UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarterly period ended November 1, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to____________
Commission File Number 0-3319
DEL GLOBAL TECHNOLOGIES CORP.
(Exact name of registrant as specified in its charter)
New York 13-1784308
- -------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Commerce Park, Valhalla, NY 10595
(Address of principal executive offices) (Zip Code)
914-686-3600
------------
(Registrant's telephone number including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-25 of the Exchange Act)
Yes / / No /X/
The number of shares of Registrant's common stock outstanding as of December 12,
2003 was 10,332,548.
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
Table of Contents
Part I. Financial Information: Page No.
--------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations for the Three Months 3
Ended November 1, 2003 and November 2, 2002
Consolidated Balance Sheets - November 1, 2003 and August 2, 2003 4-5
Consolidated Statements of Cash Flows for the Three Months Ended
November 1, 2003 and November 2, 2002 6
Notes to Consolidated Financial Statements 7-16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-24
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 24
Item 4. Controls and Procedures 24
Part II. Other Information:
Item 1. Legal Proceedings 25-27
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
Certifications 30-35
2
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands except share data)
(Unaudited)
Three Months Ended
November 1, 2003 November 2, 2002
------------------ ----------------
NET SALES $21,642 $25,733
COST OF SALES 17,163 20,517
------------- -------------
GROSS MARGIN 4,479 5,216
------------- -------------
Selling, general and administrative 4,287 5,409
Research and development 306 312
Facilities reorganization costs - 234
------------- -------------
Total operating expenses 4,593 5,955
------------- -------------
OPERATING LOSS (114) (739)
Interest expense 316 356
Other income 71 503
------------- -------------
LOSS BEFORE INCOME TAX PROVISION
AND MINORITY INTEREST (359) (592)
INCOME TAX PROVISION 183 27
------------- --------------
NET LOSS BEFORE MINORITY INTEREST (542) (619)
MINORITY INTEREST 67 (13)
------------- --------------
NET LOSS $ (609) $ (606)
============= ==============
LOSS PER COMMON SHARE:
BASIC AND DILUTED $(0.06) $ (0.06)
======= =======
Weighted average number of common
shares outstanding, basic and diluted 10,332,548 10,347,515
========== ==========
See notes to consolidated financial statements
3
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
ASSETS
November 1, August 2,
2003 2003
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 2,309 $ 1,381
Trade receivables (net of allowance
for doubtful accounts of $1,367 and
$1,232 at November 1, 2003 and
August 2, 2003, respectively) 15,814 17,063
Inventory - Net 18,067 18,448
Deferred income tax asset - current 2,591 2,591
Prepaid expenses and other current
assets 957 730
------------ -------------
Total current assets 39,738 40,213
REFUNDABLE INCOME TAXES 66 55
FIXED ASSETS - Net 8,940 9,293
DEFERRED INCOME TAX ASSET-NON CURRENT 6,063 6,148
GOODWILL 3,239 3,239
INTANGIBLES - Net 296 333
OTHER ASSETS 1,177 1,211
------------- --------------
TOTAL ASSETS $59,519 $60,492
============= ==============
See notes to consolidated financial statements
4
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
November 1, August 2,
2003 2003
------------- -------------
CURRENT LIABILITIES
Short-term credit facilities $ 6,431 $ 6,446
Current portion of long-term debt 670 655
Accounts payable - trade 8,598 8,990
Accrued liabilities 7,653 7,730
Litigation settlement reserves 2,461 2,553
Income taxes payable 427 241
------------ --------------
Total current liabilities 26,240 26,615
NON-CURRENT LIABILITIES
Long-term debt 5,076 5,312
Subordinated note 1,832 1,788
Other long-term liabilities 2,576 2,545
------------ --------------
Total liabilities 35,724 36,260
------------ --------------
MINORITY INTEREST IN SUBSIDIARY 1,339 1,253
------------ --------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.10 par value;
Authorized 20,000,000 shares;
Issued and outstanding - 10,976,081 at
November 1, 2003 and August 2, 2003 1,097 1,097
Additional paid-in capital 63,691 63,682
Accumulated other comprehensive gain 640 563
Accumulated deficit (37,426) (36,817)
Less common stock in treasury - 643,533
shares at November 1, 2003 and August 3,
2002 (5,546) (5,546)
------------- --------------
Total shareholders' equity 22,456 22,979
------------ --------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 59,519 $ 60,492
============ ==============
See notes to consolidated financial statements
5
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
Nov. 1, 2003 Nov. 2, 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(609) $(606)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 544 572
Imputed interest - Subordinated note 45 46
Minority interest 67 (13)
Stock based compensation expense 10 36
Non-cash facilities reorganization charge - 70
Changes in operating assets and liabilities:
Decrease in trade receivables 1,305 1,330
Decrease in inventory 482 469
Decrease in income taxes receivable - 3,106
(Increase) decrease in prepaid expenses and
other current assets (220) 677
Decrease in other assets 45 64
Decrease in accounts payable - trade (452) (1,262)
Decrease in accrued liabilities (110) (159)
Increase in income taxes payable 170 35
Increase in other long-term liabilities 1 9
----------- -----------
Net cash provided by operating activities 1,278 4,374
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed asset purchases (96) (718)
---------- ----------
Net cash used in investing activities (96) (718)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of bank borrowings (302) (3,316)
----------- ----------
Net cash used in financing activities (302) (3,316)
----------- ----------
EFFECT OF EXCHANGE RATE CHANGES 48 3
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 928 343
CASH AND CASH EQUIVALENTS AT THE BEGINNING
OF THE PERIOD 1,381 895
----------- ----------
CASH AND CASH EQUIVALENTS AT THE END OF
THE PERIOD $ 2,309 $ 1,238
=========== ==========
See notes to consolidated financial statements
6
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
(Unaudited)
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of the results for the interim
period have been included. Results of operations for the interim periods are not
necessarily indicative of the results that may be expected for the full year.
These consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Company's annual
report on Form 10-K filed with the Securities and Exchange Commission for the
year ended August 2, 2003. Certain prior year's amounts have been reclassified
to conform to the current period presentation.
The Company's fiscal year is based on a 52/53 week cycle ending on the Saturday
nearest to July 31. Results of the Company's Milan, Italy based Villa Sistemi
Medicali S.p.A ("Villa") subsidiary are reported on a one-month lag.
