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 May 1, 2004
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-2 of the Exchange Act)
Yes / / No /X/
The number of shares of Registrant's common stock outstanding as of June 9,2004
was 10,335,048.
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 and Nine Months
Ended May 1, 2004 and May 3, 2003 3
Consolidated Balance Sheets - May 1, 2004 and August 2, 2003 4-5
Consolidated Statements of Cash Flows for the Nine Months Ended
May 1, 2004 and May 3, 2003 6
Notes to Consolidated Financial Statements 7-18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19-27
Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
Item 4. Controls and Procedures 28
Part II. Other Information:
Item 1. Legal Proceedings 29-32
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 35
Certifications 36-39
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 Nine Months Ended
May 1, May 3, May 1, May 3,
2004 2003 2004 2003
---------- ---------- ---------- ---------
NET SALES $24,413 $23,039 $75,958 $74,907
COST OF SALES 18,372 17,911 59,129 59,015
--------- --------- --------- --------
GROSS MARGIN 6,041 5,128 16,829 15,892
--------- --------- --------- --------
Selling, general and
administrative 3,976 5,478 13,865 16,458
Research and development 413 702 1,144 1,748
Litigation settlement costs - 2,126 3,199 2,126
Impairment of goodwill and
other intangible assets - - 1,453 -
Facilities reorganization
costs - 253 - 706
---------- --------- ---------- --------
Total operating expenses 4,389 8,559 19,661 21,038
---------- --------- ---------- --------
OPERATING INCOME (LOSS) 1,652 (3,431) (2,832) (5,146)
Interest expense 915 315 1,562 1,028
Other (income)expense (52) 35 (104) (437)
---------- --------- ---------- --------
INCOME (LOSS) BEFORE INCOME
TAXES AND MINORITY INTEREST 789 (3,781) (4,290) (5,737)
INCOME TAX PROVISION 940 156 8,479 4,944
---------- --------- ---------- --------
NET LOSS BEFORE
MINORITY INTEREST (151) (3,937) (12,769) (10,681)
MINORITY INTEREST 138 (11) 484 106
---------- --------- ----------- ---------
NET LOSS $ (289) $(3,926) $(13,253) $(10,787)
=========== ========= =========== =========
LOSS PER COMMON SHARE:
BASIC AND DILUTED $ (0.03) $ (0.38) $(1.28) $(1.04)
======== ======= ======= =======
Weighted average number of
common shares outstanding,
basic and diluted 10,332,548 10,338,140 10,332,548 10,344,390
========== =========== =========== ===========
See notes to consolidated financial statements
3
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
ASSETS
May 1, August 2,
2004 2003
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 6,753 $ 1,381
Trade receivables (net of allowance
for doubtful accounts of $1,408 and
$1,232 at May 1, 2004 and August 2, 2003,
respectively) 17,337 17,063
Inventory - Net 17,132 18,448
Deferred income tax asset - current - 2,591
Prepaid expenses and other current
assets 876 730
------------ -------------
Total current assets 42,098 40,213
REFUNDABLE INCOME TAXES - 55
FIXED ASSETS - Net 8,396 9,293
DEFERRED INCOME TAX ASSET-NON CURRENT 927 6,148
GOODWILL 1,911 3,239
INTANGIBLES - Net 120 333
OTHER ASSETS 1,554 1,211
------------- --------------
TOTAL ASSETS $55,006 $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
May 1, August 2,
2004 2003
------------- -------------
CURRENT LIABILITIES
Short-term credit facilities $ 5,294 $ 6,446
Current portion of long-term debt 806 655
Accounts payable - trade 13,075 8,990
Accrued liabilities 8,324 7,730
Litigation settlement reserves 5,586 2,553
Income taxes payable 779 241
------------ --------------
Total current liabilities 33,864 26,615
NON-CURRENT LIABILITIES
Long-term debt 5,158 5,312
Subordinated note 1,921 1,788
Other long-term liabilities 2,690 2,545
------------ --------------
Total liabilities 43,633 36,260
------------ --------------
MINORITY INTEREST IN SUBSIDIARY 1,326 1,253
