory note
agreement. This promissory note is secured by all of our assets. In the event we
default under the promissory note, the bank may have the right to attach all of
our assets which would adversely affect our operations.
We are dependant on computer and other electronic equipment industries
Substantially all of our existing customers are in the computer and other
electronic equipment industries and manufacture products which are subject to
rapid technological change, obsolescence, and large fluctuations in demand.
These industries are further characterized by intense competition. The OEMs
serving these markets are pressured for increased product performance and lower
product prices. OEMs, in turn, make similar demands on their suppliers, such as
us, for increased product performance and lower prices. The computer industry is
inherently volatile. Recently, certain segments of the computer and other
electronic industries have experienced a softening in product demand. Such lower
demand may affect our customers, in which case the demand for our products may
decline, our growth could be adversely affected.
We are dependent on the performance of our facility in Guadalajara, Mexico and
manufacturer in China; Foreign currency risks
Substantially all of our products sold by Digital Power in the United
States are produced at our facility located in Guadalajara, Mexico. We also have
a "turnkey" manufacturing contract with a manufacturer located in China to
produce our products in an attempt to reduce our dependence on our Mexican
facility. For the six months ended June 30, 2000, and year ended December 31,
1999, the purchase of products from our manufacturer located in China accounts
for approximately 20% of our revenues.
We are dependant upon key personnel
Our performance is substantially dependent on the performance of its
executive officers and key personnel, and on its ability to retain and motivate
such personnel. The loss of any of our key personnel, particularly Robert O.
<PAGE> 6
Smith, Chief Executive Officer, could have a material adverse effect on the our
business, financial condition and operating results. We have "key person" life
insurance policies on Mr. Smith in the aggregate amount of $2 million.
We are dependant on suppliers
We rely on, and will continue to rely on, outside parties to manufacture
parts, components and equipment. We cannot assure you that these suppliers will
be able to meet our needs in a satisfactory and timely manner or that we will be
able to obtain additional suppliers when and if necessary. A significant price
increase, a quality control problem, an interruption in supply or other
difficulties with third party manufacturers could have a material and adverse
effect on our ability to successfully provide our proposed services. Further,
the failure of third parties to deliver the products, components, necessary
parts or equipment on schedule, or the failure of third parties to perform at
expected levels, could dely our delivery of power supply products. Recently, we
have experience lengthening lead time and allocations of certain components,
including tantalum capacitors and cores, and other surface mount technology
parts.
Our products are not patentable
Our products are not subject to any U.S. or foreign patents. We believe
that because our products are continually updated and revised, obtaining patents
would be costly and not beneficial. Therefore, we cannot guarantee that other
competitors or former employees will make use of and develop proprietary
information on which we rely.
Our common stock price is volatile
Our common stock is listed on the American Stock Exchange and is thinly
traded. In the past, our trading price has fluctuated widely, depending on many
factors that may have little to do with our operations or business prospects.
The exercise of outstanding options may adversely affect our stock price and
your percentage of ownership
As of September 30, 2000, options to purchase 931,605 shares of common
stock, with a weighted average exercise price of $2.09 exercisable at prices
ranging from $0.50 to $6.25 per share were outstanding. The exercise of these
options may have an adverse effect on the price of our common stock price and
will dilute existing shareholder percentage ownership in us.
<PAGE> 7
USE OF PROCEEDS
We will not receive any proceeds from the resale of shares of common stock
by the selling stockholder. We will receive proceeds upon the exercise of any
warrants held by Werbel-Roth Securities, Donner Corp. International and C.C.R.I.
Corporation We intend to use the proceeds from the exercise of warrants for
working capital and other general corporate purposes.
DIVIDEND POLICY
We have not declared or paid any cash dividends since our inception. We
currently intend to retain any additional future earnings, for use in the
operation and expansion of our business. We do not intend to pay any cash
dividends on our common stock in the foreseeable future. The declaration of
dividends in the future will be at the discretion of the Board of directors and
will depend upon the earnings, capital requirements and our financial position.
PRICE RANGE OF COMMON STOCK
The following table sets forth the high and low bids quoted for our common
stock during each quarter for the past two fiscal years and for the nine months
ended September 30, 2000, as quoted on the American Stock Exchange.
Common Stock
Quarter Ended High Low
------------- ---- ---
September 30, 2000 14.94 2.25
June 30, 2000 3.63 2.00
March 31, 2000 4.81 1.69
December 31, 1999 1.94 1.25
September 30, 1999 2.06 1.50
June 30, 1999 2.06 1.38
March 31, 1999 2.38 1.31
December 31, 1998 2.94 1.38
September 30, 1998 5.44 1.63
June 30, 1998 6.69 4.25
March 31, 1998 7.00 5.75
These quotations reflect inter-dealer prices, without retail markup,
mark-down or commission, and may not represent actual transactions.
As of September 30, 2000, we had 3,255,570 shares of common stock
outstanding and approximately 185 shareholders of record. The number of
shareholders does not include those who hold our securities in street name.
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
We are engaged in the business of designing, developing, manufacturing, and
marketing electronic power supplies for use in electronic circuitry. Revenues
are generated from the sale of our power supplies to distributors, OEMs in the
computer and other electronic equipment industries, and the defense industry in
the United Kingdom.
Results of Operations
The table below sets forth certain statements of operations data as a
percentage of revenues for the years ended December 31, 1998 and 1999, and six
months ended June 30, 1999 and 2000.
<TABLE>
<S> <C> <C> <C> <C>
Years Ended December 31 Years Ended June 30
----------------------- -------------------
1998 1999 1999 2000
---- ---- ---- ----
Revenues 100.00% 100.00% 100.00% 100.00%
Cost of goods sold 78.89 73.45 76.34 70.56
------ ------ ------ ------
Gross margin 21.11 26.55 23.66 29.44
Selling, general and 16.73 18.26 17.40 19.67
administrative
Research and development 7.46 6.20 5.71 6.45
------ ------ ------ ------
Total operating expense 24.19 24.46 23.11 26.12
------ ------ ------ ------
Operating income (loss) (3.08) 2.09 0.55 3.32
Net interest expense 1.14 1.07 1.21 0.48
Translation loss .20 .04 0.08 0.05
------ ------ ------ ------
Income (Loss) before (4.42) .98 (0.74) 2.79
income taxes
Provision (Benefit) for (1.37) .80 0.52 1.52
------ ------ ------ ------
income taxes
Net Income (Loss) (3.05)% .18% (1.26)% 1.27%
====== ====== ====== ======
</TABLE>
The following discussion and analysis should be read in connection with the
our consolidated financial statements and the notes thereto and other financial
information included elsewhere in this report.
<PAGE> 9
Six Months Ended June 30, 2000, Compared to June 30, 1999
Revenues
For the six months ended June 30, 2000, revenues increased by 12.9% to
$8,525,708 from $7,549,411 for the six months ended June 30, 1999. The increase
in revenues during the six months ended June 30, 2000, can be attributed
primarily to significant increases in units shipped to five large United States
OEM customers. For the six months ended June 30, 2000, Digital Power Ltd.
contributed $2,743,132 to our revenues compared to $3,106,478 for the six months
ended June 30, 1999.
Gross Margins
Gross margins were 29.4% for the six months ended June 30, 2000, compared
to 23.7% for the six months ended June 30, 1999. The increase in gross margins
can primarily be attributed to increased OEM business and manufacturing in
China, as noted above.
Selling, General and Administrative
Selling, general and administrative expenses were 19.7% of revenues for the
six months ended June 30, 2000, compared to 17.4% for the six months ended June
30, 1999. Increased selling, general and administrative expenses can be
attributed primarily to an increased marketing staff, increased commissions paid
and increased investor relations expenses.
Engineering and Product Development
Engineering and product development expenses were 6.5% of revenues for the
six months ended June 30, 2000, compared to 5.7% for the six months ended June
30, 1999. The increases in engineering and product development expenses reflect
our continuing commitment to new product development.
Interest Expense
Interest expense, net of interest income, was $41,324 for the six months
ended June 30, 2000, compared to $91,380 for the six months ended June 30, 1999.
The decrease in interest expense is primarily due to reduced borrowing on our
line of credit, which was reduced from $1,465,000 at the end of June 1999, to
$940,000 at the end of June 2000, and replacement of Digital Power Ltd.
receivables financing with a bank line of credit with a more favorable interest
rate.
Income (loss) Before Income Taxes
For the six months ended June 30, 2000, we had income before income taxes
of $237,373 compared to a loss of $56,235 for the six months ended June 30,
1999.
Income Tax
The provision for income tax increased from $38,800 for the six months
ended June 30, 1999, to $130,000 for the six months ended June 30, 2000.
<PAGE> 10
Net Income (Loss)
Net income for the six months ended June 30, 2000, was $107,373, compared
to a net loss of $95,035 for the six months ended June 30, 1999. The increase in
net income for the six month period is due to increased revenues for the six
month period, primarily related to our United States operations.
Year Ended December 31, 1999, Compared to Year Ended December 31, 1998
Revenues
Revenues for the fiscal year ended December 31, 1999, were $15,354,018,
which represented a decrease of $3,379,452, or approximately 18%, from revenues
of $18,733,470 for the year ended December 31, 1998. This decrease in total
revenues includes an 8% decrease in revenues of $532,424 from Digital Power Ltd.
with revenues of $7,002,041 and $6,469,617 for the fiscal years ended December
31, 1998 and 1999, respectively. The decrease in revenues was due primarily to a
reduction in sales and marketing efforts and a re-allocation of these resources
to new product development initiatives in the U.S.
Gross Margin
Gross margins were 26.55% for the year ended December 31, 1999, compared to
21.11% for the fiscal year ended December 31, 1998. This increase in gross
margins can be primarily attributed to aggressive cost containment measures
initiated by us including headcount reductions in the U.S. and Mexico, and a 10%
salary and wage reduction which affected all of our U.S. employees.
Selling, General and Administrative
Total selling, general and administrative expenses decreased by $330,628 to
$2,803,493 for the year ended December 31, 1999, from $3,134,121 for the fiscal
year ended December 31, 1998, primarily due to reduced U.S. payroll related
expenses and sales with a commission. Digital Power Ltd. selling, general and
administrative expenses increased $349,015 from $1,289,006 in 1998 to $1,638,021
for the fiscal year ended December 31, 1999, primarily due to the hiring of a
full time sales manager responsible for the sales and distribution of Digital
Power designs and products in the U.K. and Europe, with related increased
travel, trade show expense and advertising.
Research and Development
Research and development expenses were $952,690 for the year ended December
31, 1999, as compared to $1,397,816 for the year ended December 31, 1998. Of the
$445,126 decrease, $2,390 is attributed to Digital Power Ltd. The other
additional decrease can be primarily attributed to the 1998 settlement of
litigation involving KDK Electronics, with no comparable expense in 1999.
Interest Expense
Net interest expense was $147,408 for the year ended December 31, 1999,
compared to $220,894 for the year ended December 31, 1998. This decrease in
interest expense is primarily due to reduced borrowing on our line of credit
which was reduced from $1,590,000 at the end of 1998, to $940,000 at the end of
1999, paid by cash savings from the 1996 IPO.
<PAGE> 11
Translation Loss
The primary currency of the our subsidiary, Poder Digital, is the Mexican
peso and for Digital Power Ltd., the United Kingdom pound. During 1999, we
experienced a translation loss of $6,236 primarily related to Poder Digital's
operations using Mexican pesos, compared with a translation loss of $37,771 in
1998.
Income (Loss) Before Income Taxes
Our income before income taxes increased $978,779 to a $150,191 income
before income taxes during 1999 from a loss before income taxes of $(828,588)
during 1998. Digital Power Ltd. contributed $314,003 income before income taxes
in 1999, and $237,603 income before income taxes in 1998. This increase was due
primarily to the improvement in gross margins which resulted from the cost
containment initiatives, as discussed in the gross margin section.
Income Tax
For the year ended December 31, 1999, we had an income tax expense of
$123,000 compared to a tax benefit of $258,000 due to its 1998 net loss for the
year ended December 31, 1998.
Net Income (Loss)
Our net income increased $597,779 to a net income of $27,191 in 1999 from a
net loss of $(570,588) in 1998.
We do not believe that our business is seasonal. In the event inflation
increases, this may have a negative effect on our sales or gross margin since we
may be required to increase the cost of our products.
Liquidity And Capital Resources
On June 30, 2000, we had cash of $605,853 and working capital of
$5,476,763. This compares with cash of $1,090,292 and working capital of
$4,919,002 at June 30, 1999. The increase in working capital was due to an
increase in accounts receivable, inventory, and prepaid expenses, and decrease
of notes payable and accounts payables, offset by a decrease in other
receivables and increase in accrued liabilities and income taxes payable,
resulting in a decrease in cash and cash equivalents. Cash provided by operating
activities totaled $69,531 and $1,178,705 for the six months ended June 30, 2000
and 1999.
Cash used in investing activities was $106,127 for the six months ended
June 30, 2000, compared to $37,234 for the six months ended June 30, 1999. Net
cash provided by (used in) financing activities was $61,621 for the six months
ended June 30, 2000, compared to ($742,848).
Through June 30, 2000, we funded our operations primarily through revenues
generated from operations, and bank borrowing. As of December 31, 1999, we had
cash and cash equivalents of $824,708 and working capital of $5,367,917. This
compares with cash and cash equivalents of $867,607 and working capital of
$5,001,316 at December 31, 1998. The increase in working capital for the year
ended December 31, 1999, is primarily due to our income and reduction of debt.
Cash provided by our
<PAGE> 12
operating activities totaled $1,728,208 and $10,066 for the year ended December
31, 1999 and 1998, respectively. Cash used in investing activities of $161,896
during 1999 consisted primarily of expenditures for the purchase of production
and testing equipment. During 1998, cash used in investing activities amounted
to $3,500,586 primarily for the purchase of the assets of Digital Power Ltd. For
the year ended December 31, 1999, cash used in financing activities included
payments of $1,524,302 on borrowing. During the year ended December 31, 1998,
cash provided by financing activities included proceeds from borrowing of
$2,366,846 and proceeds of $95,350 from the exercise of warrants and stock
options, offset by payments of $307,814 on borrowing.
We were a guarantor of a $500,000 term loan granted to our employee stock
ownership plan ("ESOP"). The balance outstanding of $184,919 related to this
term loan is included in the total amount of our bank borrowing as of December
31, 1998. The loan was paid during 1999, and bore interest at 8.5% per annum.
Proceeds from the loan were used to acquire Digital Power's common stock by the
ESOP. Principal and interest on the loan was paid by the ESOP through
contributions made by Digital Power to the ESOP in the amount of approximately
$8,852 per month. This amount has been a monthly charge to expense.