The Company recognizes revenue upon shipment, provided there is persuasive
evidence of an arrangement, there are no uncertainties concerning acceptance,
the sales price is fixed, collection of the receivable is probable and only
perfunctory obligations related to the arrangement need to be completed. The
Company's products are covered primarily by one year warranty plans and in some
cases optional extended warranties for up to five years are offered. The Company
establishes allowances for warranties as more fully described in the Product
Warranty footnote herein. The Company recognizes service revenue when repairs or
out of warranty repairs are completed. The Company has an FDA obligation to
continue to provide repair service for certain medical systems for up to seven
years past the warranty period, which are billed to the customers at market
rates.
SFAS No. 148, Accounting for Stock-based Compensation-Transition and Disclosure,
an amendment of FASB Statement No. 123, amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. It also amends the
disclosure provisions of SFAS No. 123 to require prominent disclosure in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company has elected to continue to account for stock-based awards
to employees using the intrinsic value method of accounting in accordance with
Accounting Principles Board Opinion No 25, "Accounting for Stock Issued to
Employees." The Company's practice in granting these awards to employees is to
set the exercise price of the stock options equal to the market price of our
underlying stock on the date of grant. Therefore under the intrinsic value
method, no compensation expense is recognized in the Company's Consolidated
Statements of Operations.
7
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant dates for awards under those plans consistent
with the methods recommended by SFAS 123, the Company's net loss and net loss
per share for the three months ended November 1, 2003 and November 2, 2002 would
have been stated at the pro forma amounts indicated below:
Three Months Ended
------------------
Nov. 1, Nov. 2,
2003 2002
----------- -----------
Net loss - as reported $(609) $(606)
Add: Total stock-based
awards determined under
fair value method (114) (161)
----------- -----------
Proforma Net loss $(723) $(767)
=========== ===========
Loss per share -
Basic and diluted
As reported $ (0.06) $(0.06)
Proforma $ (0.07) $(0.07)
NEW ACCOUNTING PRONOUNCEMENTS
During May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). SFAS No. 150 clarifies the accounting for certain financial
instruments with characteristics of both liabilities and equity and requires
that those instruments be classified as liabilities in statements of financial
position. Previously, many of those financial instruments were classified as
equity. SFAS 150 is effective for financial instruments entered into or modified
after May 31, 2003 and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of this statement did
not have a material effect on the Company's consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation of
Variable Interest Entities ("VIE"), an Interpretation of ARB No. 51." FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 was effective
immediately for new VIEs established or purchased subsequent to January 31,
2003. For VIEs entered into prior to February 1, 2003, FIN 46 was originally
effective for interim periods beginning after June 15, 2003. In October 2003,
the FASB deferred this effective date until interim or annual periods ending
after December 15, 2003. Early adoption is permitted. The adoption of FIN 46 for
these VIEs is not expected to have a material impact on the Company's
8
consolidated financial statements. FIN 46 further requires the disclosure of
certain information related to VIEs in which the Company holds a significant
variable interest. As of November 1, 2003, the Company did not own any such
interests that required disclosure.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the cost of acquisitions over the fair value
of the identifiable assets acquired and liabilities assumed. Other intangible
assets are the Company's distribution network and non-compete agreements
acquired with the purchase of certain assets of a subsidiary. Intangibles are
being amortized on a straight-line basis over their estimated useful lives,
which range from 5 to 10 years. The components of our amortizable intangible
assets are as follows:
November 1, 2003 August 2, 2003
---------------- --------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amounts Amortization Amounts Amortization
Non-Compete
Agreements $ 902 $ 758 $ 902 $ 738
Distribution
Network 653 501 653 484
------- ------- ------- -------
Total $ 1,555 $ 1,259 $ 1,555 $ 1,222
======= ======= ======= =======
Amortization expense for intangible assets during the first quarter of fiscal
years 2004 and 2003 was $37 and $36, respectively. Estimated amortization
expense for the remainder of 2004 and the five succeeding fiscal years is as
follows:
2004 (remainder) 107
2005 144
2006 45
2007 -
2008 -
2009 -
There are no components of intangible assets that have an indefinite life.
There were no changes in goodwill balances during the first quarter of fiscal
year 2004.
9
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market.
Inventories and their effect on cost of sales are determined by physical count
for annual reporting purposes and are evaluated using perpetual inventory
records for interim reporting periods. For certain subsidiaries during interim
periods we estimate the amount of labor and overhead costs related to finished
goods inventories. The estimation methodologies used for interim reporting
purposes are described in Management's Discussion and Analysis of Financial
Condition and Results of Operations under the subtitle "Critical Accounting
Policies".
November 1, 2003 August 2, 2003
----------------- ------------------
Raw materials and purchased parts $ 15,274 $ 15,161
Work-in-process 3,518 3,757
Finished goods 3,304 3,377
---------- ----------
22,096 22,295
Less allowance for obsolete and excess
inventory (4,029) (3,847)
----------- ----------
Total inventory, net $ 18,067 $ 18,448
=========== ==========
PRODUCT WARRANTIES
The Company's products are covered primarily by one-year warranty plans and in
some cases optional extended contracts may be offered covering products for
periods up to five years, depending upon the product and contractual terms of
sale. The Company establishes allowances for warranties on an aggregate basis
for specifically identified, as well as anticipated, warranty claims based on
contractual terms, product conditions and actual warranty experience by product
line.
During the first quarter of fiscal 2004, the Company incurred payments of $259
related to warranty claims submitted and accrued $277 related to product
warranties issued during the first quarter of fiscal 2004. The liability related
to warranties is included in accrued expenses on the accompanying Consolidated
Balance Sheets and is $688 and $670 at November 1, 2003 and August 2, 2003,
respectively.
10
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
COMPREHENSIVE LOSS
Comprehensive loss for the Company includes foreign currency translation
adjustments and net loss reported in the Company's Consolidated Statements of
Operations.
Comprehensive loss for 2003 and 2002 was as follows:
Three Months Ended
November 1, 2003 November 2, 2002
---------------- ----------------
Net loss $ (609) $(606)
Foreign currency translation adjustments 77 6
-------- ---------
Comprehensive loss $ (532) $(600)
========= =========
LOSS PER SHARE Three Months Ended
November 1, 2003 November 2, 2002
----------------- ----------------
Numerator:
Net loss $(609) $ (606)
=========== =========
Denominator:
Denominator for basic loss per share -
Weighted average shares outstanding 10,332,548 10,347,515
Effect of dilutive securities - -
----------- ----------
Denominator for diluted loss per share 10,332,548 10,347,515
----------- ----------
Loss per basic and diluted common share $ (0.06) $ (0.06)
=========== ==========
Common shares outstanding for the current period and prior period ended were
reduced by 643,533 and 628,566 shares of treasury stock, respectively. The
computation of diluted shares outstanding does not include 2,116,815 and
1,990,055 employee stock options and 1,065,000 and 1,065,000 warrants to
purchase Company common stock, as of November 1, 2003 and November 2, 2002,
respectively, since the effect of their assumed conversion would be
anti-dilutive.