------------ --------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.10 par value;
Authorized 20,000,000 shares;
Issued and outstanding - 10,976,081 at
May 1, 2004 and August 2, 2003 1,097 1,097
Additional paid-in capital 63,713 63,682
Accumulated other comprehensive gain 849 563
Accumulated deficit (50,066) (36,817)
Less common stock in treasury - 643,533
shares at May 1, 2004 and August 3,
2002 (5,546) (5,546)
------------- --------------
Total shareholders' equity 10,047 22,979
------------ --------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 55,006 $ 60,492
============ ==============
See notes to consolidated financial statements
5
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
May 1,2004 May 3, 2003
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(13,253) $(10,787)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 1,533 1,856
Deferred income tax provision 7,903 4,730
Impairment of intangible assets 1,453 -
Imputed interest - Subordinated note 133 131
Minority interest 484 106
Stock based compensation expense 31 127
Loss on sale of fixed assets 72 97
Changes in operating assets and liabilities:
Decease in marketable securities - 45
Decrease in trade receivables 137 3,220
Decrease in inventory 1,731 2,004
Decrease in income taxes receivable - 3,992
(Increase) decrease in prepaid expenses and
other current assets (123) 962
Decrease in refundable income taxes 55 91
(Increase)Decrease in other assets (302) 156
Increase (decrease) in accounts payable - trade 3,866 (1,554)
Provision for DOD settlement 3,199 (2,347)
Increase(decrease) in accrued liabilities 114 (2,658)
Increase(decrease) in income taxes payable 525 (101)
Other 42 23
----------- ---------
Net cash provided by operating activities 7,600 4,756
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed asset purchases (345) (1,800)
---------- ---------
Net cash used in investing activities (345) (1,800)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of bank borrowings (1,593) (2,398)
Dividend paid to Villa minority shareholders (505) -
---------- ---------
Net cash used in financing activities (2,098) (2,398)
---------- ---------
EFFECT OF EXCHANGE RATE CHANGES 215 77
---------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 5,372 635
CASH AND CASH EQUIVALENTS AT THE BEGINNING
OF THE PERIOD 1,381 895
---------- ---------
CASH AND CASH EQUIVALENTS AT THE END OF
THE PERIOD $ 6,753 $ 1,530
========== =========
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.
FINANCIAL CONDITION AND LIQUIDITY
As discussed in the Contingencies footnote herein, in February 2004 Del Global
reached an agreement in principle with the US Government regarding a settlement
of the civil and criminal aspects of the Department of Defense's (DOD's)
investigation into certain business practices at its RFI subsidiary. The
settlement would include the Company pleading guilty to one criminal count and
agreeing to pay fines and restitution to the US Government of $4,600 if paid by
June 30, 2004 and $5,000 if paid by September 30, 2004. There can be no
assurance that the Company will enter into a binding agreement with the US
Government regarding the settlement, or that the terms will not be changed. The
Company does not expect to have funds available as early as June 30,2004 in
order to pay the reduced settlement amount.
Del Global expects to work with the DOD to avoid any future limitations on the
ability of the Company to do business with U.S. Government entities. Such
limitations could include the U.S. Government seeking a "debarment" or exclusion
of the Company from doing business with U.S. Government entities for a period of
7
time. Because management believes that it has been responsive in addressing the
problems that affected RFI in the past, the Company believes this settlement
will not limit or interrupt its ability to service the governmental and defense
sectors of its business.
