August 10, 2005
VIA EDGAR
Brian R. Cascio
Accounting Branch Chief
US Securities and Exchange Commission
Division of Corporation Finance
Mail Stop 6010
100 F Street, N.E.
Washington, D.C. 20549
Re: Digital Power Corporation.
Form 10-K for fiscal year ended December 31, 2004 and
Amendment No.1 Form 10-Q for fiscal quarter March 31, 2005
File No.: 1-12711
Dear Mr. Cascio:
This letter will set forth the Company's responses to the comments of the Staff
of the Securities and Exchange Commission ("SEC") set forth in a letter to
Jonathan Wax Chief Executive Officer of the Company, dated July 19, 2005 (the
"Staff Comments") in connection with the above-referenced filing submissions.
We have repeated your numbered comments below and have provided a
response to each comment.
Form 10-KSB for fiscal 12/31/04 and Amendment No. 1
Management Discussion and Analysis - General page 10
1. Under Item 11 in Amendment No. 1 we read that Telkoor holds 43.2% of your
stock and has a convertible note for an additional 3.7%. In addition, the
Chairman of Telkoor holds 4.4% of your stock and the General Manager holds 1.6%.
In future filings, disclose more details of the relationship with Telkoor and
its significant ownership interest. Tell us whether all the significant related
party transactions are disclosed in the financial statements as required by SFAS
57.
In response to the Staff comments we supplementally advise the staff that we
intend to review and revise our disclosure in future filings to give more
details of the relationships between Telkoor Power Ltd. and its significant
ownership interest in the Company. In addition, we will clarify that all the
significant related party transactions are disclosed in the financial statements
for the period ended December 31, 2004 in Note 10 as required by SFAS 57.
2. As a related matter, please tell and disclose in future filings details
about the accounting for the interest free convertible note disclosed in Note 12
on page F-22, including whether the $1.06 conversion price was at fair value and
how this was determined.
We supplementally advise the Staff that on February 3, 2005, the Company signed
on a $250,000 convertible note ("the Note") agreement with Telkoor Telecom
Ltd.("Telkoor"), a major stockholder in the company. In accordance with the
aforementioned agreement, the Company is obligated to repay Telkoor the amount
of $250,000 on the 10th business day after the release of its financial results
for the year ended December 31, 2005. The conversion price of the Note is $1.06,
which was the quoted market price of the Company's Common stock on the date the
Note was approved and signed. In accordance with the guidelines of APB No. 14,
"Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants",
EITF Issue No. 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios" and EITF Issue
No. 00-27, "Application of issue No. 98-5 to Certain Convertible Instruments",
the Company has determined the date of approving and signing the agreement as
the commitment date and since the conversion price was equal to the market price
of the company's Common stock at that date, the Note had no beneficial
conversion feature.
Financial Statements
Report of Independent Registered Public Accounting Firm, page F-1
3. We note that your audit report was signed by an audit firm based in Tel Aviv,
Israel. Please tell us how you concluded that it is appropriate to have an audit
report issued by an auditor licensed outside of the United States. In accordance
with Article 2 of Regulation S-X, we believe that the audit report of a
registrant (that is not a foreign private issuer) should ordinarily be rendered
by an auditor licensed in the United States. Further, guidance may be found in
Section 5.K of "International Reporting and Disclosure Issues in the Division of
Corporation Finance" on the Commission's website at:
http://www.sec.gov/divisions/corpfin/internal/cfindissues1104.htm#p442_68217.
Please tell us (1) where the majority of your revenues are earned, (2) where the
majority of your assets are located, (3) where your management and accounting
records are located and (4) where the majority of the audit work is conducted.
We may have further comments.
The Company supplementally advises the Staff that Rule 2-01 to Regulation S-X
requires that an independent accountant be licensed and in good standing under
the laws of the place of the accountant's residence or principal office. The
rule is silent as to whether or not the state or country of where the accountant
is licensed must coincide with the location of the registrant's corporate
offices or place where the registrant conducts its principal operations. The
Staff interprets Rule 2-01 to Regulation S-X to require the audit report on a
domestic registrant's financial statements to be rendered by an auditor licensed
in the United States.
In response to the Staff comment we supplementally advise the staff that, we
have considered the Staff's views on "Location of Auditors" as described in
Section 5.K of "International Reporting and Disclosure Issues in the Division of
Corporation Finance".
The following is the necessary financial information required by the Staff's
release on "Location of Auditors" (as of December 31, 2004 and March 31, 2005):
o Revenues - 56% and 50% of the Company's revenues as of December 31,
2004 and March 31, 2005, respectively derived outside the US (i.e. -
the UK subsidiary).
o Assets - 64% and 61% of the Company's assets as of December 31, 2005
and March 31, 2005 are located outside the US (i.e. - the UK
subsidiary).
o Accounting records - Each of the entities, the US and the UK subsidiary
keeps its own accounting records.
o Management - The Company's CEO and CFO resides in the US while the
Chairman of the Board of Directors, and a majority of the Board of
Directors, which also actively participates in strategic decisions
are based in Israel as well as the controlling shareholder (more than
40%), Telkoor.
o Audit work - The audit field work of the Company is conducted in the
United States and the audit field work of the UK subsidiary is
conducted in the UK.
We have considered the following factors in having our audit report signed by an
Israeli based auditor:
o Most of the Company's assets and revenues derived outside the US.
o The Company's main shareholder, Telkoor, is a publicly traded company
in the Tel-Aviv Stock Exchange ("TASE"). In addition, the Chairman of
Digital Power, who is also the Chairman of Telkoor, is involved in
operational decisions of the Company and is located in Israel.
o The Company's consolidated financial statements are included in
Telkoor's consolidated financial statements, a publicly
traded company in the TASE, reporting its consolidated
financial statements in accordance with generally accepted
accounting principles in Israel. In accordance with Israeli
regulations, the Company's publicly disclosed financial
statements, on an annual and interim basis, must be
reconciled between Israeli GAAP and US GAAP. Such
reconciliation could not be practically performed by a
non-Israeli auditor.
Based on all factors and information set forth above, we believed that it is
appropriate to have an audit report issued by an audit firm based in Israel.
Should the circumstances on which this conclusion was based on would change,
this conclusion will be re-considered.
Note 2(l) Accounting for stock-based compensation, page F-9
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4. In future filings clarify how you account for options issued to non-employees
and how it differs from accounting for options issued to employees.
The Company supplementally advises the Staff that it intends to review and
revise its disclosure in future filings to clarify how options issued to
non-employees were accounted and how it differs from accounting for options
issued to employees.
Certifications, Exhibits 31
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5. We see differences between your Certifications and the language specified in
Item 601(b) (31) of Regulation S-B. Please revise to include the specified
language in all Certifications.
In response to the Staff comment we supplementally advise the staff that, we
will revise the language in the Certification to read in its entirely as
follows:
I, Jonathan Wax, Chief Executive Officer of Digital Power Corporation,
certify that:
1. I have reviewed this annual report of Digital Power
Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report
is being prepared;
(b) Omitted.;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal control over financial reporting.
I, Leo Yen, Chief Financial Officer of Digital Power Corporation, certify that:
1. I have reviewed this annual report of Digital Power Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report
is being prepared;
(b) Omitted.;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal control over financial reporting.
The Company acknowledges the following statements:
o the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
o staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking
any action with respect to the filing, and
o the Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
Should you have any further questions, please do not hesitate to contact me.
Sincerely,
/s/ Jonathan Wax
-----------------------
Jonathan Wax,
Chief Executive Officer
CC: Jeanne Bennett
Martin F. James