11
SEGMENT INFORMATION
The Company has three reportable segments: Medical Systems Group, Power
Conversion Group and Other. The "Other" segment includes unallocated corporate
costs. Interim segment information is as follows:
Medical Power
For three months ended Systems Conversion
November 1, 2003 Group Group Other Total
- ----------------------- --------- -------- -------- -------
Net Sales to Unaffiliated Customers $13,701 $ 7,941 - $21,642
Cost of sales 10,416 6,747 - 17,163
------- -------- ------- ------
Gross margin 3,285 1,194 - $ 4,479
Operating expenses 2,379 1,670 $ 544 4,593
------ ------- ------ ------
Total operating expenses 2,379 1,670 544 4,593
------ ------- ------ ------
Operating income / (loss) $ 906 $ (476) $ (544) $ (114)
====== ======= ====== ======
Medical Power
For three months ended Systems Conversion
November 2, 2002 Group Group Other Total
- ----------------------- ------- ---------- ------ --------
Net Sales to Unaffiliated Customers $12,068 $13,665 - $25,733
Cost of sales 9,537 10,980 - 20,517
------- --------- ------ --------
Gross margin 2,531 2,685 - 5,216
Operating expenses 2,652 1,975 $ 1,094 5,721
Facilities reorganization costs - 104 130 234
-------- -------- ------- ------
Total operating expenses 2,652 2,079 1,224 5,955
-------- ------- ------- -------
Operating income / (loss) $ (121) $ 606 $(1,224) $ (739)
======== ======== ====== =======
12
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
CONTINGENCIES
Securities and Exchange Commission ("SEC") Investigation - On December 11, 2000,
the Division of Enforcement of the SEC issued the SEC Order, designating SEC
officers to take testimony and requiring the production of certain documents, in
connection with matters giving rise to the need to restate the Company's
previously issued financial statements. In conjunction with this investigation,
the Company provided numerous documents and cooperated fully with the SEC staff.
In December 2003, the Company signed a consent agreement with the Staff of the
SEC for a settlement of the SEC's claims against the Company that includes a
previously announced penalty of $400 and an injunction against future violations
of the antifraud, periodic reporting, books and records and internal accounting
control provisions of the federal securities law. The settlement is subject to,
among other things final approval by the Commission and court approval. We can
give no assurance that this settlement will receive final Commission approval or
court approval.
Previously, the Company had reached an agreement in principle with the SEC on
these settlement terms, which management believed provided a reasonable basis
for estimating the financial impact of this SEC investigation. As a result, the
Company recorded a charge of $685 in the fourth quarter of fiscal year 2002
related to the agreement in principle with the SEC staff, which included
associated legal costs.
Department of Defense ("DOD") Investigation - On March 8, 2002, RFI Corporation,
a subsidiary of the Company and part of the Power Conversion Group segment, was
served with a subpoena by the US Attorney Eastern District of New York in
connection with an investigation by the US Department of Defense ("DOD"). RFI
supplies noise suppression filters for communications and defense applications.
Since March 2002, the DOD has been investigating certain past practices at RFI
which date back more than six years and pertain to RFI's Military Specification
testing, record keeping and general operating procedures. Management retained
special counsel to represent the Company on this matter. The Company has
cooperated fully with this investigation, including voluntarily providing
employees to be interviewed by the Defense Criminal Investigative Services
division of the DOD.
In June 2003, the Company was advised that the US Government is willing to enter
into negotiations regarding a comprehensive settlement of this investigation.
Management believes that a potential comprehensive settlement will include the
Company's pleading guilty to certain criminal charges, and agreeing to pay
certain fines and restitution to the Government in an amount which could be
material to the Company. Prior to the preliminary discussions with the US
Government in June 2003, the Company had no basis to estimate the financial
impact of this investigation. Based on preliminary settlement discussions with
the US Government, discussions with the Company's legal advisors, consideration
of settlements reached by other parties in investigations of this nature, and
consideration of the Company's capital resources, management then developed an
estimate of the low end of the
13
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
potential range of the financial impact. Accordingly, during the third quarter
of fiscal 2003, the Company recorded a charge of $2,347 which represents its
estimate of the low end of a range of potential fines and legal and professional
fees. The liability associated with this charge is included in Litigation
settlement reserves on the accompanying consolidated balance sheet as of August
2, 2003 and November 1, 2003. In October 2003, based on discussions with the US
Government, the Company was advised that the US Government is currently seeking
up to approximately $5 million in the fines and restitution portion of any
comprehensive settlement. The Company is continuing to negotiate with the US
Government regarding a comprehensive settlement, including the amount of such
fines.
The Company believes that any settlement could cause the DOD to seek to limit
the ability of the Company to do business with US Government entities. Such
limitations could include seeking a "debarment" or exclusion from doing business
with US Government entities for a period of time. Because management believes
that it has been responsive in addressing the problems that affected RFI in the
past, and RFI is the sole source provider of certain products to certain
critical defense programs, the Company is hopeful that as a result of the
potential settlement, its ability to service the governmental and defense
sectors of its business will not be interrupted.
There can be no assurance that such a settlement will be reached and, even if
reached, that the ultimate fines and outcome of any settlement will not vary
significantly from the fines and restitution included in the $2,347 charge
recognized in the third quarter of fiscal 2003. This charge recorded in the
third quarter represented the Company's original estimate of its minimum
liability. The Company has not recorded an additional charge as a result of the
$5,000 requested by the US Government. In addition, such a settlement, even on
the most favorable terms, may have a material adverse impact on the Company's
financial condition, liquidity and operations.
ERISA Matters - During the year ended July 28, 2001, management of the Company
concluded that violations of the Employee Retirement Income Security Act,
("ERISA") existed relating to a defined benefit plan for which accrual of
benefits had been frozen as of February 1, 1986. The violations related to
excess concentrations of the Common stock of the Company in the plan assets. In
July 2001, management of the Company decided to terminate this plan, subject to
having available funds to finance the plan in accordance with rules and
regulations relating to terminating pension plans. This plan has not been
terminated yet, but the Company expects to start the process of terminating this
plan in fiscal 2004. At time of settlement, the Company expects to recognize a
related charge of approximately $0.5 million, including a cash disbursement of
approximately $0.2 million.