Impact of Recently Issued Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities," (FASB133). FASB133 requires that an entity recognize
all derivatives as assets or liabilities in the statement of financial position
and measure those instruments at fair value. This statement was amended by
Statement of Financial Accounting Standards No. 137, issued in June 1999, such
that it is effective for our financial statements for the year ending December
31, 2001. We do not believe the adoption of FASB133 will have a material impact
on assets, liabilities or equity. We have not yet determined the impact of
FASB133 on the income statement or the impact on comprehensive income.
In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin 101 (SAB 101) "Revenue Recognition in Financial
Statements". SAB 101 establishes guidelines in applying generally accepted
accounting principles to the recognition of revenue in financial statements
based on the following four criteria: persuasive evidence that an arrangement
exists, delivery has occurred or services have been rendered, the seller's price
to the buyer is fixed or determinable, and collectibility is reasonably assured.
SAB 101, as amended by SAB 101A and SAB 101B, is effective no later than the
fourth fiscal quarter of the fiscal years beginning after December 15, 1999,
except that registrants with fiscal years that begin between December 16, 1999
and March 15, 2000, may report any resulting change in accounting principle no
later than their second fiscal quarter of the fiscal year beginning after
December 15, 1999. The Company does not believe that the adoption of SAB 101
will have a material effect on its financial position or result of operations.
DESCRIPTION OF BUSINESS
General
We are a California corporation originally formed in 1969. Our corporate
office is located in Fremont, California. We have a manufacturing facility in
Guadalajara, Mexico and a design, manufacturing, and sales facility in
Salisbury, England. We design, develop, manufacture, and sell 50 watt to 750
watt switching power supplies and DC/DC converters to OEMs of computers and
other electronic equipment. Through our subsidiary Digital Power Limited, we
also design, manufacture and sell uninterruptible power supplies, power
conversion and distribution equipment for naval and military applications and
DC/AC inverters primarily for the telecommunications industry in Europe under
the label Gresham Power Electronics. Power supplies are critical components of
electronic equipment that supply, convert, distribute, and regulate electrical
power. The various subsystems within electronic equipment require a steady
supply of direct current (DC) electrical power, usually at different voltage
levels from the other subsystems within the equipment. In addition, the
electronic components and subsystems require protection from the harmful surges
and drops in electrical power that commonly occur over power lines.
<PAGE> 13
Power supplies satisfy these issues of allocation and protection by (i)
converting alternating current (AC) electricity into DC; (ii) by dividing a
single input voltage into distinct and isolated output voltages; and (iii) by
regulating and maintaining such output voltages within a narrow range of values.
Products which convert AC from a primary power source into DC are generally
referred to as "power supplies." Products which convert one level of DC voltage
into a higher or lower level of DC voltage are generally referred to as "DC/DC
converters." "Switching" power supplies are distinguished from "linear" power
supplies by the manner and efficiency with which the power supply "steps down"
voltage levels. A linear power supply converts an unregulated DC voltage to a
lower regulated voltage by "throwing away" the difference between the two
voltages as heat. Consequently, the linear power supply is inherently
inefficient-typically only 45% efficient for a 5V output regulator. By contrast,
a switching power supply converts an unregulated DC voltage to a lower regulated
voltage by storing the difference in a magnetic field. When the magnetic field
grows to a pre-determined level, the unregulated DC is switched off and the
output power is provided by the energy stored in the magnetic field. When the
field is sufficiently depleted, the unregulated DC is switched on again to
deliver power to the output while the excess voltage is again stored in the
magnetic field. As a result, the switching power supply is more
efficient-typically 75% efficient for a 5V output regulator.
One of the great advantages of switching power supplies, in addition to the
high efficiency, is their high power density, or power-to-volume ratio. This
density is the result of the reduction in the size of the various components.
Our switching power supply products have a high power density and are generally
smaller than those of competitors. For example, to the best of our knowledge our
US100 series of power supplies, on a 3"x 5" printed circuit board, is the
smallest 100 watt off-line (AC input) power supply available in the industry.
Another advantage of our power supply products is the extreme flexibility
of design. We have designed the base model power supply products so that they
can be quickly and inexpensively modified and adapted to the specific power
supply needs of any OEM. This "flexibility" approach has allowed us to provide
samples of modified power supplies to OEM customers in only a few days after
initial consultation, an important capability given the emphasis placed by OEMs
on "time to market." This "flexibility" approach also results in very low
non-recurring engineering (NRE) expenses. Because of reduced NRE expenses, we do
not charge our OEM customers for NRE related to tailoring a power supply to a
customer's specific requirements. This gives us a distinct advantage over our
competitors, many of whom do charge their customers for NRE expenses. Our
marketing strategy is to exploit this combination of high power density, design
flexibility, and short time-to-market to win an increasing share of the growing
power supply market.
In addition to the line of proprietary products offered, and in response to
requests from OEMs, we also provide "value-added services." The term
"value-added services" refers to our incorporation of an OEM's selected
electronic components, enclosures, and cable assemblies with our power supply
products to produce a power subassembly that is compatible with the OEM's own
equipment and specifically tailored to meet the OEM's needs. We purchase parts
and components that the OEM itself would otherwise attach to or integrate with
our power supply, and we provide the OEM with that integration and installation
service, thus saving the OEM time and money. We believe that this value-added
service is well-suited to those OEMs who wish to reduce their vendor base and
minimize their investment in manufacturing which leads to increased fixed costs.
Based on the value-added services, the OEMs do not need to build assembly
facilities to manufacture their own power subassemblies and thus are not
required to purchase individual parts from many vendors.
<PAGE> 14
We are a California corporation originally formed in 1969 through a
predecessor. Unless the context indicates otherwise, any reference to "Digital
Power" herein includes our wholly-owned Mexican subsidiary, Poder Digital S.A.
de C.V. and our wholly-owned United Kingdom subsidiary, Digital Power Limited,
dba Gresham Power Electronics. Further, unless otherwise indicated, reference to
dollars in this prospectus shall mean United States dollars.
Digital Power Limited
In 1998, we acquired the assets of Gresham Power Electronics. Our
wholly-owned subsidiary, headquartered in Salisbury, England, Digital Power
Limited designs, manufactures, and distributes switching power supplies,
uninterruptible power supplies, and frequency converters for the commercial and
military markets under the name Gresham Power Electronics. Uninterruptible power
supplies (UPS) are devices that are inserted between a primary power source and
the primary power input of the electronic equipment to be protected for the
purpose of eliminating the effects of transient anomalies or temporary outages.
A UPS consists of an inverter that is powered by a battery that is kept
trickle-charged by rectified AC from an incoming power line. In the event of a
power interruption, the battery takes over without the loss of even a fraction
of a cycle in the AC output of the UPS. The battery also provides protection
against transients. A frequency converter is an electronic unit for speed
control of a phase induction motor. The frequency converters manufactured by
Digital Power Ltd. are used to convert a warship's generated 60 cycle
electricity supply to 400 cycles. This 400 cycle supply is used to power
critical equipment such as the ship's gyro, compass and weapons systems. The
acquisition of Gresham Power Electronics has diversified our product line,
provided greater access to the United Kingdom and European markets, and
strengthened our engineering and technical resources.
The Market
Since all electronic equipment requires power supplies, the overall market
for power supplies is very large. The growth of the power supply industry has
paralleled that of the general electronics industry. Since 1994, growth has
escalated at an even faster pace, fueled by the demand for networking
communications equipment and computing equipment and its peripherals. Future
growth is expected to come from the same markets, as internet and intranet
networking and cellular and digital telephones continue to become popular around
the world.
The electronic power supply market is typically split into "captive" and
"merchant" market segments. The captive segment of the market is represented by
OEMs who design and manufacture power supplies for use in their own products.
The remaining power supply market is served by merchant power supply
manufacturers, such as Digital Power, that design and manufacture power supplies
for sale to OEMs.
We believe that the merchant market is the fastest growing segment of the
power supply market, as OEMs continue to outsource their power supply
requirements. We believe that this increase is due, in part, to the fact that
power supplies are becoming an increasingly complex component in the eyes of
OEMs, with constantly changing requirements such as power factor correction
(PFC) and filtering specifications to minimize electromagnetic interference
(EMI).
The power supply market can also be divided between "custom" and "standard"
power supplies. Custom power supplies are those that are customized in design
and manufactured with a specific application in mind, whereas standard power
supplies are sold off-the-shelf to customers whose
<PAGE> 15
electronic equipment can operate from standard output voltages such as 5, 12, or
24 volts. Power supplies in the captive market that are designed and
manufactured by an OEM for use in its own equipment are an example of a custom
design, as the product is not intended for resale. However, custom power
supplies are also common in the merchant market, as certain OEMs contract with
power supply manufacturers to design a product that meets the form, fit, and
function requirements of that OEM's specific application. A subset of the
standard segment of the market has evolved, commonly known as "modified
standard" segment, comprising power supply products that have the performance
characteristics of a standard power supply, but require certain, usually minor,
modifications. These modifications typically involve an adjustment to one of the
standard output voltages, such as from 5 volts to 7 volts, or from 15 volts to
18.5 volts.
The power supply industry is highly fragmented. There are approximately 300
domestic merchant power supply competitors in the United States, with over 200
that generate less than $5 million in revenues. No one manufacturer holds more
than five percent of the total market. The merchant market segment is also
highly fragmented according to the power level, technology, packaging, or
application of a merchant's particular power supply. Most merchant manufacturers
concentrate on niche markets, whether power ranges or industry segments.
With no industry standards for power supplies, it is very difficult to
design out an existing power supply component, which prevents large companies
from quickly gaining market share. The key to being a profitable manufacturer is
to have long-term expertise in power electronics and to be able to provide
products needed by customers. We have targeted and serve the industrial and
office automation, industrial and portable computing, and networking
applications niches of the merchant market. We believe that our focus on
high-efficiency, high-density, design-flexible power supplies is ideally suited
to the rapid growth opportunities existing in this market segment.
Geographically, we primarily serve the North American power electronics
market with AC/DC power supplies and DC/DC converters ranging from 50 watts to
750 watts of total output power. Digital Power Ltd. serves the United Kingdom
marketplace with AC/DC power supplies, uninterruptible power supplies, and
frequency inverters. Both commercial and government (Ministry of Defense)
markets are served by Digital Power Ltd.
Customers
Our products are sold domestically and in Canada through a network of 14
manufacturers' representatives. We also have 23 stocking distributors in the
United States and Europe. In addition, we have formed strategic relationships
with three of our customers to private label our products. Our customers can
generally be grouped into three broad industries, consisting of the computer,
telecommunication, and instrument industries. We have a current base of over 150
active customers, including companies such as Ascend Communications, Telex, Dot
Hill, Motorola, Stanford Telecommunications, Extreme Networks, Foundry Networks,
JDS Uniphase, Ericsson, British Telecom and Lucent.
Gresham Power Electronic products are sold primarily in the United Kingdom
and to a lesser extent in Europe. Our customers in Europe include the United
Kingdom Ministry of Defense, Vosper Thorney Croft, Emerson and Seimens.
<PAGE> 16
Strategy
Our strategy is to be the supplier of choice to OEMs requiring a
high-quality power solution where size, rapid modification, and time-to-market
are critical to business success. Target market segments include
telecommunications, networking, switching, mass storage, and industrial and
office automation products. While many of these segments would be characterized
as computer-related, we do not participate in the personal computer (PC) power
supply market because of the low margins arising out of the high volume and
extremely competitive nature of that market.
We intend to continue our sales primarily to existing customers while
simultaneously targeting sales to new customers. We believe that our
"flexibility" concept allows customers a unique choice between our products and
products offered by other power supply competitors. OEMs have typically had to
settle for a standard power supply product with output voltages and other
features predetermined by the manufacturer. Alternatively, if the OEM's product
required a different set of power supply parameters, the OEM was forced to
design this modification in-house, or pay a power supply manufacturer for a
custom product. Since custom-designed power supplies are development-intensive
and require a great deal of time to design, develop, and manufacture, only OEMs
with significant volume requirements can economically justify the expense and
delay associated with their production. Furthermore, since virtually every power
conversion product intended for use in commercial applications requires certain
independent safety agency testing at considerable expense, such as by
Underwriters Laboratories, an additional barrier is presented to the smaller
OEM. By offering OEM customers a new choice with Digital Power "flexibility"
series, we believe we have an advantage over our competitors. Our "flexibility"
series is designed around a standardized power platform, but allows the customer
to specify output voltages tailored to its exact requirements within specific
parameters. Furthermore, OEMs are seeking power supplies with greater power
density. Digital Power's strategy in responding to this demand has been to offer
increasingly smaller power supply units or packages.
Product Strategy and Products
We have nine series of base designs from which thousands of individual
models can be produced. Each series has its own printed circuit board (PCB)
layout that is common to all models within the series regardless of the number
of output voltages (typically one to four) or the rating of the individual
output voltages. A broad range of output ratings, from 3.3 volts to 48 volts,
can be produced by simply changing the power transformer construction and a
small number of output components. Designers of electronic systems can determine
their total power requirements only after they have designed the system's
electronic circuitry and selected the components to be used in the system. Since
the designer has a finite amount of space for the system and may be under
competitive pressure to further reduce its size, a burden is placed on the power
supply manufacturer to maximize the power density of the power supply. A typical
power supply consists of a PCB, electronic components, a power transformer and
other electromagnetic components, and a sheet metal chassis. The larger
components are typically installed on the PCB by means of pin-through-hole
assembly where the components are inserted into pre-drilled holes and soldered
to electrical circuits on the PCB. Other components can be attached to the PCB
by surface mount interconnection technology (SMT) which allows for a reduction
in board size since the holes are eliminated and components can be placed on
both sides of the board. Our US100 series is an example of a product using this
manufacturing technology.
Digital Power's "flexibility" concept applies to all of our US, UP/SP, DP
and UPF product series. A common printed circuit board is shared by each model
in a particular family, resulting in a
<PAGE> 17
reduction in parts inventory while allowing for rapid modifiability into
thousands of output combinations. The following is a description of our
products.
The US50 series of power supplies consists of compact, economical, high
efficiency, open frame switchers that deliver up to 50 watts of continuous
power, or 60 watts of peak power, from one to four outputs. The 90-264 VAC
universal input allows them to be used worldwide without jumper selection.
Flexibility options include chassis and cover, power good signal, an isolated V4
output, and UL544 (medical) safety approval. All US50 series units are also
available in 12VDC, 24VDC, or 48VDC inputs. This optional DC input unit (DP50
series) maintains the same pin-out, size, and mounting as the US50 series.