As of January 31,2004 the Company was out of compliance with the Adjusted
Earnings, Adjusted US Earnings, Senior Debt Ratio, and Fixed Charge Coverage
Ratio covenants of its lending facility with General Electric Capital Corp
("GECC"). In March 2004, the Company received a waiver of these covenant
defaults from GECC and signed a Fourth Amendment to the credit facility with
GECC. This Fourth Amendment (i) includes revisions to the financial covenants,
(ii) provides for a $100 waiver fee payable immediately and a $500 fee payable
to GECC earned immediately but payable on the earlier to occur of (a)the
expiration of the GECC Facility and/or (b) the date of repayment of all amounts
outstanding under and the termination of the GECC Facility, (iii) includes the
elimination of the early termination fee under the GECC facility, (iv) contains
the consent of GECC for the Company to obtain funding from a junior lender to
fund the proposed settlement regarding the DOD matter, (v) replaces the existing
prime rate and LIBOR pricing with pricing based on 30 day Commercial Paper plus
3.5% and (vi) requires the Company to have entered into a written settlement
agreement regarding the DOD matter on terms acceptable to GECC and to have paid
the U.S. Government an amount not to exceed $5.0 million with respect to such
settlement by September 30, 2004. The Company has included the $600 in fees
associated with this amendment in Interest Expense for the three and nine months
periods ended May 1, 2004 on the accompanying Consolidated Statement of
Operations. While the Company is in compliance with these covenants as of May 1,
2004, there can be no assurance that the Company will be able to continue to
meet them. If the Company were to breach the covenants, GECC could accelerate
the amounts due under and foreclose on assets securing the GECC Facility and the
Company would be forced to seek alternative sources of funding for its debt
repayment obligations. Previously, the Company has breached certain financial
covenants in the GECC Facility, including in the fourth quarter of fiscal 2003,
for which it has obtained waivers of non-compliance. The GECC Facility expires
on December 31, 2004. No assurances can be made that the Company will be able to
renew or replace the GECC Facility on terms acceptable to the Company, or at
all.
As of May 1, 2004, the Company does not have sufficient cash balances or
borrowing availability under its lending facilities to fund the $5,000 required
by the settlement with the US Government on September 30, 2004 or to fund the
lesser amounts stipulated upon earlier payment.
The Company's Board of Directors has retained Imperial Capital, LLC, an
investment bank, to assist the Company in exploring all strategic alternatives
to raise the additional funding necessary to fund the proposed DOD settlement
and to maximize returns to shareholders.
In particular, such alternatives include potential financings and asset sales.
The Company would be required to obtain an amendment to, or other accommodations
in, its existing credit facility from its current U.S. lender prior to the
consummation of any additional financing or asset sales.
The Company's present lenders have indicated a willingness to work with the
Company on these strategic alternatives. Presently management has received
initial term sheets from lenders that would provide for the repayment of the
existing lender and additional borrowings necessary to fund the DOD settlement.
8
There can be no assurance that the additional capital required to fund the DOD
settlement will be available to the Company either through a replacement lender
or through asset sales on terms acceptable to the Company or at all. If the
Company is unable to fund the settlement with the US Government, it is possible
the US Government could seek injunctive relief or other civil or criminal
actions.
STOCK BASED COMPENSATION
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.
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 and nine months ended May 1, 2004 and May 3, 2003 would
have been stated at the pro forma amounts indicated below:
Three Months Ended Nine Months Ended
------------------ -----------------
May 1, May 3, May 1, May 3,
2004 2003 2004 2003
------- ------- ------- -------
Net loss - as reported $ (289) $(3,926) $(13,253) $(10,787)
Add: Total stock-based
awards determined under
fair value method (114) (161) (342) (483)
------- ------- ------- -------
Proforma Net loss $ (403) $(4,087) $(13,595) $(11,270)
======= ======= ======= =======
Loss per share -
Basic and diluted
As reported $ (0.03) $(0.38) $ (1.28) $(1.04)
Proforma $ (0.04) $(0.40) $ (1.32) $(1.09)
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities." In
December 2003, the FASB issued FIN No. 46 (Revised) ("FIN 46-R") to address
certain FIN 46 implementation issues. This interpretation requires that the
9
assets, liabilities, and results of activities of a Variable Interest Entity
("VIE") be consolidated into the financial statements of the enterprise that has
a controlling interest in the VIE. FIN 46R also requires additional disclosures
by primary beneficiaries and other significant variable interest holders. For
entities acquired or created before May 3, 2003, this interpretation is
effective no later than the end of the first interim or annual reporting period
ending after March 15, 2004, except for those VIE's that are considered to be
special purpose entities, for which the effective date is no later than the end
of the first interim or annual reporting period ending after December 15, 2003.