14
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Employment Matters - The Company has an employment agreement with Samuel Park,
the previous CEO, for the period May 1, 2001 to April 30, 2004. The terms of
this agreement provided a base salary, bonuses and deferred compensation. The
bonus provided by this agreement was based on a percentage of the base salary,
if certain performance goals established by the board were achieved. In
addition, the employment agreement provided for certain payments in the event of
death, disability or change in the control of the Company.
On October 10, 2003, the Company announced the appointment of Walter F.
Schneider as President and CEO to replace Mr. Park, effective as of such date.
As a result, the Company recorded a charge of $200 during the first quarter of
fiscal 2004 to accrue the balance remaining under Mr. Park's employment
agreement.
In addition, the Company's Board of Directors elected at the Company's Annual
Meeting of Shareholders held on May 29, 2003 had previously reviewed the "change
in control" provisions regarding payments totaling up to approximately $1,800
under the employment agreement between the Company and Mr. Park. As a result of
this review and based upon, among other things, the advice of special counsel,
the Company's Board of Directors determined that no obligation to pay these
amounts has been triggered. Prior to his departure from the Company on October
10, 2003, Mr. Park orally informed the Company that, after reviewing the matter
with his counsel, he believes that the obligation to pay these amounts has been
triggered. On October 27, 2003, the Company received a letter from Mr. Park's
counsel demanding payment of certain sums and other consideration pursuant to
the Company's employment agreement with Mr. Park, including these change in
control payments. On November 17, 2003, the Company filed a complaint against
Mr. Park seeking a declaratory judgment that no change in control payment was or
is due to Mr. Park and that an amendment to the employment contract with Mr.
Park regarding advancement and reimbursement of legal fees is invalid and
unenforceable. If paid in a lump sum, these payments may have a material adverse
effect on the Company's liquidity. In the event Mr. Park seeks to assert a claim
for these payments, it is not possible to predict the outcome of any such claim.
Indemnification Legal Expenses - Pursuant to indemnification and undertaking
agreements with certain former officers, directors and employees, the Company
has advanced legal expenses in connection with the Company's previously reported
accounting irregularities and the related shareholder litigation and
governmental enforcement actions. During fiscal 2003, the Company spent
approximately $310 in the advancement of legal expenses pursuant to these
agreements. Management is unable to estimate at this time the amount of legal
fees that the Company may have to pay in the future related to these matters.
Further, there can be no assurance that those to whom we have been advancing
expenses will have the financial means to repay the Company pursuant to
undertaking agreements that they executed, if it is later determined that such
individuals were not entitled to be indemnified.
15
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other Legal Matters - On October 6, 2003, Carmelo Guiseppe Ammendola, a minority
shareholder of Villa, served a summons on Villa in the Civil Court of Milan,
Italy, challenging the terms of certain related party transactions between Villa
and the Company relating to intercompany pricing and a management fee. Villa is
vigorously defending against this claim, believes that there is no merit to the
case, and that Villa has meritorious defenses. Although these can be no
assurances, management believes that the impact of this action will not have a
material adverse effect on the financial position or results of operations of
either Villa or the Company.
In addition, the Company is a defendant in several other legal actions arising
from the normal course of business in various US and foreign jurisdictions.
Management believes the Company has meritorious defenses to such actions and
that the outcomes will not be material to the Company's consolidated financial
statements.
16
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Dollars in Thousands except share data)
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on current
expectations and the current economic environment. We caution that these
statements are not guarantees of future performance. They involve a number of
risks and uncertainties that are difficult to predict including, but not limited
to, our ability to implement our business plan, retention of management,
changing industry and competitive conditions, obtaining anticipated operating
efficiencies, securing necessary capital facilities, favorable determinations in
various legal and regulatory matters, including a settlement of the Department
of Defense investigation on terms that we can afford and that does not include a
debarment from doing business with the US Government, and favorable general
economic conditions. Actual results could differ materially from those expressed
or implied in the forward-looking statements. Important assumptions and other
important factors that could cause actual results to differ materially from
those in the forward-looking statements are specified in the Company's filings
with the Securities and Exchange Commission including our Form 10-K for the
fiscal year ended August 2, 2003.
OVERVIEW
The Company is a leader in developing, manufacturing and marketing medical
imaging equipment and power conversion subsystems and components worldwide. Our
products include stationary and portable medical diagnostic imaging equipment,
high voltage power systems and electronic systems and components such as
electronic filters, transformers and capacitors. We manage our business in two
operating segments; our Medical Systems Group and our Power Conversion Group. In
addition, we have a third reporting segment, Other, comprised of certain
unallocated corporate General and Administrative expenses.
CRITICAL ACCOUNTING POLICIES
Complete descriptions of significant accounting policies are outlined in Note 1
of our Form 10-K for the fiscal year ended August 2, 2003. Within these
policies, we have identified the accounting for deferred tax assets and the
allowance for obsolete and excess inventory as being critical accounting
policies due to the significant amount of estimates involved. In addition, for
interim periods, we have identified the valuation of finished goods inventory as
being critical due to the amount of estimates involved.
Deferred Income Taxes
We account for deferred income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," whereby we
recognize an asset related to our net operating loss carry forwards and other
temporary differences between financial reporting basis and income tax basis. As
of November 1, 2003, this deferred income tax asset represented approximately
15% of our total assets.
17
This deferred income tax asset is net of a valuation allowance of $10.1 million
established during fiscal 2003 that was computed by considering the amount of
future U.S. taxable income expected over the net operating loss carryforward
period, considering recent performance and other specific actions the Company
has taken to improve profitability. The valuation allowance recorded is the
estimate of the amount of deferred income tax assets that may not be realized.
No assurances can be given that the Company's results of operations will
generate profits in the future.
OBSOLETE AND EXCESS INVENTORY
Another significant estimate is our allowance for obsolete and excess inventory.