The US70 series of power supplies is similar to the US50 series, a compact,
economical, highly efficient, open frame switcher that delivers up to 65 watts
with a 70 watt peak. This unit is offered with one to four outputs, a universal
input rated from 90 to 264 VAC, and is only slightly larger than the US50
series. The US70 series is differentiated from competitive offerings by virtue
of its smaller size, providing up to four outputs while competitors typically
are limited to three outputs. Flexibility options include cover, power good
signal, an isolated V4 output, and UL544 (medical) safety approval. The DP70 is
the same as the US70 except the input is 48 volts DC. We also offer 12 & 24VDC
DC input on this series where the model series changes to DN & DM. This type of
product is ideal for low profile systems, with the power supply measuring 3.2" x
5" x 1.5".
The US100/DP100 is the industry's smallest 100 watt switcher. Measuring
only 5" x 3.3" x 1.5", this series delivers up to 100 watts of continuous power,
or 120 watt peak power, from one to four outputs. The 90-264VAC universal input
allows them to be used worldwide. This product is ideal in applications where
OEMs have upgraded their systems, requiring an additional 30-40 watts of output
power but being unable to accommodate a larger unit. The US100 fits in the same
form factor and does not require any tooling or mechanical changes by the OEM.
Flexibility options include a cover and adjustable post regulators on V3 and/or
V4 outputs. Fully customized models are also available. All US100 series units
are also available with 12VDC, 24VDC, or 48 VDC inputs. This optional DC input
unit (DP100) maintains the same pin-out, size, and mounting as the US100 series.
The UP300 series consists of economical, high efficiency, open frame
switchers that deliver up to 300 watts of continuous, or 325 watts of peak
power, from one to two outputs. The 115/230VAC auto-selectable input allows them
to be used worldwide. On-board EMI filtering is a standard feature. Flexibility
options include a cover, power fail/power good signal, and an isolated 2nd
output. The UP300 is also available as the SP300 series, which is jumper
selectable between 115 and 230VAC and provides the OEM an even more economical
solution. This product can be used in network switching systems or other
electronic systems where a lot of single output current, such as 5, 12, 24, or
48 volt current might be required.
The US250 series consists of economical, high efficiency, open frame
switchers that deliver up to 250 watts of continuous power, or 300 watts of peak
power, from one to four outputs. The 115/230VAC auto-selectable input allows
them to be used worldwide. Flexibility options include cover, power fail/power
good signal, enable/inhibit, and an isolated V3 output. All US250 series units
are also available with 12VDC, 24VDC, or 48VDC inputs. This optional DC input
unit (DP250) maintains the same pin-out, size, and mounting as the US250 series.
<PAGE>18
The US350 series is a full-featured unit that has active power factor
correction and was designed to be field-configurable by our international and
domestic sales channels. This feature allows the stocking distributor to lower
its inventory costs but still maintain the required stock to rapidly provide
power supplies with the unique combination of output voltages required by an
OEM. This unit delivers 350 watts from one to four output modules and meets the
total harmonic distortion spec IEC 555.2. The US350 has an on-board EMI filter
and operates from 90-264 VAC input. This unit measures 9" x 5" x 2.5". It can
operate without any minimum loads and has an optional internal fan and power
fail/power good signal.
The newest product developed by us is the UPF 150 series. The UPF 150 is an
open-frame switcher that delivers up to 150watts of continuous power from one to
four outputs. The UPF 150 is endowed with power factor correction and a Class B
EMI filter, making the series particularly well-suited for those customers
selling into the international market place.
We offer our customers various types of value-added services, which may
include the following additions to its standard product offerings:
Electrical (power): Paralleled power supplies for (N+1) redundancy, hot
swapability, output OR'ing diodes, AC input receptacle with fuse, external EMI
filter, on/off switch, cabling and connectors, and battery backup with charger.
Electrical (control and monitoring): AC power fail detect signal, DC
output(s) OK signal, inhibit, output voltage margining, and digital control
interface.
Mechanical: Custom hot-plug chassis for (N+1) redundant operation, locking
handle, cover, and fan.
These services incorporate one of our base products along with additional
enclosures, cable assemblies, and other electronic components to arrive at a
power subassembly. This strategy matches with those OEMS wishing to reduce their
vendor base, as the turnkey sub-assembly allows customers to eliminate other
vendors.
Other than certain fabricated parts such as printed circuit boards and
sheet metal chassis which are readily available from many suppliers, we use no
custom components. Typically, two suppliers are qualified for every component,
with the exception being one line transformer manufactured by Spitznagel. This
transformer is designed into one of our products, which accounted for less than
10% of our total sales in 1999.
Gresham Power Electronics' primary product lines include the following:
Military Power Supplies. Design and manufacture of AC and DC power
conversion equipment which is intended for naval and other applications where
arduous duties demand quality and reliability. Products include transformer
rectifier units to 15KVA and Static Frequency Converters to 5KVA.
Commercial Component Power Supplies. Distribution and service of all
Digital Power's product lines to non-American markets.
<PAGE> 19
Uninterruptible Power Supplies. Distribution and service of uninterruptible
power supplies mainly to the United Kingdom telecommunications industry.
Products offered range from 250VA to 100KVA but main market is up to 10KVA.
Telecommunications Inverters. Design and manufacture of DC to AC sine-wave
inverters. Rugged equipment intended for use in remote areas for the support of
mobile telecommunications installations.
Manufacturing Strategy
Consistent with its product flexibility strategy, we aim to maintain a high
degree of flexibility in our manufacturing processes in order to respond to
rapidly changing market conditions. With few exceptions, the competitive nature
of the power supply industry has placed continual downward pressure on selling
prices. In order to achieve low cost manufacturing with a labor-intensive
product, manufacturers have the option of automating much of the labor out of
their product, or producing their product in a low labor cost environment. Given
the high fixed costs of automation and the resistance this places on making
major product changes, we believe that our flexible manufacturing strategy is
best achieved through a highly variable cost of operation. In 1986, we
established a wholly-owned subsidiary in Guadalajara, Mexico to assemble our
products. This manufacturing facility performs materials management,
sub-assembly, final assembly, and test functions for the majority of our power
supply products. Currently, almost all of our manufacturing, including our
value-added services, is done at a 16,000 square foot facility operated by our
wholly-owned subsidiary, Poder Digital, S.A. de C.V., located in Guadalajara,
Mexico. In addition, we have entered into an agreement with Fortron/Source Corp.
to manufacture our products at a facility located in China on a turnkey basis.
Purchases from Fortron/Source will be made pursuant to purchase orders and the
agreement may be terminated upon 120 days notice. We are manufacturing
approximately 20% of our product requirements through Fortron/Source and expect
to increase these production levels due to cost advantages achieved through
Chinese procurement. We believe that the facility in China complements our
manufacturing facility in Guadalajara, Mexico since the facility in China allows
us to produce power supplies with sufficient lead time at lower costs, while the
Guadalajara facility will continue to manufacture power supplies that need a
quick turnaround or modification.
Sales, Marketing and Customers
During 1999, we had revenues of $15,354,018 and net income of $27,191
compared to revenues of $18,733,470 and a net loss of $(570,588) during fiscal
year 1998.
Digital Power markets its products through a network of thirteen domestic
and one Canadian independent manufacturers' representatives. Each representative
organization is responsible for managing sales in a particular geographic
territory. Generally, the representative has exclusive access to all potential
customers in the assigned territory and is compensated by commissions at 5% of
net sales after the product is shipped, received, and paid for by the customer.
Typically, either we or the representative organization may terminate the
agreement with 30 days' written notice.
In certain territories, we have entered into agreements with 23 stocking
distributors who buy and resell our products. For the fiscal years ended
December 31, 1999 and 1998, distributor sales accounted for 31.6% and 29.1%,
respectively, of our total sales. Over this same period, one distributor
accounted for 11.5% and 13.1%, respectively, of total sales. In addition,
international sales through stocking
<PAGE> 20
distributors accounted for less than 5% of our sales. In general, the agreements
with stocking distributors are subject to annual renewal and may be terminated
upon 90 days' written notice. Although these agreements may be terminated by
either party in the event a stocking distributor decides to terminate its
agreement with us, we believe that we would be able to continue the sale of our
products through direct sales to the customers of the stocking distributor.
Further, and in general, stocking distributors are eligible to return 25% of
their previous six-months' sales for stock rotation. For the past three years,
stock rotations have not exceeded one percent of total sales.
We have also entered into agreements with three private label customers who
buy and resell our products. Under these agreements, we sell our products to the
private label company who then resells the products with its label to its
customers. We believe that these private label agreements expand our market by
offering the customer a second source for our products. The private label
agreements may be terminated by either party. Further, the private label
agreement requires that any product subject to a private label be available for
five years. For the years ended December 31, 1999 and 1998, private label sales
accounted for 3.7% and 8.2%, respectively, of total sales.
Our promotional efforts to date have included product data sheets, feature
articles in trade periodicals, and trade shows. Our future promotional
activities will likely include space advertising in industry-specific
publications, a full-line product catalog, application notes, and direct mail to
an industry-specific mail list.
Our products are warranted to be free of defects for a period ranging from
one to two years from date of shipment. No significant warranty returns were
experienced in either 1999 or 1998. As of June 30, 2000, and December 31, 1999,
our warranty reserve was $211,643 and $272,782, respectively.
Competition
The merchant power supply manufacturing industry is highly fragmented and
characterized by intense competition. Our competition includes over 500
companies located throughout the world, some of whom have advantages over us in
terms of labor and component costs, and some of whom may offer products
comparable in quality to ours. Many of our competitors, including PowerOne,
Artesyn Technologies, Inc. (now merged with Zytec Corporation), ASTEC America,
Lambda Electronics, Westinghouse, Belix and American Power Conversion have
substantially greater fiscal and marketing resources and geographic presence
than we. If we continue to be successful in increasing our revenues, competitors
may notice and increase competition for our customers. We also face competition
from current and prospective customers who may decide to design and manufacture
internally the power supplies needed for their products. Furthermore, certain
larger OEMs tend to contract only with larger power supply manufacturers. This
factor could become more problematic to us if consolidation trends in the
electronics industry continue and some of the OEMs to whom we sell our products
are acquired by larger OEMs. To remain competitive, management believes that we
must continue to compete favorably on the basis of value by providing advanced
manufacturing technology, offering superior customer service and design
engineering services, continuously improving quality and reliability levels, and
offering flexible and reliable delivery schedules. We believe we have a
competitive position with our targeted customers who need a high-quality,
compact product which can be readily modified to meet the customer's unique
requirements. However, there can be no assurance that we will continue to
compete successfully in the power supply market.
<PAGE> 21
Research and Development
Our research and development efforts are primarily directed toward the
development of new standard power supply platforms which may be readily modified
to provide a broad array of individual models. Improvements are constantly
sought in power density, modifiability, and efficiency, while we attempt to
anticipate changing market demands for increased functionality, such as PFC and
improved EMI filtering. Internal research is supplemented through the
utilization of consultants who specialize in various areas, including component
and materials engineering and electromagnetic design enhancements to improve
efficiency, while reducing the cost and size of our products. Product
development is performed at our headquarters in California by three engineers
who are supported and assisted by five technicians. Our total expenditures for
research and development were $549,912, $952,690 and $1,397,816 for the six
months ended June 30, 2000, and years ended December 31, 1999 and 1998,
respectively, and represented 6.45%, 6.20% and 7.46% of our total revenues for
the corresponding periods.
Employees
As of December 31, 1999, we had approximately 285 full-time employees, with
210 of these employed at our wholly-owned subsidiary Poder Digital located in
Guadalajara, Mexico, and 50 employed by Digital Power Ltd. The employees of
Digital Power's Mexican operation are members of a national labor union, as are
most employees of Mexican companies. We have not experienced any work stoppages
at any of our facilities and believe that our employee relations are good.
Guadalajara, Mexico Facility and Foreign Currency Fluctuations
We produce substantially all of our products at our 16,000 square foot
facility located in Guadalajara, Mexico. The products are then delivered to
Fremont, California for testing and distribution. We believe that we have a good
working relationship with our employees in Guadalajara, Mexico and have recently
signed a five-year contract with the union representing the employees. In 1997,
we entered into a "turnkey" manufacturing contract with a manufacturer located
in China to produce our products in an attempt to reduce our dependence on our
Mexican facility. At this time the purchase of products from the manufacturer
located in China accounts for approximately 20% of revenues and requires advance
scheduling which affects our ability to produce products quickly. However, if
our revenues grow as anticipated, we intend to manufacture more of our products
utilizing the Chinese manufacturer. In the event that there is an unforeseen
disruption at the Guadalajara production plant or with the Chinese manufacturer,
such disruption may have an adverse effect on our ability to deliver our
products and may adversely affect our financial operations.
Further, the Guadalajara, Mexico facility conducts its financial operations
using the Mexican peso and Gresham Power conducts its financial operation using
the United Kingdom pound. Therefore, due to financial conditions beyond our
control, we are subject to monetary fluctuations between the U.S. dollar,
Mexican peso, and United Kingdom pound. During fiscal 1999, we lost $6,236 as a
result of currency fluctuations.
Facilities
Our headquarters are located in approximately 9,500 square feet of leased
office, research and development space in Fremont, California. We pay $6,653 per
month, subject to adjustment, and the
<PAGE> 22
lease expires on January 31, 2001. We plan to review this lease prior to
expiration; however, given market conditions, we expect that the rent will be
substantially higher. Our manufacturing facility is located in 16,000 square
feet of leased space in Guadalajara, Mexico. We pay approximately $4,583 per
month, subject to adjustment, and the lease expires in February 2001. Gresham
Power leases approximately 25,000 square feet for its location in Salisbury,
England. Gresham Power pays rent of approximately (pound)17,500 per quarter, and
the lease will expire September 26, 2009. We believe that our existing
facilities are adequate for the foreseeable future and have no plans to expand
them.
Legal Proceedings
We are not currently involved in any legal proceedings.
<PAGE> 23
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Our directors and executive officers, their ages, positions held, and
duration as such, are as follows:
Directors, Executive Officers and
Name Age Background For thePast Five Years
---- --- --------------------------------------------
Robert O. Smith 55 Chief Executive Officer and Director since 1989
and President since May 1996. From 1980 to 1989
variously served as Vice President/Group
Controller of Power Conversion Group, General
Manager of Compower Division, and President of
Boschert subsidiary, of Computer Products, Inc.,
manufacturer of power conversion products and
industrial automation systems. Received B.S. in
Business Administration from Ohio University and
completed course work in M.B.A. program at Kent
State University.
Chris Schofield 43 Managing Director of Digital Power Limited
since January 1998. Director and General
Manager of Gresham Power Group from 1995 to 1998.
From 1988 to 1995, Director of United Kingdom
Operations of the Oxford Instruments Group.