We re-evaluate our allowance for obsolete inventory once a quarter, and this
allowance comprises the most significant portion of our inventory reserves. The
re-evaluation of reserves is based on a written policy, which requires at a
minimum that reserves be established based on our analysis of historical actual
usage on a part-by-part basis. In addition, if management learns of specific
obsolescence in addition to this minimum formula, these additional reserves will
be recognized as well. Specific obsolescence might arise due to a technological
or market change, or based on cancellation of an order. As we typically do not
purchase inventory substantially in advance of production requirements, we do
not expect cancellation of an order to be a material risk. However, market or
technology changes can and do happen.
VALUATION OF FINISHED GOODS INVENTORIES
In addition, we use certain estimates in determining interim operating results.
The most significant estimates in interim reporting relate to the valuation of
finished goods inventories. For certain subsidiaries, for interim periods, we
estimate the amount of labor and overhead costs related to finished goods
inventories. As of November 1, 2003, finished goods represented approximately
15.9% of the gross carrying value of our total gross inventory. We believe the
estimation methodologies used to be appropriate and are consistently applied.
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated net sales of $21.6 million for the first quarter of fiscal 2004
decreased by $4.1 million or 15.9% from fiscal 2003 first quarter net sales of
$25.7 million, with decreases at the Power Conversion Group partially offset by
increases at our Medical Systems Group. The Medical Systems Group's first
quarter fiscal 2004 sales of $13.7 million improved by $1.6 million or 13.5%
from the prior year's first quarter with increases at both domestic and
international locations, plus favorable exchange rate effects from the
translation of Villa's financial statements from euros. The Power Conversion
Group's first quarter fiscal 2003 sales of $7.9 million decreased by $5.7
million or 41.9% from last year's levels, primarily due to decreases in
Explosive Detection System ("EDS") business and the shift to in-house production
of components formerly purchased from us by a large customer, both of which took
place after the end of last year's first quarter.
18
Consolidated backlog at November 1, 2003 was $24.6 million versus backlog at
August 2, 2003 of approximately $26.3 million. The backlog in the Power
Conversion Group decreased $2.8 million from levels at beginning of the fiscal
year partially offset by a $1.1 million increase in the backlog at our Medical
Systems Segment. Substantially all of the backlog should result in shipments
within the next 12 months.
Gross margins as a percent of sales were 20.7% for the first quarter of fiscal
2004, compared to 20.3% in the first quarter of fiscal 2003. The Power
Conversion Group's margins for the first quarter of fiscal 2004 were 15.0%,
versus 19.7% in the prior year quarter. The prior year's first quarter margins
reflected shipments of higher margin EDS product partially offset by depressed
margins at RFI due to the DOD investigation. First quarter fiscal 2004 Power
Conversion group margins also benefited from an approximate $0.8 million
reduction in labor and overhead resulting from the consolidation of the
Hicksville facility completed during the second half of fiscal 2003. The Medical
Systems Group's fiscal 2004 first quarter gross margins of 24.0% improved from
the 21.0% level in the prior year first quarter due to increased shipments and a
favorable product mix at both locations.
Selling, General and Administrative expenses ("SG&A") for the first quarter of
fiscal 2004 were $4.3 million (19.8% of sales) compared to $5.4 million (21% of
sales) in the prior year's first quarter. The decrease in SG&A in the first
quarter of fiscal 2004 reflects reduced corporate legal and accounting costs,
reductions in headcount and the consolidation of the Hicksville facility. SG&A
in the prior year's first quarter includes an expense of $0.2 million for
separation payments to the former president of our Italian subsidiary and
unusually high legal and accounting fees of $0.5 million.
Facilities reorganization costs in the first quarter of fiscal 2003 related to
the phase out of the Power Conversion Group's Hicksville facility and
integration into the Valhalla facility, which was started in the fourth quarter
of fiscal 2002. The reorganization of the Valhalla facility and personnel, as
well as the balance of the physical move of Hicksville inventory, equipment and
personnel was completed in the second half of fiscal 2003. We are attempting to
sublet the Hicksville facility through the end of our lease in May 2004. Any
remaining rental obligations or other expenses related to terminating our
tenancy will be charged against a balance sheet accrual established during
fiscal 2002.
As a result of the foregoing, we recognized a first quarter fiscal 2004
operating loss of $0.1 million compared to an operating loss of $0.7 million in
the first quarter of fiscal 2003. The Medical Systems Group posted a first
quarter fiscal 2004 operating profit of $0.9 million, offset by a $0.5 million
operating loss at the Power Conversion Group, and unallocated corporate costs of
$0.5 million.
Interest expense for the first quarter of fiscal 2004 was lower than the prior
year's first quarter due to decreased borrowings and lower interest rates.
19
During the first quarter of fiscal 2003, the Company recognized other income of
$0.5 million related to the settlement of a dispute in connection with a 1999
product line acquisition.
The Company has not provided for a U.S. domestic income tax benefit in the first
quarter of either fiscal 2004 or fiscal 2003 despite a loss for these periods.
With the exception of tax provisions and adjustments recorded at Villa, our
Italian subsidiary, we recorded no adjustments to our current or net deferred
tax accounts during the first quarter of fiscal 2004 or fiscal 2003. We expect
to be profitable in future periods; however management periodically evaluates
the likelihood of the recoverability of the deferred tax asset recognized on our
balance sheet. Based on management's current analysis, we believe it is more
likely than not that the remaining deferred tax assets will be realized.
Reflecting the above, we recorded net losses of $0.6 million or $0.06 per share
in the first quarter of fiscal 2004, which were comparable to amounts recorded
in the prior year's first quarter.
FINANCIAL CONDITION
LIQUIDITY AND CAPIAL RESOURCES
We fund our investing and working capital needs through a combination of cash
flow from operations and short-term credit facilities.
Working Capital - At November 1, 2003 and August 2, 2003, our working capital
was approximately $ 13.5 million and $ 13.6 million, respectively. At such dates
we had approximately $2.3 million and $1.4 million, respectively, in cash and
cash equivalents. As of November 1, 2003 we had approximately $3.3 million of
excess borrowing availability under our domestic revolving credit facility.
As a result of the potential settlement of the DOD investigation, we have taken
a temporary reduction of $0.5 million against our excess domestic borrowing
availability under our revolving credit facility with Transamerica. At this
time, we do not expect these temporary reductions of borrowing availability to
have a material detrimental impact on our ability to finance working capital
requirements. However, there can be no assurance that the ultimate outcome of
the DOD investigation matters will not differ materially from our estimates or
the amount of the temporary reduction.
In addition, as of November 1, 2003, our Villa subsidiary has an aggregate of
approximately $7.0 million of excess borrowing availability under its various
short-term credit facilities. Terms of the Italian credit facilities do not
permit the use of borrowing availability to finance operating activities at our
U.S. subsidiaries.