Thomas W. O'Neil, Jr. 70 Director since 1991. Certified Public Accountant
and Partner since 1991 of Schultze, Wallace and
O'Neil, CPAs. Retired as Partner, from 1955 to
1991, of KPMG Peat Marwick. Director of California
Exposition and State Fair; Director of Regional
Credit Association; Director of Alternative
Technology Resources, Inc. Graduate of St. Mary's
College and member of the St. Mary's College Board
of Regents.
<PAGE> 24
Directors, Executive Officers and
Name Age Background For thePast Five Years
---- --- --------------------------------------------
Scott C. McDonald 46 Director since May 1998. Chief Financial and
Administrative Officer of Conxion Corporation
since December 1999. Director of Castelle
Incorporated since April 1999. Director of Octant
Technologies, Inc. since April 1998. From November
1996 to May 1998, director of CIDCO Incorporated,
a communications and information delivery company.
From October 1993 to January 1997, Executive Vice
President, Chief Operating and Financial Officer
of CIDCO. From March 1993 to September 1993,
President, Chief Operating and Financial Officer
of PSI Integration, Inc. From February 1989 to
February 1993, Chief Financial Officer and Vice
President, Finance of Administration of Integrated
System, Inc. Received B.S. in Accounting from The
University of Akron and M.B.A. from Golden Gate
University.
Robert J. Boschert 63 Director since 1998. Business consultant for small
high-growth technology companies. Director since
1990 of Hytek Microsystems, Inc. From June 1986
until June 1998, served as consultant to Union
Technology. Founder of Boschert, Inc. Retired as
a member of the board of directors in 1984.
Received B.S. in Electrical Engineering from
University of Missouri.
Philip G. Swany 50 Mr. Swany joined us as our Controller in 1981. In
February 1992, he left us to serve as the
Controller for Crystal Graphics, Inc., a 3-D
graphics software development company. In
September 1995, Mr. Swany returned to us and he
was made Vice President-Finance. In May 1996, he
was named Chief Financial Officer and Secretary of
Digital Power. Mr. Swany received a B.S. degree
in Business Administration - Accounting from Menlo
College, and attended graduate courses in business
administration at the University of Colorado.
EXECUTIVE COMPENSATION
Non-employee directors receive $10,000 per annum paid quarterly and options
to purchase 10,000 shares of Common Stock.
Executive officers are appointed by, and serve at the discretion of, the
board of directors. Except for Robert O. Smith, our President and Chief
Executive Officer, we have no employment agreements with any of its executive
officers. The following table sets forth the compensation of our President and
<PAGE> 25
Chief Executive Officer during the past three years. No other officer received
annual compensation in excess of $100,000 during the 1999 fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Long Term Compensation
Annual Compensation Awards Payouts
------------------------ -------------------------- -----------------
Name and Other Annual Restricted Securities LTIP All Other
Principal Compensation Stock Underlying Payouts Compensa-
Position Year Salary ($) Award(s)($) Options (#) ($) tion
------------------------------------------------- -------------------------- ----------------------------
Robert O. Smith 1999 $134,038 $0 $0 100,000(1) $0 $0
President and 1998 $141,912 $0 $0 100,000(2) $0 $0
CEO 1997 $150,000 $0 $0 100,000(3) $0 $0
-----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents options to acquire 100,000 shares of common stock at $1.875
per share.
(2) Pursuant to his employment contract, in January 1998, Mr. Smith received
options to acquire 100,000 shares of Common Stock at $6.69 per share.
These options expire in January 2008. On November 5, 1998, these options
were repriced to an exercise price of $2.31 per share.
(3) Pursuant to his employment contract, in January 1997, Mr. Smith received
options to acquire 100,000 shares of Common Stock at $5.4375 per share.
These options expire in January 2007. On November 5, 1998, these options
were repriced to an exercise price of $2.31 per share.
On March 1, 2000, Digital Power and Mr. Smith entered into an employment
contract effective January 1, 2000. The term of the employment agreement is for
one year subject to annual renewal. Under the terms of Mr. Smith's employment
contract, Mr. Smith shall serve as President and Chief Executive Officer and his
salary shall be $200,000 per annum and shall be entitled to bonuses as
determined by the Board. In addition, he shall have the right to receive on the
first business day of each January during the term of his contract options to
acquire 100,000 shares of Common Stock at the lower of market value as of such
date or the average closing price for the first six months of each year of his
contract. Pursuant to Mr. Smith's employment contract, in the event there is a
change in control of Digital Power, Mr. Smith shall be entitled to receive in
one payment, the sum of six (6) times his annual base salary. If Mr. Smith's
employment agreement is not renewed or he is terminated without cause, Mr. Smith
will be entitled to three times his annual base salary.
The following table sets forth the options granted to Mr. Smith during the
past fiscal year.
<PAGE> 26
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
--------------------------------------------------------------
Number of % of Total Options Exercise or
Securities Granted to Base Price Expiration
Name Underlying Employees in ($/Sh) Date
Options Fiscal Year
Granted (#)
--------------------------------------------------------------------------------
Robert O. Smith 100,000 54.98% $1.875 January 2009
The following table sets forth Mr. Smith's fiscal year end option values.
No options were exercised by Mr. Smith during 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<S> <C> <C> <C> <C>
Value of
Number of Unexercised
Unexercised In-the-Money
Options at FY-End Options
(#) at FY-End ($)(1)
Shares Acquired on Exercisable/ Exercisable/
Name Exercise (#) Value Realized ($) Unexercisable Unexercisable
--------------------------------------------------------------------------------------------------
Robert O. Smith None None 386,900 Exercisable $81,469 Exercisable
</TABLE>
(1) Market price at December 31, 1999, for a share of common stock was
$1.4375.
Stock Plans
Employee Stock Purchase Plan. We have adopted an Employee Stock Ownership
Plan ("ESOP") in conformity with ERISA requirements. As of December 31, 1999,
the ESOP owns, in the aggregate, 167,504 shares of our Common Stock. In June
1996, the ESOP entered into a $500,000 loan with San Jose National bank to
finance the purchase of shares. We guaranteed the repayment of the loan, and our
contributions to the ESOP were used to pay off the loan by the end of 1999. All
our employees participate in the ESOP on the basis of level of compensation and
length of service. Participation in the ESOP is subject to vesting over a
six-year period. The shares of our Common Stock owned by the ESOP are voted by
the ESOP trustees. Mr. Smith, President and Chief Executive Officer, is one of
two trustees of the ESOP.
1998 and 1996 Stock Option Plans. We have established the 1998 and 1996
Stock Option Plans (the "Plans"). The purposes of the Plans are to encourage
stock ownership by employees, officers, and directors to give them a greater
personal interest in the success of the business and to provide an added
incentive to continue to advance in their employment by or service to Digital
Power. A total of 753,000 options are authorized to be issued under the Plans,
all of which have been issued. The Plans
<PAGE> 27
provide for the grant of either incentive or non-statutory stock options. The
exercise price of any incentive stock option granted under the Plans may not be
less than 100% of the fair market value of the Common Stock on the date of
grant. The fair market value for which an optionee may be granted incentive
stock options in any calendar year may not exceed $100,000. Shares subject to
options under the Plans may be purchased for cash. Unless otherwise provided by
the Board, an option granted under the Plans is exercisable for ten years. The
Plans are administered by the Compensation Committee which has discretion to
determine optionees, the number of shares to be covered by each option, the
exercise schedule, and other terms of the options. The Plans may be amended,
suspended, or terminated by the Board but no such action may impair rights under
a previously granted option. Each incentive stock option is exercisable in
accordance with its term, during the lifetime of the optionee, only so long as
the optionee remains employed by us. No option is transferrable by the optionee
other than by will or the laws of descent and distribution.
Other Stock Options
As of December 31, 1999, we have outstanding options to acquire 92,000
shares of Common Stock at $1.80 per share and options to acquire 86,900 shares
of Common Stock at $.50 per share. These options were granted to employees in
May 1993 and are now fully vested.
401(k) Plan
We have adopted a tax-qualified employee savings and retirement plan (the
"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 401(k)
Plan up to a maximum of six percent of eligible compensation. These deferred
amounts are contributed to the 401(k) Plan. The 401(k) Plan permits, but does
not require, additional matching or contributions by us on behalf of Plan
participants. We match contributions at the rate of $.25 for each $1.00
contributed. We can also 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
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.
Limitation of Liability and Indemnification Matters
Sections 204 and 317 of the California Corporations Code ("Corporations
Code") permit indemnification of directors, officers, and employees of
corporations under certain conditions subject to certain limitations. Article IV
of the our Amended and Restated Articles of Incorporation ("Articles") provides
that the liability of the directors for monetary damages shall be eliminated to
the fullest extent permissible under California Law. Article V of the our
Articles states that the we may provide indemnification of its agents, including
its officers and directors, for breach of duty to Digital Power in excess of the
indemnification otherwise permitted by Section 317 of the Corporations Code,
subject to the limits set forth in Section 204 of the Corporations Code. Article
VI of the Bylaws provides that the we shall, to the maximum extent and in the
manner permitted in the Corporations Code, indemnify each of its agents,
including its officers and directors, against expenses, judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding arising by reason of the fact any such person is or was our
agent.
<PAGE> 28
Pursuant to Section 317 of the Corporations Code, we are empowered to
indemnify any person who was or is a party or is threatened to be made a party
to any proceeding (other than an action by or in the right of the company to
procure a judgment in its favor) by reason of the fact that such person is or
was an officer, director, employee, or other agent of ours or our subsidiaries,
against expenses, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with such proceeding, if such person acted in
good faith and in a manner such person reasonably believed to be in our best
interests and, in the case of a criminal proceeding, has no reasonable cause to
believe the conduct of such person was unlawful. In addition, we may indemnify,
subject to certain exceptions, any person who was or is a party or is threatened
to be made a party to any threatened, pending, or completed action by or in the
right of the company to procure a judgment in its favor by reason of the fact
that such person is or was an officer, director, employee, or other agent of the
Digital Power or its subsidiaries, against expenses actually and reasonably
incurred by such person in connection with the defense or settlement of such
action if such person acted in good faith and in a manner such person believed
to be in the best interest of the company and its shareholders. We may advance
expenses incurred in defending any proceeding prior to final disposition upon
receipt of an undertaking by the agent to repay that amount if it shall be
determined that the agent is not entitled to indemnification as authorized by
Section 317. In addition, we are permitted to indemnify its agents in excess of
Section 317.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the company
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1999 and 1998, we have not been a party to any transaction, proposed
transaction, or series of transactions in which the amount involved exceeds
$60,000, and in which, to our knowledge any director or executive officer,
nominee, five percent beneficial security holder, or any member of the immediate
family of the foregoing persons have or will have a direct or indirect material
interest.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 30, 2000, certain
information with respect to the beneficial ownership of shares of common stock
by all shareholders known by us to be the beneficial owners of more than five
percent of the outstanding shares of such common stock, all directors and
executive officers individually, and all directors and all executive officers of
as a group. As of September 30, 2000, there were 3,255,570 shares of Common
Stock outstanding.
No. of Shares
Name Common Stock(1) Percent
--------------------------------------------------------------------------------
Rhodora Finance Corporation Limited 183,464 6.54%
80 Broad Street
Monrovia, Liberia
Digital Power - ESOP 167,504 5.97%
41920 Christy Street
Fremont, CA 94538
<PAGE> 29
No. of Shares
Name Common Stock(1) Percent
--------------------------------------------------------------------------------
Thomas W. O'Neil, Jr., 55,600(2) 2.65%
Director
Robert O. Smith, 406,504(3) 13.34%
Director and Chief Executive Officer
Chris Schofield, 47,000(4) 1.6%
Managing Director, Digital Power Limited
Philip G. Swany, 42,250(5) 1.5%
Chief Financial Officer
Scott C. McDonald, 10,000(6) *
Director
Robert J. Boschert, 10,000(6) *
Director
All directors and executive officers as a
group 570,854(7) 18.0%
(6 persons)
================================================================================
* Less than one percent.
(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by them, subject to
community property laws where applicable.
(2) Includes 20,000 shares subject to options and warrants exercisable
within 60 days.
(3) Includes 235,500 shares subject to options and warrants exercisable
within 60 days. Also includes 167,504 owned by the Digital Power ESOP of
which Mr. Smith is a trustee.
(4) Includes 40,000 shares subject to options exercisable within 60 days.
Does not include options to purchase 85,000 shares that are not
exercisable within 60 days.
(5) Represents 49,250 shares subject to options exercisable within 60 days.
(6) Includes 10,000 shares subject to options and warrants exercisable
within 60 days.
(7) Includes 357,750 shares subject to options and warrants and exercisable
within 60 days. Also includes 167,504 shares owned by the Digital Power
ESOP of which Mr. Smith is a trustee and may be deemed a beneficial
owner.
SELLING STOCKHOLDER
The common stock registered hereby will be resold by the selling
stockholders listed below. On December 16, 1996, in connection with our initial
public offering , we entered into an underwriting agreement. Subject to the
terms and conditions of the underwriting agreement, we issued to Werbel-Roth
Securities, Inc., an underwriter's warrant to purchase shares of common stock
and common stock purchase warrants (the "Underwriter's Warrant"). The
Underwriter's Warrant entitles Werbel-Roth to purchase at any time or from time
to time until five years from the effective date up to 100,000 shares of
<PAGE> 30
common stock at $4.80 per share and up to a maximum of 50,000 stock purchase
warrants at 15(cent) per warrant, each of which entitled Werbel-Roth to purchase
a single share of common stock at $5.00 per share. Subsequent to the offering,
the Underwriter's Warrants were transferred to the selling stockholders listed
below. The resale of the shares issuable upon exercise of the Underwriting
Warrant are included in this prospectus.
In addition, we have issued 5,000 shares of common stock and warrants to
purchase 30,000 shares of common stock at $3.88 per share to Donner Corp.
International; warrants to purchase 30,000 shares of common stock at $3.88 per
share to C.C.R.I. Corporation; and warrants to purchase 15,000 shares of common
stock at $6.75 per share to Research Works. Donner Corp. International, C.C.R.I.
Corporation and Research Works have provided financial and investment relation
services to Digital.
The following table identifies the selling stockholders, as of September
15, 2000, and indicates certain information known to us to respect to (i) the
number of common shares beneficially owned by the selling stockholder, (ii) the
number of common shares to be offered for the selling stockholders' account, and
(iii) the number of common stock and percentage of outstanding common stock to
be beneficially owned by the selling stockholders after the sale of the common
stock offered by the selling stockholders. The term "beneficially owned" means
common stock owned or that may be acquired within 60 days. The number of common
stock outstanding as of September 30, 2000, was 3,255,570. The selling
stockholders may sell some, all or none of their common stock.
Shares Beneficially Shares to Shares Beneficially
Owned Prior to Offering be Offered Owned After Offering
----------------------- ---------- --------------------
Name of Stockholder Number Percentage Number Number Percentage
------------------- ------ ---------- ------ ------ ----------
Howard Roth 115,000 3.4% 115,000 0 0
Carol Cohen 15,000 * 15,000 0 0
Laurence Feirstein 15,000 * 15,000 0 0
Myron Sayer 5,000 * 5,000 0 0
Donner Corp.
International 35,000 1.1% 35,000 0 0
C.C.R.I. Corporation 30,000 * 30,000 0 0
Research Wo 15,000 * 15,000 0 0
*Less than 1%.
PLAN OF DISTRIBUTION
No underwriter will be used in connection with the sale of the shares of
common stock registered hereby. The selling stockholder may, from time to time,
sell all or a portion of the shares of common stock on any market upon which the
common stock may be quoted, in privately negotiated transactions or otherwise,
at fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices related to such market prices or at negotiated prices. The
shares of common stock may be sold by the selling stockholder by one or more of
the following methods, without limitation:
<PAGE> 31
o block trades in which the broker or dealer so engaged will attempt to
sell the shares of common stock as agent but may position and resell a portion
of the block as principal to facilitate the transaction;
o purchases by broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this prospectus;
o an exchange distribution in accordance with the rules of such exchange;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
o privately negotiated transactions;
o market sales (both long and short to the extent permitted under the
federal securities laws), and;
o a combination of any such methods of sale.
In effecting sales, brokers and dealers engaged by the selling shareholder
may arrange for other brokers or dealers to participate. Brokers or dealers may
receive commissions or discounts from the selling shareholder (or, if any such
broker-dealer acts as agent for the purchaser of such shares, from such
purchaser) in amounts to be negotiated and which are not expected to exceed
those customary in the types of transactions involved. Broker-dealers may agree
with the selling shareholder to sell a specified number of such shares of common
stock at a stipulated price per share, and, to the extent such broker-dealer is
unable to do so acting as agent for the selling shareholder, to purchase as
principal any unsold shares of common stock at the price required to fulfill the
broker-dealer commitment to the selling shareholders. Broker-dealers who acquire
shares of common stock as principal may thereafter resell those shares of common
stock from time to time in transactions (which may involve block transactions
and sales to and through other broker-dealers, including transactions of the
nature described above) on the American Stock Exchange or otherwise at prices
and on terms then prevailing at the time of sale, at prices then related to the
then-current market price or in negotiated transactions and, in connection with
such resales, may pay to or receive from the purchasers of such shares of common
stock commissions as described above.
From time to time, the selling stockholder may pledge its shares of common
stock under the margin provisions of customer agreements. Upon default by the
selling stockholder, the broker may offer and sell the pledged shares of common
stock from time to time. Upon sales of the shares of common stock, the selling
stockholder intend to comply with the prospectus delivery requirements, under
the Securities Act, by delivering a prospectus to each purchaser in the
transaction. We intend to file any amendments or other necessary documents in
compliance with the Securities Act which may be required in the event a selling
stockholder defaults under any customer agreement with brokers.
To the extent required under the Securities Act, a supplemental prospectus
will be filed, disclosing, the name of any broker-dealers, the number of shares
of common stock involved, the price at which the common stock is to be sold, the
commissions paid or discounts or concessions allowed to such broker-dealers,
where applicable, that such broker-dealers did not conduct any investigation to
verify the information set out or incorporated by reference in this prospectus,
as supplemented, and other facts material to the transaction.
<PAGE> 32
We and the selling stockholder will be subject to applicable provisions of
the Exchange Act and the rules and regulations under it, including, without
limitation, Rule 10b-5 and, insofar as the selling stockholders are distribution
participants and we, under certain circumstances, may be a distribution
participant, under Regulation M of the Exchange Act. All of the foregoing may
affect the marketability of the common stock.
DESCRIPTION OF SECURITIES
We are authorized to issue up to 10,000,000 shares of common stock, no par
value, and 2,000,000 shares of preferred stock, no par value. As of September
30, 2000, there were 3,255,570 shares of common stock outstanding and no shares
of preferred stock outstanding.
Common Stock
Each shareholder is entitled to one vote for each share of common stock
held on all matters submitted to a vote of shareholders. Each holder of common
stock has the right to cumulate his votes, which means each share shall have the
number of votes equal to the number of directors to be elected and all of which
votes may be cast for any one nominee. Subject to such preferences as may apply
to any preferred stock outstanding at the time, the holders of outstanding
shares of common stock are entitled to receive dividends out of assets legally
available therefor at such times and in such amounts as the board of directors
may from time to time determine. The common stock is not entitled to preemptive
rights and is not subject to conversion or redemption. Upon the liquidation,
dissolution, or winding up of the company, the holders of common stock and any
participating preferred stock outstanding at that time would be entitled to
share ratably in all assets remaining after the payment of liabilities and the
payment of any liquidation preferences with respect to any outstanding preferred
stock. Each outstanding share of common stock now is, and all shares of common
stock that will be outstanding will be, fully paid and non-assessable.
Preferred Stock
The board of directors is authorized, subject to any limitations prescribed
by California law, to provide for the issuance of shares of common stock in one
or more series, to establish from time to time the number of shares to be
included in each such series, to fix the powers, designations, preferences and
rights of the share of each wholly unissued series and any qualifications,
limitations, or restrictions thereon, and to increase or decrease the number of
shares of any such series (but not below the number of shares of such series
then outstanding) without any further vote or action by the shareholders. The
board of directors may authorize the issuance of preferred stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of common stock. Thus, the issuance of preferred stock may have
the effect of delaying, deterring, or preventing a change in control of the
company. We have no current plans to issue any shares of preferred stock.
Options
At September 30, 2000, we have 931,605 shares of common stock subject to
outstanding options with exercise prices ranging from $.50 to $6.25 per share.
<PAGE> 33
Warrants
As of September 30, 2000, in addition to the underwriter's warrants, we had
outstanding warrants to purchase 30,000 shares of common stock at $7.00 per
share, warrants to purchase 15,000 shares of common stock at $6.75 per share,
and warrants to purchase 5,000 shares of common stock at $3.38 per share.
EXPERTS
The consolidated balance sheet as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years then ended included in this prospectus have been included
herein in reliance on the report of Hein + Associates LLP, independent certified
public accountants, giving authority of that firm, as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. Our Commission filings
are available to the public over the Internet at the SEC's Website at
http://www.sec.gov. You may also read and copy any document we file at the
Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549, Seven World Trade Center, 13th Floor, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You may contact the
SEC at 1-800-SEC-0330 for further information about the public reference room.
We have filed with the Commission a registration statement on form SB-2
under the Securities Act with respect to the securities offered under this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement, certain items of which are omitted in accordance with the rules and
regulations of the Commission. Statements contained in this prospectus as to the
contents of any contract or other documents are not necessarily complete and in
each instance reference is made to the copy of such contact or documents filed
as an exhibit to the registration statement, each such statement being qualified
in all respects by such reference and the exhibits and schedules thereto. For
further information regarding Digital Power and the securities offered under
this prospectus, we refer you to the registration statement and such exhibits
and schedules which may be obtained from the Commission at its principal office
in Washington, D.C. upon payment of the fees prescribed by the Commission.
<PAGE> F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report............................................... F-2
Consolidated Balance Sheets - December 31, 1999 and
June 30, 2000 (unaudited).................................................. F-3
Consolidated Statements of Operations - For the Years Ended
December 31, 1998 and 1999 and For the Six Months Ended
June 30, 1999 and 2000 (unaudited)......................................... F-4
Consolidated Statement of Stockholders' Equity - For the Years
Ended December 31, 1998 and 1999 and For the Six Months Ended
June 30, 2000 (unaudited).................................................. F-5
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 1998 and 1999 and For the Six Months Ended
June 30, 1999 and 2000 (unaudited)......................................... F-7
Notes to Consolidated Financial Statements................................. F-9
<PAGE> F-2
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Digital Power Corporation and subsidiaries
Fremont, California
We have audited the accompanying consolidated balance sheet of Digital Power
Corporation and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1998 and 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Digital Power
Corporation and subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for the years ended December 31, 1998 and 1999,
in conformity with generally accepted accounting principles.
/s/HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
March 15, 2000
<PAGE> F-3
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
DECEMBER 31, JUNE 30,
1999 2000
--------------------------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 824,708 $ 605,853
Accounts receivable - trade, net of allowance for
doubtful accounts of $210,485 and $210,454 2,813,080 3,211,352
(unaudited)
Income tax refund receivable 70,988 19,556
Other receivables 99,875 125,534
Inventories, net 4,531,261 4,836,375
Prepaid expenses and deposits 61,326 129,280
Deferred income taxes 360,136 360,136
------------- -------------
Total current assets 8,761,374 9,288,086
PROPERTY AND EQUIPMENT, net 1,223,137 1,161,782
EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED, net of
accumulated amortization of $289,926 and $432,428 (unaudited) 1,162,264 1,019,762
DEPOSITS 14,058 13,909
------------- -------------
TOTAL ASSETS $ 11,160,833 $ 11,483,539
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 940,000 $ 940,000
Current portion of capital lease obligations 43,646 43,877
Accounts payable 1,196,170 1,456,549
Accrued liabilities 1,213,641 1,370,897
------------- -------------
Total current liabilities 3,393,457 3,811,323
CAPITAL LEASE OBLIGATIONS, less current portion 80,825 63,546
OTHER LONG-TERM LIABILITIES 25,000 -
DEFERRED INCOME TAXES 9,344 9,344
------------- -------------
Total liabilities 3,508,626 3,884,213
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 12)
STOCKHOLDERS' EQUITY:
Preferred stock issuable in series, no par value,
2,000,000 shares authorized, no shares issued and - -
outstanding.
Common stock, no par value, 10,000,000 shares authorized,
2,771,435 and 2,812,435 (unaudited) shares issued and
outstanding, respectively 9,012,679 9,091,348
Additional paid-in capital 331,310 279,110
Accumulated deficit (1,832,337) (1,724,964)
Note receivable - stockholder (52,200) -
Accumulated other comprehensive income (loss) 192,755 (46,168)
------------- -------------
Total stockholders' equity 7,652,207 7,599,326
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,160,833 $ 11,483,539
============= =============
</TABLE>
<PAGE> F-4
<TABLE>
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<S> <C> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------------- ---------------------------------
1998 1999 1999 2000
--------------- --------------- ---------------------------------
(unaudited) (unaudited)
REVENUES $ 18,733,470 $ 15,354,018 $ 7,549,411 $ 8,525,708
COST OF GOODS SOLD 14,778,103 11,277,170 5,763,266 6,016,381
------------- ------------- ------------- -------------
Gross margin 3,955,367 4,076,848 1,786,145 2,509,327
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Research and development 1,397,816 952,690 431,282 549,912
Marketing and selling 1,561,803 1,159,323 597,984 703,642
General and administrative 1,572,318 1,644,170 715,474 973,687
------------- ------------- ------------- -------------
Total operating expenses 4,531,937 3,756,183 1,744,740 2,227,241
------------- ------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS (576,570) 320,665 41,405 282,086
-------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 16,074 30,935 7,508 9,460
Interest expense (236,968) (178,343) (98,888) (50,784)
Translation loss (37,771) (6,236) (6,260) (4,957)
Gain (loss) on disposal of assets 6,647 (16,830) - 1,568
------------- -------------- ------------- -------------
Other income (expense) (252,018) (170,474) (97,640) (44,713)
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES (828,588) 150,191 (56,235) 237,373
PROVISION FOR INCOME TAX (BENEFIT)
EXPENSE (258,000) 123,000 38,800 130,000
-------------- ------------- ------------- -------------
NET INCOME (LOSS) $ (570,588) $ 27,191 $ (95,035) $ 107,373
============== ============= ============= =============
NET INCOME (LOSS) PER COMMON SHARE:
Basic net income (loss) per share $ (.21) $ .01 $ (0.03) $ 0.04
============== ============== =============== =============
Diluted net income (loss) per $ (.21) $ .01 $ (0.03) $ 0.03
============== ============== =============== =============
share
</TABLE>
See accompanying notes to these consolidated financial statements.
<PAGE> F-5
<TABLE>
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 and 1999 and FOR THE SIX MONTHS ENDED JUNE 30, 2000 (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACCUMULATED
COMMON STOCK ADDITIONAL NOTE OTHER TOTAL
--------------------- PAID-IN ACCUMULATED ESOP RECEIVALBE- COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT SHARES STOCKHOLDER INCOME (LOSS) EQUITY
--------- ---------- -------- ------------ ---------- ----------- ------------- ------------
BALANCES, January 1, 1998 2,694,485 $8,856,489 $233,762 $(1,288,940) $(325,423) $ - $196,828 $7,672,716
Exercise of stock options 35,750 64,350 - - - - - 64,350
Exercise of warrants 6,200 31,684 (684) - - - - 31,000
Stock issued for legal
settlement 35,000 60,156 - - - - - 60,156
Contribution to ESOP - - - - 140,504 - - 140,504
Compensation recognized
upon issuance of
warrants - - 46,032 - - - - 46,032
Comprehensive loss:
Net loss - - - (570,588) - - - -
Income tax benefit
arising from
the exercise of employee
options stock - - - - - - 38,366 -
Foreign currency
translation adjustment - - - - - - 36,234 -
Total comprehensive loss - - - - - - - (495,988)
---------
BALANCES, December 31, 1998 2,771,435 9,012,679 279,110 (1,859,528) (184,919) - 271,428 7,518,770
Contribution to ESOP - - - - 184,919 - - 184,919
Note receivable for
common stock - - 52,200 - - (52,200) - -
(Continued)
<PAGE> F-6
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 and 1999 and FOR THE SIX MONTHS ENDED JUNE 30, 2000(unaudited)
(Continued)
ACCUMULATED
COMMON STOCK ADDITIONAL NOTE OTHER TOTAL
--------------------- PAID-IN ACCUMULATED ESOP RECEIVALBE- COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT SHARES STOCKHOLDER INCOME (LOSS) EQUITY
--------- ---------- -------- ------------ ---------- ----------- ------------- ------------
Comprehensive income:
Net income - $ - $ - $ 27,191 $ - $ - $ - $ -
Foreign currency
translation adjustment - - - - - - (78,673) -
Total comprehensive loss - - - - - - - (51,482)
--------
BALANCES, December 31, 1999 2,771,435 9,012,679 331,310 (1,832,337) - (52,200) 192,755 7,652,207
Exercise of stock
options (unaudited) 41,000 78,669 (52,200) - - 52,200 - 78,669
Comprehensive loss:
Net income (unaudited) - - - 107,373 - - - -
Foreign currency
translation adjustment
(unaudited) - - - - - - (238,923) -
Total comprehensive loss
(unaudited) - - - - - - - (131,550)
--------- ---------- -------- ------------ ---------- ----------- ------------- ------------
BALANCES, June 30, 2000
(unaudited) 2,812,435 $9,091,348 $279,110 $(1,724,964) $ - $ - $(46,168) $7,599,326
========= ========== ======== ============ ========== =========== ============= ============
See accompanying notes to these consolidated financial statements.