Cash Flows from Operating Activities - For the three months ended November 1,
2003 the Company generated approximately $1.3 million of cash from operations,
compared to a generation of $4.4 million in the first quarter of the prior
fiscal year. Contributing to cash generation in the first quarter of fiscal 2004
were a decrease in trade receivables of approximately $1.3 million, and a
reduction in inventory of approximately $0.5 million. The first quarter
20
of fiscal 2003 included the collection of approximately $3.1 million in income
tax receivable. This income tax receivable was the result of filing amended tax
returns and carryback claims for fiscal 1997 through 2001 due to a change in the
tax laws permitting loss carrybacks of five years from two years.
Cash Flows from Investing Activities - We continue to invest in capital
equipment and improvements, principally for manufacturing operations, in order
to improve our manufacturing capability and capacity. We have expended
approximately $0.1 million for facility improvements and capital equipment for
the three months ended November 1, 2003. We anticipate fiscal 2004 capital
expenditures will be lower than the expenditures in fiscal 2003 due to the
completion of the facility consolidation work in Valhalla and the HVAC system in
Italy during fiscal 2003.
Cash Flows from Financing Activities - During the first quarter of fiscal 2004,
we repaid a total of approximately $0.3 million of indebtedness on our domestic
and Italian borrowings.
The following table summarizes our contractual obligations, including debt and
operating leases at August 2, 2003: (in thousands)
Obligations Within 2-3 4-5 After 5
Total (1) 1 Year Years Years Years
--------- ------ ----- ----- -------
Long-Term Debt Obligations $2,895 $ 508 $1,037 $ 771 $ 579
Capital Lease Obligations 3,072 148 358 641 1,925
Subordinated Note 2,000 - - 2,000 -
Operating Lease Obligations 1,873 959 897 17 -
----- ------ ------ ------ ------
Total Contractual Cash Obligations $9,840 $1,615 $2,292 $3,429 $2,504
====== ====== ====== ====== ======
(1) In addition, as of August 2, 2003 we had approximately $6.2 million
revolving credit debt in the U.S. and $0.2 million in Italy. The Italian
credit facilities are generally renewed on a yearly basis and the
Transamerica Facility matures in fiscal 2005. The maturity of the
Transamerica Facility is subject to acceleration upon certain events of
default as defined in the credit agreement, including uncured covenant
defaults. Upon maturity, the Company anticipates refinancing any balances
remaining on the U.S. facility.
Credit Facility and Borrowing - The Company has a $10 million senior revolving
credit agreement with Transamerica under the Transamerica Facility, as amended
dated as of June 10, 2002. This facility has a term of three years and interest
under this U.S. credit facility is at prime plus 3/4%, or at the Company's
option, at a rate tied to LIBOR. The interest rate on the revolving line of
credit is 4.75% at August 2, 2003. The Transamerica Facility is subject to
commitment fees of 3/8% on the daily unused portion of the facility, payable
monthly. Under terms of the Transamerica Facility, interest is calculated based
on the higher of the actual balance, or a floor revolving credit balance of $5
million. The Transamerica Facility is secured by substantially all of the
Company's accounts receivable, inventory, and fixed assets in the U.S. The terms
of the Transamerica Facility require the Company to comply with various
operational and financial covenants, and place limitations on the Company's
ability to make capital expenditures and to pay dividends.
21
Our Villa subsidiary is a party to various short-term credit facilities with
interest rates ranging from 6% to 14%. These facilities generally renew on a
yearly basis and include overdraft, receivables and import export financing
facilities.
In addition, Villa is a party to various medium-term commercial and Italian
Government long-term loans. Medium term facilities have interest rates ranging
from 3 to 6%, with principal payable semi-annually through maturity in March
2007, and interest payable quarterly. The Government long-term facilities have
an interest rate of 3.4% with principal payable annually through September 2010.
Villa's manufacturing facility is subject to a capital lease obligation which
matures in 2011 with an option to purchase. Villa is in compliance with all
related financial covenants under these short and long-term financings.
As of November 1, 2003, the Company has a minimum liability and corresponding
debit in other comprehensive income to account for the unfunded status of its
defined benefit plan, in accordance with SFAS No. 87. In accordance with SFAS
No. 88, at the time of final settlement of the pension plan, the Company will
recognize an expense to the statement of operations for the amount of such debit
to other comprehensive income, adjusted for the difference between the cost to
settle the pension obligation and the amount of the recorded net liability. This
plan has not been terminated yet, but the Company expects to start the process
of terminating this plan in fiscal 2004. At time of settlement, the Company
expects to recognize a related charge of approximately $0.5 million, including a
cash disbursement of approximately $0.2 million.
During fiscal 2004 we intend to complete a registration statement with the SEC
covering the issuance of one million shares of our common stock underlying
warrants that were issued to certain shareholders in connection with the
previous shareholder litigation. Prior to completing this amended registration
statement and having it declared effective, we must satisfactorily respond to
questions raised by the SEC in its review of the registration statement, and
there can be no assurances that the SEC will declare the registration statement
effective in fiscal 2004. Should the SEC declare this registration statement
effective, shareholders would be able to exercise the warrants issued as part of
the shareholder litigation settlement and purchase the Company's common stock at
a price of $2 per share. These warrants are also callable by the Company at a
price of $0.25 per warrant, if the Common Stock trades at or above $4 per share
for ten (10) consecutive days. We anticipate using any proceeds received from
the exercise of the warrants to pay down our Transamerica Facility.
As described in "Legal Proceedings" Part II, Item 1 below, management had
developed an estimate of the low end of the potential range of the financial
impact of a potential comprehensive settlement with the DOD regarding an ongoing
investigation of our RFI subsidiary. Accordingly, during the third quarter of
fiscal 2003, we recorded a charge of $2.3 million, which represents our estimate
of the low end of a range of potential fines and legal and professional fees.
The liability associated with this charge is included in Litigation settlement
reserves on the accompanying balance sheet. In October 2003, based on
discussions with the U.S. Government, the Company was advised that the U.S.
Government is currently seeking approximately $5 million in the
22
fines and restitution portion of any comprehensive settlement. The Company is
continuing to negotiate with the U.S. Government regarding a comprehensive
settlement, including the amount of such fines.