</TABLE>
<PAGE> F-7
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C> <C>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------------- ---------------------------------
1998 1999 1999 2000
--------------- -------------- --------------- ----------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (570,588) $ 27,191 $ (95,035) $ 107,373
Adjustments to reconcile net
income(loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 423,655 500,691 267,816 311,551
(Gain) loss on disposal of assets (6,647) 16,830 - (1,568)
Deferred income taxes (287,927) 8,813 - -
Warranty expense 140,000 (110,000) - (17,915)
Inventory obsolescence reserve 230,000 30,000 - (29,312)
Contribution to ESOP 140,504 184,919 46,003 -
Bad debt expense 50,000 35,547 - (31)
Compensation cost recognized upon
issuance of warrants 46,033 - - -
Income tax benefit related to
exercise of stock options 38,366 - - -
Foreign currency translation
adjustment 37,771 6,236 6,260 4,957
Stock issued for legal settlement 60,156 - - -
Changes in operating assets and
liabilities:
Accounts receivable 614,453 711,411 426,025 (398,241)
Income tax refund receivable (392,646) 321,658 215,917 51,432
Other receivables 173,507 3,167 (48,945) (25,659)
Inventories 434,597 303,259 454,976 (287,199)
Prepaid expenses and deposits 50,455 20,671 (87,166) (67,805)
Accounts payable (1,950,562) (50,685) 314,872 260,380
Accrued liabilities 743,896 (271,457) (341,975) 186,568
Other long-term liabilities 35,043 (10,043) 19,957 (25,000)
--------- --------- --------- ---------
Net cash provided by operating
activities 10,066 1,728,208 1,178,705 69,531
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Gresham Power
Electronics (3,370,293) - - -
Purchase of property and equipment (156,707) (168,042) (37,234) (140,609)
Proceeds from sale of assets 26,414 6,146 - 34,482
--------- --------- --------- ---------
Net cash used in investing
activities (3,500,586) (161,896) (37,234) (106,127)
--------- --------- --------- ---------
(Continued)
<PAGE> F-8
DIGITAL POWER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------------- --------------------------------
1998 1999 1999 2000
--------------- -------------- --------------- ---------------
(unaudited) (unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock
options and warrants 95,350 - - 78,669
Principal payments on long-term
debt (140,504) (184,919) (46,002) -
Principal payments on capital
lease obligations (7,310) (72,537) (19,637) (17,048)
Proceeds from notes payable 2,366,846 - - -
Principal payments on notes payable (160,000) (1,266,846) (677,209) -
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities 2,154,382 (1,524,302) (742,848) 61,621
--------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,537) (84,909) (175,938) (243,880)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,337,675) (42,899) 222,685 (218,855)
CASH AND CASH EQUIVALENTS, beginning
of period 2,205,282 867,607 867,607 824,708
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of
period $ 867,607 $ 824,708 $ 1,090,292 $ 605,853
=========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Interest $ 233,982 $ 277,935 $ 99,807 $ 50,328
============= ============= =========== ===========
Income taxes $ 289,872 $ 117,494 $ 36,997 $ -
============= ============= =========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of equipment through
capital leases $ 166,396 $ 19,720 $ - $ -
============= ============= =========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
<PAGE> F-9
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
1 ORGANIZATION AND NATURE OF OPERATIONS:
-------------------------------------
Digital Power Corporation ("DPC"), a California corporation, and its wholly
owned subsidiaries, Poder Digital, S.A. de C.V. ("PD"), located in
Guadalajara, Mexico, and Digital Power Limited ("DPL"), located in the
United Kingdom, are engaged in the design, manufacture and sale of
switching power supplies. DPC, PD, and DPL are collectively referred to as
the "Company".
2 SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------
Principles of Consolidation - The consolidated financial statements include
the accounts of DPC and its wholly owned subsidiaries, DP and DPL. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Statements of Cash Flows - For purposes of the statements of cash flows,
the Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market.
Property and Equipment - Property and equipment are stated at cost.
Depreciation of equipment and furniture is calculated using the
straight-line method over the estimated useful lives (ranging from 5 to 10
years) of the respective assets. Leasehold improvements are amortized over
the shorter of their estimated useful life or the term of the lease. The
cost of normal maintenance and repairs is charged to operations as
incurred. Material expenditures that increase the life of an asset are
capitalized and depreciated over the estimated remaining useful life of the
asset. The cost of fixed assets sold, or otherwise disposed of, and the
related accumulated depreciation or amortization are removed from the
accounts, and any resulting gains or losses are reflected in current
operations.
Excess of Purchase Price Over Net Assets Acquired - Excess of purchase
price over net assets acquired ("Goodwill") represents the purchase price
in excess of the fair value of the net assets of the acquired business and
is being amortized using the straight-line method over its estimated useful
life of ten years.
Income Taxes - The Company accounts for income taxes under the liability
method which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included
in the financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
Revenue Recognition - Sales revenue is recognized when the products are
shipped to customers, including distributors. Customers receive a one or
two-year product warranty and certain sales to distributors are subject to
a limited right of return. At the same time sales revenue is recognized,
the Company provides a reserve for estimated warranty costs and a reserve
for estimated product returns.
<PAGE> F-10
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
Research and Development Costs - Research and development costs are charged
to operations in the period incurred.
Foreign Currency Translation - Gains and losses from the effects of
exchange rate fluctuations on transactions denominated in foreign
currencies are included in the results of operations. Assets and
liabilities of the Company's foreign subsidiaries are translated into U.S.
dollars at year-end exchange rates. Income and expense items are translated
at average exchange rates prevailing during the year. The resulting
translation adjustment for DPL is recorded as a component of accumulated
other comprehensive income, a component of stockholders equity. Because PD
operates in a country with a highly inflationary economy, any translation
adjustment related to PD is included in the results of operations.
Earnings Per Share - Basic earnings per share excludes dilution and is
computed by dividing income (loss) available to common stockholders by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity. Common stock equivalents
for the year ended December 31, 1998 were anti-dilutive and excluded from
the earnings per share computation.
Use of Estimates - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
requires the Company's management to make estimates and assumptions that
affect the amounts reported in these consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
The Company's consolidated financial statements are based upon a number of
significant estimates, including the allowance for doubtful accounts,
technological obsolescence of inventories, the estimated useful lives
selected for property and equipment and goodwill, realizability of deferred
tax assets, allowance for sales returns, and warranty reserve. Due to the
uncertainties inherent in the estimation process, it is at least reasonably
possible that these estimates will be further revised in the near term and
such revisions could be material.
Impairment of Long-Lived Assets - In the event that facts and circumstances
indicate that the cost of long lived assets may be impaired, an evaluation
of recoverability would be performed. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down to
market value or discounted cash flow value is required.
Stock Based Compensation - The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB25) and related interpretations in accounting for its employee stock
options. In accordance with FASB Statement No. 123 "Accounting for
Stock-Based Compensation" (FASB123), the Company will disclose the impact
of adopting the fair value accounting of employee stock options.
Transactions in equity instruments with non-employees for goods or services
have been accounted for using the fair value method as prescribed by
FASB123.
<PAGE> F-11
Concentrations of Credit Risk - Credit risk represents the accounting loss
that would be recognized at the reporting date if counterparties failed
completely to perform as contracted. Concentrations of credit risk (whether
on or off balance sheet) that arise from financial instruments exist for
groups of customers or counterparties when they have similar economic
characteristics that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic or other
conditions described below. In accordance with FASB Statement No. 105,
"Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk," financial instruments that subject the Company to credit risk
consist of cash balances maintained in excess of federal depository
insurance limits and accounts and notes receivable, which have no
collateral or security. See Note 13 for major customers.
Fair Value of Financial Instruments - The estimated fair values for
financial instruments under FAS No. 107, "Disclosures about Fair Value of
Financial Instruments", are determined at discrete points in time based on
relevant market information. These estimates involve uncertainties and
cannot be determined with precision. The fair value of cash is based on its
demand value, which is equal to its carrying value. The fair values of
notes payable are based on borrowing rates that are available to the
Company for loans with similar terms, collateral, and maturity. The
estimated fair values of notes payable approximate their carrying values.
Comprehensive Income - The Company has adopted the Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (FASB130). FASB130 defines comprehensive
income as all changes in stockholders' equity exclusive of transactions
with owners, such as capital investments. Comprehensive income includes net
income or loss and changes in certain assets and liabilities that are
reported directly in equity, such as, translation adjustments on
investments in foreign subsidiaries, difference in the recognition of
compensation expense for books versus tax for employee stock options, and
certain changes in minimum pension liabilities.
Impact of Recently Issued Standards - In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities,"(FASB133). FASB133 requires that an entity recognize all
derivatives as assets or liabilities in the statement of financial position
and measure those instruments at fair value. This statement was amended by
Statement of Financial Accounting Standards No. 137, issued in June 1999,
such that it is effective for the Company's financial statements for the
year ending December 31, 2001. The Company does not believe the adoption of
FASB133 will have a material impact on assets, liabilities or equity. The
Company has not yet determined the impact of FASB133 on the income
statement or the impact on comprehensive income.
In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin 101 (SAB 101) "Revenue Recognition in Financial
Statements". SAB 101 establishes guidelines in applying generally accepted
accounting principles to the recognition of revenue in financial statements
based on the following four criteria: persuasive evidence that an
arrangement exists, delivery has occurred or services have been rendered,
the seller's price to the buyer is fixed or determinable, and
collectibility is reasonably assured. SAB 101, as amended by SAB 101A and
SAB 101B, is effective no later than the fourth fiscal quarter of the
fiscal years beginning after December 15, 1999, except that registrants
with fiscal years that begin between December 16, 1999 and March 15, 2000,
may report any resulting change in accounting principle no later than their
second fiscal quarter of the fiscal year beginning after December 15, 1999.
The Company does not believe that the adoption of SAB 101 will have a
material effect on its financial position or result of operations.
<PAGE> F-12
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
Interim Financial Information - The June 30, 1999 and 2000 financial
statements have been prepared by the Company without audit. In the opinion
of management, the accompanying financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary for a
fair presentation of the Company's financial position as of June 30, 2000
and the results of operations and cash flows for the six months ended June
30, 1999 and 2000. The results of operations for the six month periods
ended June 30, 2000 are not necessarily indicative of those that will be
obtained for the entire fiscal year.
3. INVENTORIES:
-----------
Inventories consists of the following as of:
DECEMBER 31, JUNE 30,
1999 2000
--------------- ---------------
Raw materials $ 4,017,991 $ 4,346,713
Work-in-process 699,490 948,226
Finished goods 485,430 195,171
------------- -------------
Allowance for obsolescence (671,650) (653,735)
------------- -------------
$ 4,531,261 $ 4,836,375
============= =============
4. PROPERTY AND EQUIPMENT:
----------------------
Property and equipment consist of the following as of:
DECEMBER 31, JUNE 30,
1999 2000
--------------- ---------------
Machinery and equipment $ 1,375,563 $ 1,439,532
Office equipment and furniture 838,311 856,070
Leasehold improvements 518,586 510,054
Transportation equipment 136,655 127,729
------------- -------------
2,869,115 2,933,385
------------- -------------
Less: Accumulated depreciation
and amortization (1,645,978) (1,771,603)
------------- -------------
$ 1,223,137 $ 1,161,782
============= =============
<PAGE> F-13
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
5. ACCRUED LIABILITIES:
-------------------
Accrued liabilities consist of the following as of:
DECEMBER 31, JUNE 30,
1999 2000
--------------- ---------------
Accrued payroll and benefits $ 176,167 $ 243,994
Accrued commissions and royalties 78,383 99,130
Accrued warranty and product
return expense 272,782 211,643
Income taxes payable 207,358 190,443
Accrued legal and professional fees 168,042 213,887
Other 310,909 411,800
------------- -------------
$ 1,213,641 $ 1,370,897
============= =============
6. NOTES PAYABLE :
-------------
DPC has a $3,000,000 line of credit pursuant to a promissory note
agreement. The line of credit agreement provides for borrowings up to 80%
of eligible accounts receivable, plus 20% of inventory or $500,000,
whichever is less, not to exceed a total of $3,000,000. Borrowing under
this line of credit bears interest based upon an index equal to the
lender's prime rate (totaling 8.50% at December 31, 1999), payable monthly
with outstanding principal due on demand. If no demand is made, the
outstanding principal and unpaid accrued interest is due September 15,
2001. At December 31, 1999 and June 30, 2000, the outstanding principal
balance was $940,000. Under the terms of the agreement, the Company is
required to maintain certain ratios and be in compliance with other
covenants. At December 31, 1999 the Company was in compliance with all
covenants.
DPL has a $800,000 line of credit pursuant to a loan agreement. Borrowing
under this line of credit bears interest at 2% per annum over the Bank's
Base rate (totaling 9.5% at December 31, 1999), payable monthly with
outstanding principal due on demand. If no demand is made, the outstanding
principal and accrued interest is due March 31, 2001. The loan is
collateralized by substantially all of the DPL's assets. At December 31,
1999 and June 30, 2000, no principal or accrued interest was outstanding.
Under the terms of the agreement, if borrowings exist under this line of
credit, the Company is required to maintain certain ratios and be in
compliance with other covenants.
7. CAPITAL LEASE OBLIGATIONS:
-------------------------
The Company leases certain equipment and vehicles under agreements
classified as capital leases. The cost of assets under capital leases is
$181,484 with accumulated depreciation amounts of $48,701 and $78,245 at
December 31, 1999 and June 30, 2000, respectively.
<PAGE> F-14
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
The future minimum lease payments, as of December 31, 1999, are as follows:
YEARS ENDING
DECEMBER 31, AMOUNT
------------ -------------
2000 $ 48,732
2001 43,412
2002 27,792
2003 13,896
--------
Total future minimum lease payments 133,832
Less amount representing interest (9,361)
--------
Present value of net minimum lease payments 124,471
Less Current portion (43,646)
--------
$ 80,825
========
8. PREFERRED STOCK:
---------------
The preferred stock has one series authorized, 500,000 shares of Series A
cumulative redeemable convertible preferred stock ("Series A"), and an
additional 1,500,000 shares of preferred stock has been authorized, but the
rights, preferences, privileges and restrictions on these shares has not
been determined. DPC's Board of Directors is authorized to create new
series of preferred stock and fix the number of shares as well as the
rights, preferences, privileges and restrictions granted to or imposed upon
any series of preferred stock.
9. NOTE RECEIVABLE - STOCKHOLDER:
-----------------------------
At December 31, 1999, the Company had a note receivable in the amount of
$52,200 due from a former employee received in consideration for the
exercise of stock options. The note bears interest at 5% and was paid in
full in February 2000.
10. STOCK OPTIONS AND WARRANTS:
--------------------------
Stock Options - In May 1996, the Company adopted the 1996 Stock Option Plan
covering 513,000 shares. Under the plan, the Company can issue either
incentive or non-statutory stock options. The price of the options granted
pursuant to the plan will not be less than 100% of the fair market value of
the shares on the date of grant. The compensation committee of the board of
directors will decide the vesting period of the options, if any, and no
option will be exercisable after ten years from the date granted.
<PAGE> F-15
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
The Company granted 100,000 non-qualified options to purchase the Company's
stock to the president of the Company in each of the years ended December
31, 1997 and 1998, in accordance with his employment agreement. The
exercise prices of $5.4375 and $6.6875 per share in 1997 and 1998,
respectively, were equal to the fair market value on the dates of grant.
Such options vested immediately and expire in 2007 and 2008, respectively.
On November 5, 1998, these options were repriced to $2.3125, which was
equal to the fair market value on that date.
During the year ended December 31, 1999, the Company issued 100,000
non-qualified options to purchase the Company's stock to the president of
the Company, in accordance with his employment agreement. The exercise
price of $1.8750 per share was equal to the fair market value on the date
of grant. Such options vested immediately and expire in 2009.
During the six month period ended June 30, 2000, the Company issued 100,000
non-qualified options to purchase the Company's stock to the president of
the Company, in accordance with his employment agreement. The exercise
price of $1.5625 per share was equal to the fair market value on the date
of grant. Such options vested immediately and expire in 2010.
During the years ended December 31, 1998 and 1999, the Company granted
non-qualified options under the 1998 plan of 60,000 and 30,000 options,
respectively, to purchase the Company's stock to outside directors. The
exercise prices range from $1.93 to $6.25 per share, which was equal to the
fair value on the date of grant. The options vest after one year.
In February 1998, the Company adopted the 1998 Stock Option Plan covering
240,000 shares. Under the plan, the Company can issue either incentive or
non-qualified stock options. The exercise price of the options granted
pursuant to the plan will not be less than 100% of the fair market value of
the shares on the grant date. The compensation committee of the Board of
Directors will determine the vesting period of the options, if any, and no
options will be exercisable after ten years from the date of grant.
During the year ended December 31, 1998, the Company granted 254,000
options to purchase the Company's stock under the 1996 Stock Option Plan to
certain employees. The exercise prices range from $4.00 to $6.1250 per
share, which was equal to the fair market value on the date of grant. The
options vest over 5 years at 25% per year starting in the second year. On
November 5, 1998, the options were repriced to the current fair market
value of $2.3125 per share.
During the year ended December 31, 1998, the Company granted 124,940
options to purchase the Company's stock under the 1998 Stock Option Plan to
certain employees. The exercise price of the options is $6.25 per share,
which was equal to the fair market value on the date of grant. The options
vest over 5 years at 25% per year starting in the second year. On November
5, 1998, the options were repriced to the current fair market value of
$2.3125 per share.
During the year ended December 31, 1999, the Company granted 70,000 options
to purchase the Company's stock under the 1996 Stock Option Plan to certain
employees. The exercise prices range from $1.6875 to $2.00 per share, which
was equal to the fair market value on the date of grant. The options vest
over 5 years at 25% per year starting in the second year.
During the year ended December 31, 1999, the Company granted 11,900 options
to purchase the Company's stock under the 1998 Stock Option Plan to certain
employees. The exercise prices of the
<PAGE> F-16
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
options ranges from $1.5625 to $1.8750 per share, which was equal to the
fair market value on the date of grant. The options vest over 5 years at
25% per year starting in the second year.
During the period ended June 30, 2000, the Company granted 243,000 options
to purchase the Company's stock under the 1998 Stock Option Plan to certain
employees. The exercise price of the options rages from $1.5625 to $2.3750
per share which was equal to the fair market value on the date of grant.
The options vest over 5 years at 25% per year starting in the second year.
The following table sets forth activity for all options:
AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
-------------- -----------------
OUTSTANDING, January 1, 1998 652,900 $ 2.41
Granted 548,940 2.74
Forfeited (100,160) 2.85
Exercised (35,750) 1.80
--------- ---------
OUTSTANDING, December 31, 1998 1,065,930 2.19
Granted 211,900 1.90
Forfeited (194,200) 2.42
--------- ---------
OUTSTANDING, December 31, 1999 1,083,630 2.09
Granted 343,000 1.65
Forfeited (8,295) 2.11
Exercise (41,000) 1.92
--------- ---------
OUTSTANDING, June 30, 2000 1,377,335 $ 2.09
--------- ---------
At December 31, 1999 and June 30, 2000, options to purchase 40,000 shares,
with a weighted average exercise price of $6.06, were exercisable at prices
ranging from $6.00 to $6.25 per share.
At December 31, 1999 and June 30, 2000, options to purchase 1,043,630 and
1,337,335 shares, respectively, were outstanding with exercise prices
ranging from $.50 to $2.31 per share, a weighted average exercise price of
$1.94 and $1.97, and a weighted average remaining contractual life of 7.17
and 8.05 years, respectively. Of the outstanding options at June 30, 2000,
860,939 options were excisable at a weighted average exercise price of
$1.95 with the remaining 476,396 unvested options exercisable as follows:
<PAGE> F-17
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
WEIGHTED
NUMBER OF AVERAGE
YEAR ENDING JUNE 30, SHARES EXERCISE PRICE
-------------------- ----------------- -----------------
2000 39,839 $2.22
2001 140,421 2.23
2002 146,318 2.23
2003 79,630 2.18
2004 70,188 2.21
------- -----
476,396 $2.22
======= =====
If not previously exercised the outstanding options, with a weighted
average contractual life of 8.10 years will expire as follows:
WEIGHTED
NUMBER OF AVERAGE
YEAR ENDING JUNE 30, SHARES EXERCISE PRICE
------------------------ ----------------- -----------------
2003 247,650 $1.40
2006 192,000 2.07
2007 106,000 2.31
2008 280,580 2.53
2009 343,105 2.34
2010 208,000 2.37
--------- -----
1,377,335 $2.09
========= =====
Warrants - In January 1998, the Company issued warrants to purchase 30,000
shares of common stock at $7.00 per share granted, to an investor relations
firm for services provided. Compensation expense of $46,032 was recognized
upon issuance of the warrants. The warrants are immediately exercisable and
expire in January 2001.
The following represents all activity that took place for warrants issued:
AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
------------- --------------
OUTSTANDING, January 1, 1998 814,290 $5.02
Granted 30,000 7.00
Exercised (6,200) 5.00
------- -----
OUTSTANDING, December 31, 1998 838,090 5.09
Expired (643,090) 5.00
------- -----
OUTSTANDING, December 31, 1999 195,000 5.38
Expired - -
------- -----
OUTSTANDING, June 30, 2000 195,000 $5.38
======= =====
<PAGE> F-18
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
As stated in Note 2, the Company has not adopted the fair value accounting
prescribed by FASB123 for employees. Had compensation cost for stock
options or warrants issued to employees been determined based on the fair
value at grant date for awards in 1998 and 1999, consistent with the
provisions of FASB123, the Company's net income (loss) and net income
(loss) per share would have been reduced to the proforma amounts indicated
below:
<TABLE>
<S> <C> <C> <C> <C>
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1998 1999 1999 2000
------------ ------------ ------------ ------------
(unaudited) (unaudited)
Net loss $(1,472,681) $ (326,681) $ (161,221) $ (58,727)
============ ============ ============ ============
Net loss per common share:
Basic and diluted $ (0.54) $ (0.12) $ (0.06) $ (0.02)
======== ======== ======== ========
</TABLE>
The fair value of each option or warrant was estimated on the date of grant
using the using the Black-Scholes option pricing model using the following
assumptions: average risk-free interest rates ranging from 4.6% to 5.6%,
expected life of two years, dividend yield of 0%; and expected volatility
ranging from 55.0% to 56.8%. The weighted-average fair value of the options
on the grant date for the years ended December 31, 1998 and 1999 and the
six months ended June 30, 1999 and 2000 was $2.74, $2.09, $2.31 and $1.79
per share, respectively.
11. NET INCOME (LOSS) PER COMMON SHARE:
----------------------------------
The following represents the calculation of net income (loss) per common
share:
<TABLE>
<S> <C> <C> <C> <C>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1998 1999 1999 2000
------------ ------------ ------------ ------------
BASIC
Net income (loss) applicable to
common shareholders $ (570,588) $ 27,191 $ (95,035) $ 107,373
============ ============ ============ ============
Weighted average number of
common shares 2,726,631 2,771,435 2,771,435 2,794,550
============ ============ ============ ============
Basic earnings (loss) per share $ (0.21) $ 0.01 $ (0.03) $ 0.04
============ ============ ============ ============
DILUTED
Net income (loss) applicable to
common shareholders $ (570,588) $ 27,191 $ (95,035) $ 107,373
============ ============ ============ ============
Weighted average number of
common shares 2,726,631 2,771,435 2,771,435 2,794,550
Common stock equivalent shares
representing shares issuable
upon exercise of stock options - 61,447 - 417,242
Weighted average number of
shares used in calculation of
diluted income (loss) per share 2,726,631 2,832,882 2,771,435 3,211,792
============ ============ ============ ============
Diluted earnings (loss) per
share $ (0.21) $ 0.01 $ (0.03) $ 0.03
============ ============ ============ ============
</TABLE>
<PAGE> F19
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
12. COMMITMENTS:
-----------
LEASES - The Company leases its office space in California, a manufacturing
facility in Guadalajara, Mexico, and the facility and certain equipment in
the UK under operating leases. The total future minimum lease payments, as
of December 31, 1999, are as follows:
YEARS ENDING DECEMBER 31,
2000 $ 275,446
2001 154,643
2002 134,284
2003 129,242
2004 128,820
Thereafter 611,895
-----------
$ 1,434,330
===========
Lease payments on the manufacturing facility in Mexico are to be made in
Mexican Pesos. Lease payments on the facility and equipment in the UK are
to be made in GB pound-sterling. The above schedule was prepared using the
conversion rate in effect at December 31, 1999. Changes in the conversion
rate will have an impact on the Company's required minimum payments and its
operating results.
Rent expense was $243,154 and $253,530 for the years ended December 31,
1998 and 1999, respectively. Rent expense was $166,132 and $160,557 for the
six months ended June 30, 1999 and 2000, respectively.
ROYALTY AGREEMENT - The Company had a royalty agreement with a third party
on various products, and any derivatives from the base design of these
products.
In April 1998, the third party filed a lawsuit against the Company related
to this agreement. This lawsuit was settled in September 1998. In exchange
for the release of all future obligations under the royalty agreement, the
Company agreed to pay $150,000 and issue 35,000 shares of common stock
valued at $60,156. The shares were issued upon the close of the agreement.
The $150,000 is due in installments through June 2000. As of December 31,
1999, the Company had paid $118,000 in installments with the remaining
$32,000 being included in accrued liabilities. The remaining balance due
was paid in full during the six months ended June 30, 2000.
EMPLOYMENT AGREEMENT - The Company has an employment contract with its
President/CEO that terminates on December 31, 2000. The contract provides
for an automatic one-year renewal unless terminated by either the Company
or the employee. Under the terms of the employment contract, he shall serve
as president and chief executive officer of the Company for a salary of
$200,000 per annum. In addition, pursuant to the contract, he shall have
the right to receive on the first business day of each January during the
term of his contract options to acquire 100,000 shares of Common Stock at
the lower of market value per share as of such date or the average per
share bid price for the first six months beginning from the date of grant
of this option. Also, pursuant to the employment contract, in the event
there is a change in control of the Company, the employee shall be paid, in
one payment, the sum of six times the annual base salary for the year
preceding the announcement of the change in control.
Finally, pursuant to the employment contract, in the event of termination
without cause, the employee shall receive in one lump sum an amount equal
to three times the employees base salary for the year preceding the
termination.
<PAGE> F-20
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
13. MAJOR CUSTOMERS:
---------------
The Company frequently sells large quantities of inventory to its
customers. For the year ended December 31, 1998, two customers accounted
for 13% and 10%, respectively, of the Company's net sales. For the year
ended December 31, 1999, two customers each accounted for 11% of the
Company's net sales. At December 31, 1999, approximately $417,000 or 15% of
the Company's net accounts receivable were due from two customers.
14. EMPLOYEE BENEFIT PLANS:
----------------------
401(K) PROFIT SHARING PLAN - The Company has a 401(k) profit sharing plan
(the "Plan") covering substantially all employees of DPC. Eligible
employees may make voluntary contributions to the Plan, which are matched
by the Company at a rate of $.25 for each $1.00 contributed, up to a
maximum of six percent of eligible compensation. The Company can also make
discretionary contributions. The Company made matching contributions to the
Plan of $17,073, $11,400, $5,700 and $6,326 for years ended December 31,
1998 and 1999 and for the six months ended June 30, 1999 and 2000,
respectively. The Board of Directors of DPC elected not to make a
discretionary contribution to the Plan for 1999 or 1998.
The Company's subsidiary DPL, has a group personal pension plan covering
substantially all of its employees. Eligible employees may make voluntary
contributions to the plan. The Company will contribute 7% of the employees
basic annual salary to the plan. Contributions are charged to operations as
incurred. The Company made contributions totaling $50,145, $71,400, $
25,073 and $35,700 to the plan for the years ended December 31, 1998 and
1999 and the six months ended June 30, 1999 and 2000, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN - The Company also has an employee stock
ownership plan (the "ESOP") covering substantially all employees of DPC.
The Company can make discretionary contributions of cash or company stock
(as defined in the ESOP plan document) up to deductible limits prescribed
by the Internal Revenue Code.
Effective June 13, 1996, the ESOP obtained a $500,000 loan guaranteed by
the Company for the purpose of acquiring common stock of the Company from
existing stockholders. The loan bore interest at 8.5% per annum and
required monthly payments of principal and interest of $8,852 through June
2001. Immediately upon the funding of the loan, the ESOP purchased
approximately 154,000 shares of the Company's common stock from existing
shareholders. The Company was required to contribute amounts to the plan to
sufficiently cover the debt payments. Contributions to the plan in 1998 and
1999 were $165,971 and $184,919, respectively. As of December 31, 1999, the
Company has repaid the loan.