It is possible that the DOD could seek a "debarment" or exclusion of the Company
from doing business with U.S. Government entities for a period of time. Because
management believes that it has been responsive in addressing the problems that
affected RFI in the past, and RFI is the sole source provider of certain
products to several critical defense programs, we are hopeful that our ability
to service the governmental and defense sectors will not be interrupted as a
result of the potential settlement. There can be no assurance that such a
settlement will be reached and, even if such a settlement is reached that the
ultimate fines and outcome of any settlement will not vary significantly from
the Company's original estimate and expectations. In addition, such a
settlement, even on the most favorable terms, may have a material adverse impact
on the Company's financial condition, liquidity and operations.
The Company's Board of Directors elected at the Company's Annual Meeting of
Shareholders held on May 29, 2003 has reviewed the "change in control"
provisions regarding payments totaling up to approximately $1.8 million under
the employment agreement between the Company and its former Chief Executive
Officer, Samuel Park. As a result of this review and based upon, among other
things, the advice of special counsel, the Company's Board of Directors has
determined that no obligation to pay these amounts has been triggered. Prior to
his departure from the Company on October 10, 2003, Mr. Park orally informed the
Company that, after reviewing the matter with his counsel, he believes that the
obligation to pay these amounts has been triggered. On October 27, 2003, the
Company received a letter from Mr. Park's counsel demanding payment of certain
sums and other consideration pursuant to the Company's employment agreement with
Mr. Park, including these change in control payments. On November 17, 2003, the
Company filed a complaint against Mr. Park seeking a declaratory judgment that
no change in control payment was or is due to Mr. Park and that an amendment to
the employment contract with Mr. Park regarding advancement and reimbursement of
legal fees is invalid and unenforceable. If paid in a lump sum, these payments
may have a material adverse effect on the Company's liquidity. In the event Mr.
Park seeks to assert a claim for these payments, it is not possible to predict
the outcome of any such claim; however, the Company's Board of Directors does
not believe that such a claim is reasonably likely to result in a material
decrease in the Company's liquidity in the foreseeable future.
The outcome of the elections at the Company's Annual Meeting of Shareholders
held on May 29, 2003 represents a change in control under change in control
agreements between the Company and each of four other members of executive
management. However, as each of these agreements contains "double-triggers"
requiring the termination of the individual, no change in control payments are
currently due to any such individuals.
23
We anticipate that cash generated from operations and amounts available from
credit facilities will be sufficient to satisfy our currently projected
operating cash needs for at least the next twelve months, and for the
foreseeable future. In the event the potential settlement of the DOD
investigation is materially higher than anticipated, we will consider all
available alternatives. However, there is no assurance that any alternatives
will be available to the Company on acceptable terms at such time.
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not ordinarily hold market risk sensitive instruments for trading
purposes. We do, however, recognize market risk from interest rate and foreign
currency exchange exposure. There have been no changes in financial market risk
as originally discussed in the Company's Annual Report on Form 10-K for the
fiscal year ended August 2, 2003.
Item 4 CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of the Company's
management, including Walter F. Schneider, Chief Executive Officer and Thomas V.
Gilboy, Chief Financial Officer, has evaluated the effectiveness of the design
and operation of the Company's "disclosure controls and procedures", as such
term is defined in Rules 13a-15e and 15d-15e promulgated under the Securities
Exchange Act of 1934, as amended, as of the end of the period covered by this
Form 10-Q. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this Form 10-Q
to provide reasonable assurance that information required to be disclosed by the
Company in reports that it files or submits under the Securities Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms.
In the ordinary course of business, the Company routinely enhances its
information systems by either upgrading its current systems or implementing new
systems. There were no changes in the Company's internal controls or in other
factors that could significantly affect these controls, during the Company's
first fiscal quarter ended November 1, 2003 that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute assurance that the objectives of the control system are
met. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within a company have been detected.
24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS (Dollars in Thousands)
Securities and Exchange Commission ("SEC") Investigation - On December 11, 2000,
the Division of Enforcement of the SEC issued the SEC Order, designating SEC
officers to take testimony and requiring the production of certain documents, in
connection with matters giving rise to the need to restate the Company's
previously issued financial statements. In conjunction with this investigation,
the Company provided numerous documents and cooperated fully with the SEC staff.
In December 2003, the Company signed a consent agreement with the Staff of the
SEC for a settlement of the SEC's claims against the Company that includes a
previously announced penalty of $400 and an injunction against future violations
of the antifraud, periodic reporting, books and records and internal accounting
control provisions of the federal securities law. The settlement is subject to,
among other things, final approval by the Commission and court approval. We can
give no assurance that this settlement will receive final approval by the
Commission or court approval.
Previously, the Company had reached an agreement in principle with the SEC on
these settlement terms, which management believed provided a reasonable basis
for estimating the financial impact of this SEC investigation. As a result, the
Company recorded a charge of $685 in the fourth quarter of fiscal year 2002
related to the agreement in principle with the SEC staff, which includes
associated legal costs.
Department of Defense ("DOD") Investigation - On March 8, 2002, RFI Corporation,
a subsidiary of the Company and part of the Power Conversion Group segment, was
served with a subpoena by the US Attorney Eastern District of New York in
connection with an investigation by the US Department of Defense ("DOD"). RFI
supplies noise suppression filters for communications and defense applications.
Since March 2002, the DOD has been investigating certain past practices at RFI
which date back more than six years and pertain to RFI's Military Specification
testing, record keeping and general operating procedures. Management retained
special counsel to represent the Company on this matter. The Company has
cooperated fully with this investigation, including voluntarily providing
employees to be interviewed by the Defense Criminal Investigative Services
division of the DOD.
In June 2003, the Company was advised that the US Government is willing to enter
into negotiations regarding a comprehensive settlement of this investigation.
Management believes that a potential comprehensive settlement will include the
Company's pleading guilty to certain criminal charges, and agreeing to pay
certain fines and restitution to the Government in an amount which could be
material to the Company. Prior to the preliminary discussions with the US
Government in June 2003, the Company had no basis to estimate the financial
impact of this investigation. Based on preliminary settlement discussions with
the US Government, discussions with the Company's legal advisors, consideration
of settlements reached by other parties in investigations of this nature, and
consideration of the Company's capital resources, management then developed an
estimate of the low end of the potential range of the financial impact.