<PAGE> F-21
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
15. INCOME TAXES:
------------
Income tax expense (benefit) is comprised of the following:
FOR THE YEARS ENDED
DECEMBER
------------------------------------
1998 1999
----------------- -----------------
Current
Federal $ (32,000) $ (28,000)
State (60,000) 1,000
Foreign 121,000 143,000
---------- ----------
29,000 116,000
---------- ----------
Deferred
Federal (234,000) 2,000
State (53,000) 5,000
Foreign - -
(287,000) 7,000
---------- ----------
$ (258,000) $ 123,000
========== ==========
The components of the net deferred tax asset and liability recognized as of
December 31, 1999 are as follows:
Current deferred tax assets (liabilities):
Accounts receivable, principally due
to allowance for doubtful accounts $ 84,294
Compensated absences, principally due
to accrual for financial reporting purposes 28,113
Accrued commissions 14,725
Inventory reserve 204,714
Warranty reserve 78,273
Stock rotation liability 24,084
Accrued settlement 12,845
Accrued other 10,404
Book compensation for stock options 79,038
Effect of change in tax accounting method (109,599)
UNICAP 23,896
State taxes 272
---------
451,059
Valuation allowance (90,923)
---------
Net current deferred tax asset $ 360,136
=========
Long-term deferred tax assets (liabilities):
Net operating loss carryforwards 7,667
Depreciation (17,011)
---------
Net long-term deferred tax liability $ (9,344)
=========
<PAGE> F-22
Total income tax expense differed from the amounts computed by applying the
U.S. federal statutory tax rates to pre-tax income as follows:
<TABLE>
<S> <C> <C>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------
1998 1999
----------------- -----------------
Total expense (benefit) computed by applying
the U.S. statutory rate (34.0)% 34.0%
Permanent differences .8 2.3
State income taxes (13.5) 3.8
Tax effect resulting from foreign activities 7.4 41.5
Change in valuation allowance 10.8 -
Change in beginning balance of deferred asset (8.2) -
Effect of IRS examination 5.4 -
Other .6 -
----- -----
(30.7%) 81.6%
===== =====
</TABLE>
16. ACCUMULATED OTHER COMPREHENSIVE INCOME BALANCES:
-----------------------------------------------
Accumulated other comprehensive income consists of the following as of June
30, 2000:
<TABLE>
<S> <C> <C> <C>
Total
Compensation Accumulated
Foreign related to Other
Currency exercise of Comprehensive
Translation stock options Income
------------- -------------- ---------------
Balance January 1, 1998 $ - $ 196,828 $ 196,828
Current-period change 36,234 38,366 74,600
--------- ----------- -----------
Balance December 31, 1998 36,234 235,194 271,428
Current-period change (78,673) - (78,673)
--------- ----------- -----------
Balance December 31, 1999 (42,439) 235,194 192,755
Current period change (238,923) - (238,923)
--------- ----------- -----------
Balance, June 30, 2000 $(281,362) $ 235,194 $ (46,168)
========= =========== ===========
</TABLE>
<PAGE> F-23
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
17. SEGMENT REPORTING:
-----------------
The Company has identified its segments based upon its geographic
operations. These segments are represented by each of the Company's
individual legal entities: DPC, PD and DPL. Segment operations are measured
consistent with accounting policies used in these consolidated financial
statements. Segment information is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
December 31, 1998
-----------------
DPC PD DPL Eliminations Totals
-------------- --------------- --------------- -------------- --------------
Revenues $ 11,681,979 $ 49,450 $ 7,002,041 $ - $ 18,733,470
============= ============= ============= ============= =============
Intersegment
Revenues $ 94,223 $ 2,541,720 $ - $ (2,635,943) $ -
============= ============= ============= ============= =============
Interest Income
$ 114,686 $ - $ - $ (98,612) $ 16,074
============= ============= ============= ============= =============
Interest Expense
$ 163,344 $ 3,867 $ 168,369 $ (98,612) $ 236,968
============= ============= ============= ============= =============
Depreciation and
Amortization $ 164,548 $ 26,780 $ 232,327 $ - $ 423,655
============= ============= ============= ============= =============
Income Tax
(Benefit) $ (378,983) $ - $ 120,983 $ - $ (258,000)
============= ============= ============= ============= =============
Net (loss) $ (634,896) $ (52,312) $ 116,620 $ - $ (570,588)
============= ============= ============= ============= =============
Expenditures for
Segment Assets $ 34,182 $ 76,185 $ 212,736 $ - $ 323,103
============= ============= ============= ============= =============
Segment Assets $ 10,999,046 $ 602,425 $ 5,501,699 $ (4,112,351) $ 12,990,819
============= ============= ============= ============= =============
</TABLE>
<PAGE> F-24
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999
-----------------
DPC PD DPL Eliminations Totals
-------------- --------------- --------------- -------------- --------------
Revenues $ 8,864,412 $ 19,989 $ 6,469,617 $ $ 15,354,018
============= ============= ============= ============= =============
Intersegment
Revenues $ 221,138 $ 2,150,000 $ - $ (2,371,138) $ -
============= ============= ============= ============= =============
Interest Income
$ 128,106 $ 3,806 $ 12,936 $ (113,913) $ 30,935
============= ============= ============= ============= =============
Interest Expense
$ 130,173 $ 7,098 $ 154,985 $ (113,913) $ 178,343
============= ============= ============= ============= =============
Depreciation and
Amortization
$ 161,489 $ 49,358 $ 289,844 $ - $ 500,691
============= ============= ============= ============= =============
Income Tax
Expense $ (20,000) $ - $ 143,000 $ - $ 123,000
============== ============= ============= ============= =============
Net Income $ (67,139) $ (76,673) $ 171,003 $ - $ 27,191
============== ============== ============= ============= =============
Expenditures for
Segment Assets $ 42,281 $ 51,687 $ 93,794 $ - $ 187,762
============= ============= ============= ============= =============
Segment Assets $ 9,251,925 $ 829,095 $ 4,924,991 $ (3,845,178) $ 11,160,833
============= ============= ============= ============= =============
</TABLE>
<PAGE> F-25
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
June 30, 1999
-------------
<TABLE>
<S> <C> <C> <C> <C> <C>
DPC PD DPL Eliminations Totals
-------------- --------------- --------------- -------------- --------------
Revenues $ 4,433,281 $ 9,652 $ 3,106,478 $ - $ 7,549,411
============= ============= ============= ============= =============
Intersegment
Revenues $ 100,910 $ 1,040,449 $ - $ (1,141,359) $ -
============= ============= ============= ============= =============
Interest Income $ 62,398 $ 1,599 $ - $ (56,489) $ 7,508
============= ============= ============= ============= =============
Interest Expense $ 68,180 $ 3,189 $ 84,008 $ (56,489) $ 98,888
============= ============= ============= ============= =============
Depreciation and
Amortization $ 74,576 $ 10,266 $ 182,974 $ - $ 267,816
============= ============= ============= ============= =============
Income Tax Expense
(Benefit) $ - $ - $ 38,800 $ - $ 38,800
============= ============= ============= ============= =============
Net (loss) $ (95,169) $ (16,224) $ 16,358 $ - $ (95,035)
============== ============= ============= ============= =============
Expenditures for
Segment Assets $ 10,549 $ - $ 26,685 $ - $ 37,234
============= ============= ============= ============= =============
Segment Assets $ 11,093,732 $ 574,944 $ 4,627,027 $ (4,273,592) $ 12,022,111
============= ============= ============= ============= =============
</TABLE>
<PAGE> F-26
DIGITAL POWER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
June 30, 2000
<TABLE>
<S> <C> <C> <C> <C> <C>
-------------
DPC PD DPL Eliminations Totals
-------------- --------------- --------------- -------------- --------------
Revenues $ 5,772,572 $ 10,004 $ 2,743,132 $ - $ 8,525,708
============= ============= ============= ============= =============
Intersegment
Revenues $ 266,392 $ 1,141,880 $ - $ (1,408,272) $ -
============= ============= ============= ============= =============
Interest Income $ 58,923 $ 1,064 $ 6,273 $ (56,800) $ 9,460
============= ============= ============= ============= =============
Interest Expense $ 43,254 $ 1,256 $ 63,074 $ (56,800) $ 50,784
============= ============= ============= ============= =============
Depreciation and
Amortization $ 79,072 $ 26,348 $ 206,131 $ - $ 311,551
============= ============= ============= ============= =============
Income Tax Expense
(Benefit) $ 130,000 $ - $ - $ - $ 130,000
============= ============= ============= ============= =============
Net income (loss) $ 191,997 $ 3,545 $ (88,169) $ - $ 107,373
============= ============= ============= ============= =============
Expenditures for
Segment Assets $ 97,138 $ 17,124 $ 26,347 $ - $ 140,609
============= ============= ============= ============= =============
Segment Assets $ 11,080,046 $ 827,699 $ 4,461,134 (4,885,340) $ 11,483,539
============= ============= ============= ============= =============
</TABLE>
<PAGE> II-1
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Sections 204 and 317 of the California Corporations Code ("Corporations
Code") permit indemnification of directors, officers, and employees of
corporations under certain conditions subject to certain limitations. Article IV
of the our Amended and Restated Articles of Incorporation ("Articles") provides
that the liability of the directors for monetary damages shall be eliminated to
the fullest extent permissible under California Law. Article V of the our
Articles states that the we may provide indemnification of its agents, including
its officers and directors, for breach of duty to Digital Power in excess of the
indemnification otherwise permitted by Section 317 of the Corporations Code,
subject to the limits set forth in Section 204 of the Corporations Code. Article
VI of the Bylaws provides that the we shall, to the maximum extent and in the
manner permitted in the Corporations Code, indemnify each of its agents,
including its officers and directors, against expenses, judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding arising by reason of the fact any such person is or was our
agent.
Pursuant to Section 317 of the Corporations Code, we are empowered to
indemnify any person who was or is a party or is threatened to be made a party
to any proceeding (other than an action by or in the right of the company to
procure a judgment in its favor) by reason of the fact that such person is or
was an officer, director, employee, or other agent of ours or our subsidiaries,
against expenses, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with such proceeding, if such person acted in
good faith and in a manner such person reasonably believed to be in our best
interests and, in the case of a criminal proceeding, has no reasonable cause to
believe the conduct of such person was unlawful. In addition, we may indemnify,
subject to certain exceptions, any person who was or is a party or is threatened
to be made a party to any threatened, pending, or completed action by or in the
right of the company to procure a judgment in its favor by reason of the fact
that such person is or was an officer, director, employee, or other agent of the
Digital Power or its subsidiaries, against expenses actually and reasonably
incurred by such person in connection with the defense or settlement of such
action if such person acted in good faith and in a manner such person believed
to be in the best interest of the company and its shareholders. We may advance
expenses incurred in defending any proceeding prior to final disposition upon
receipt of an undertaking by the agent to repay that amount if it shall be
determined that the agent is not entitled to indemnification as authorized by
Section 317. In addition, we are permitted to indemnify its agents in excess of
Section 317.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the company
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses payable in connection
with the issuance and distribution of the securities being registered hereunder.
No expenses shall be borne by the Selling Shareholders except for commissions
and expenses related to the sale of their shares. All of the amounts shown are
estimates, except for the SEC and NASD registration fees.
<PAGE> II-2
SEC registration fee * 100
AMEX registration fee * 500
Accounting fees and expenses * 10,000
Legal fees and expenses * 10,000
Transfer agent and registrar fees 500
Fees and expenses for qualification
Miscellaneous * 1,000
==========
TOTAL $ 22,100
*Estimated
Item 26. Recent Sales of Unregistered Securities
On January 1, 1998, we issued warrants to purchase 30,000 shares of common
stock at $7.00 per share to C.C.R.I. for investment relation services. The
Company believes that C.C.R.I. is a sophisticated investor and the issuance was
exempt from registration under Section 4(2) of the 1933 Act. No commissions were
paid.
On October 25, 2000, we issued 5,000 shares of common stock and warrants to
purchase 60,000 shares of common stock at $3.88 per share to C.C.R.I. and Donner
Corp. International for investment relation services. The Company believes that
C.C.R.I. and Donner Corp. International are sophisticated investors and the
issuances were exempt from registration under Section 4(2) of the 1933 Act. No
commissions were paid.
Item 27. 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)
5.1 Opinion of Bartel Eng Linn & Schroder re Legality*
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 1997 Stock Option Plan(1)
10.6 Gresham Power Asset Purchase Agreement(3)
10.7 1998 Stock Option Plan
10.8 Technology Transfer Agreement with KDK Electronics(4)
10.9 Loan Commitment and Letter Agreement(5)
<PAGE> II-3
10.10 Promissory Note(5)
10.11 Employment Agreement with Robert O. Smith(6)
21.1 The Company's subsidiaries consist of Poder Digital S.A. de C.V., a
corporation formed under the laws of Mexico, and Digital Power
Limited, a corporation formed under the laws of the United Kingdom.
23.1 Consent of Hein & Associates LLP
23.2 Consent of Bartel Eng Linn & Schroder is contained in Exhibit 5.1*
27.1 Financial Data Schedule
(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.
* To be filed by amendment.
Item 28. Undertakings
We hereby undertake that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497 (h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
We hereby undertake that we will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value
of securities offered would not exceed that which was
registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in
the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
and
<PAGE> II-4
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each post
effective amendment as a new registration statement of the securities offered
and the offering of the securities at that time to be the initial bona fide
offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
<PAGE> II-5
SIGNATURE
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this registration statement on Form SB-2 and
authorized this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fremont, California on
November , 2000.
DIGITAL POWER CORPORATION,
a California Corporation
/s/ Robert O. Smith
------------------------------
Robert O. Smith,
Chief Executive Officer
In accordance with to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
Signatures Date
---------- ----
/s/ Robert O. Smith October 31, 2000
----------------------------------------
Robert O. Smith, Chief Executive Officer
(Principal Executive Officer)
/s/ Philip G. Swany October 31, 2000
----------------------------------------
Philip G. Swany, Chief Financial Officer
(Principal Accounting and
Financial Officer)
/s/ Robert J. Boschert October 15, 2000
----------------------------------------
Robert J. Boschert, Director
/s/ Scott C. McDonald November 8, 2000
----------------------------------------
Scott C. McDonald, Director
/s/ Thomas W. O'Neil, Jr. November 8, 2000
----------------------------------------
Thomas W. O'Neil, Jr., Director
/s/ Chris Schofield September 12, 2000
----------------------------------------
Chris Schofield, Director
<PAGE> II-6
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form SB-2 of
our report dated March 15, 2000, relating to the consolidated financial
statements of Digital Power Corporation and subsidiary. We also consent to the
reference to our firm under the caption "Experts" in the Prospectus.
/s/ Hein + Associates LLP
Hein + Associates LLP
Certified Public Accountants
Orange, California
November 8, 2000