Accordingly, during the third quarter of fiscal 2003, the Company recorded a
charge of $2,347 which represents its
25
estimate of the low end of a range of potential fines and legal and professional
fees. The liability associated with this charge is included in Litigation
settlement reserves on the accompanying consolidated balance sheet as of August
2, 2003 and November 1, 2003. In October 2003, based on discussions with the US
Government, the Company was advised that the US Government is currently seeking
up to approximately $5 million in the fines and restitution portion of any
comprehensive settlement. The Company is continuing to negotiate with the US
Government regarding a comprehensive settlement, including the amount of such
fines.
The Company believes that any settlement could cause the DOD to seek to limit
the ability of the Company to do business with US Government entities. Such
limitations could include seeking a "debarment" or exclusion from doing business
with US Government entities for a period of time. Because management believes
that it has been responsive in addressing the problems that affected RFI in the
past, and RFI is the sole source provider of certain products to several
critical defense programs, the Company is hopeful that as a result of the
potential settlement, its ability to service the governmental and defense
sectors of its business will not be interrupted.
There can be no assurance that such a settlement will be reached and, even if
reached, that the ultimate fines and outcome of any settlement will not vary
significantly from the fines and restitution included in the $2,347 charge
recognized in the third quarter of fiscal 2003. This charge recorded in the
third quarter represented the Company's original estimate of its minimum
liability. The Company has not recorded an additional charge as a result of the
$5,000 requested by the US Government. In addition, such a settlement, even on
the most favorable terms, may have a material adverse impact on the Company's
financial condition, liquidity and operations.
ERISA Matters - During the year ended July 28, 2001, management of the Company
concluded that violations of the Employee Retirement Income Security Act,
("ERISA") existed relating to a defined benefit plan for which accrual of
benefits had been frozen as of February 1, 1986. The violations related to
excess concentrations of the Common stock of the Company in the plan assets. In
July 2001, management of the Company decided to terminate this plan, subject to
having available funds to finance the plan in accordance with rules and
regulations relating to terminating pension plans. This plan has not been
terminated yet, but the Company expects to start the process of terminating this
plan in fiscal 2004.
Employment Matters - The Company had an employment agreement with Samuel Park,
the previous CEO, for the period May 1, 2001 to April 30, 2004. The terms of
this agreement provided a base salary, bonuses and deferred compensation. The
bonus provided by this agreement was based on a percentage of the base salary,
if certain performance goals established by the board were achieved. In
addition, the employment agreement provided for certain payments in the event of
death, disability or change in the control of the Company.
On October 10, 2003, the Company announced the appointment of Walter F.
Schneider as President and CEO to replace Mr. Park, effective as of such date.
As a result, the Company recorded a charge of $200 during the first quarter of
fiscal 2004 to accrue the balance remaining under Mr. Park's employment
agreement.
26
In addition, the Company's Board of Directors elected at the Company's Annual
Meeting of Shareholders held on May 29, 2003 had previously reviewed the "change
in control" provisions regarding payments totaling up to approximately $1,800
under the employment agreement between the Company and Mr. Park. As a result of
this review and based upon, among other things, the advice of special counsel,
the Company's Board of Directors determined that no obligation to pay these
amounts has been triggered. Prior to his departure from the Company on October
10, 2003, Mr. Park orally informed the Company that, after reviewing the matter
with his counsel, he believes that the obligation to pay these amounts has been
triggered. On October 27, 2003, the Company received a letter from Mr. Park's
counsel demanding payment of certain sums and other consideration pursuant to
the Company's employment agreement with Mr. Park, including these change in
control payments. On November 17, 2003, the Company filed a complaint against
Mr. Park seeking a declaratory judgment that no change in control payment was or
is due to Mr. Park and that an amendment to the employment contract with Mr.
Park regarding advancement and reimbursement of legal fees is invalid and
unenforceable. If paid in a lump sum, these payments may have a material adverse
effect on the Company's liquidity. In the event Mr. Park seeks to assert a claim
for these payments, it is not possible to predict the outcome of any such claim.
Indemnification Legal Expenses - Pursuant to indemnification and undertaking
agreements with certain former officers, directors and employees, the Company
has advanced legal expenses in connection with the Company's previously reported
accounting irregularities and the related shareholder litigation and
governmental enforcement actions. During fiscal 2003, the Company spent
approximately $310 in the advancement of legal expenses pursuant to these
agreements. Management is unable to estimate at this time the amount of legal
fees that the Company may have to pay in the future related to these matters.
Further, there can be no assurance that those to whom we have been advancing
expenses will have the financial means to repay the Company pursuant to
undertaking agreements that they executed, if it is later determined that such
individuals were not entitled to be indemnified.
Other Legal Matters - On October 6, 2003, Carmelo Guiseppe Ammendola, a minority
shareholder of Villa, served a summons on Villa in the Civil Court of Milan,
Italy, challenging the terms of certain related party transactions between Villa
and the Company relating to intercompany pricing and a management fee. Villa is
vigorously defending against this claim, believes that there is no merit to the
case, and that Villa has meritorious defenses. Although these can be no
assurances, management believes that the impact of this action will not have a
material adverse effect on the financial position or results of operations of
either Villa or the Company.
In addition, the Company is a defendant in several other legal actions arising
from the normal course of business in various US and foreign jurisdictions.
Management believes the Company has meritorious defenses to such actions and
that the outcomes will not be material to the Company's consolidated financial
statements.
27
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a: Exhibits
4.1* Amendment No. 1 dated July 17, 2003 to the Del Global Technologies
Corp Amended and Restated Stock Option Plan (as adopted effective
as of January 1, 1994 and as amended December 14, 2000).
31.1* Certification of Chief Executive Officer, Walter F. Schneider,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Chief Financial Officer, Thomas V. Gilboy,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of the Chief Executive Officer, Walter F. Schneider,
pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2* Certification of the Chief Financial Officer, Thomas V. Gilboy,
pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
* Filed herewith
b: Reports on Form 8-K
On October 10, 2003, the Company filed a Current Report on Form
8-K reporting under Item 5. "Other Events" to report that the
Company had appointed a new President and CEO and a new
Chairman.
On October 31, 2003, the Company filed a Current Report on Form
8-K reporting under Item 5. "Other Events" to report that the
Company announced plans to issue financial results for the
Company on November 3, 2003.
28
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DEL GLOBAL TECHNOLOGIES CORP.
/s/ Walter F. Schneider
---------------------------------
Walter F. Schneider
Chief Executive Officer
and President
/s/ Thomas V. Gilboy
--------------------------------
Thomas V. Gilboy
Chief Financial Officer,
Vice President
Dated: December 12, 2003
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