For all entities that were acquired subsequent to May 1, 2003, this
interpretation is effective as of the first interim or annual period ending
after December 31, 2003. The adoption of this interpretation did not have a
material impact on the Company's consolidated financial statements.
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:
May 1, 2004 August 2, 2003
---------------- --------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amounts Amortization Amounts Amortization
Non-Compete
Agreements $ - $ - $ 902 $ 738
Distribution
Network 653 533 653 484
------- ------- ------- -------
Total $ 653 $ 533 $ 1,555 $ 1,222
======= ======= ======= =======
Amortization expense for intangible assets during the three and nine months of
fiscal year 2004 was $16 and $89, respectively, and for fiscal year 2003 was $36
and $108, respectively. Estimated amortization expense for the remainder of 2004
and the succeeding fiscal years is as follows:
2004 (remainder) $ 16
2005 66
2006 38
There are no components of intangible assets that have an indefinite life.
At the end of the second quarter of fiscal year 2004, due to continuing
operating losses at the Company's Del High Voltage division, the Company
concluded that sufficient indicators of impairment were present to warrant a
review of the goodwill and intangible assets of this reporting unit. In
accordance with the provisions of SFAS 142, based on a recent valuation of this
reporting unit, the Company compared the implied fair value of the goodwill to
10
the actual carrying value as of January 31, 2004, and concluded an impairment
loss of $1,328 had occurred. Accordingly, a charge of $1,328 was recorded during
the second quarter of fiscal year 2004 on the accompanying Consolidated
Statement of Operations.
The Company also conducted an impairment test of the carrying value of
non-compete agreements related to the Del High Voltage division. In accordance
with the provision of SFAS 144, the Company compared the expected future cash
flows related to the non-compete agreements to the carrying value and concluded
and impairment loss of $125 had occurred. Accordingly, the Company recorded a
charge of $125 during the second quarter of fiscal year 2004 on the accompanying
Consolidated Statement of Operations.
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".
May 1, 2004 August 2, 2003
----------------- ----------------
Raw materials and purchased parts $ 14,801 $ 15,161
Work-in-process 3,015 3,757
Finished goods 3,020 3,377
---------- ----------
20,836 22,295
Less allowance for obsolete and excess
inventory (3,704) (3,847)
----------- ----------
Total inventory, net $ 17,132 $ 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 nine months of fiscal 2004, the Company incurred payments of
$691 related to warranty claims submitted and accrued $1,206 related to product
warranties issued during the first nine months of fiscal 2004. The liability
related to warranties is included in accrued expenses on the accompanying
Consolidated Balance Sheets and is $1,184 and $670 at May 1, 2004 and August 2,
2003, respectively.
DEFERRED INCOME TAX ASSET
Deferred income tax assets and liabilities represent the effects of the
differences between the income tax basis and financial reporting basis of the
assets and liabilities at the tax rates expected at the time the deferred tax
11
liability or asset is expected to be settled or realized. Based on information
and forecasts available as of August 2003, the Company recorded a net deferred
income tax asset of $8,739, with $2,591 classified as a current asset and the
balance of $6,148 as a long term asset.
Based on an evaluation conducted in February 2004, management concluded that due
to recent results being lower than originally anticipated, it was prudent to
establish an additional valuation allowance of $1,859 against current deferred
tax assets and $5,312 against long term deferred tax assets. The valuation
allowance was computed by estimating the amount of future taxable income
expected over the net operating loss carryforward period, and that estimate was
based principally on the Company's recent performance. The valuation allowance
recorded is the estimate of the amount of deferred tax assets that are more
likely than not to go unrealized by the Company. A corresponding amount of
$7,171 was charged to the income tax provision for the six months ended January
1, 2004 to reflect this valuation allowance.
The total income tax provision, including the $7,171 valuation allowance and tax
provision amounts recorded at Villa, was $940 and $8,479 for the three and nine
month periods ended May 1, 2004, respectively. The provision of $940 recognized
during the third quarter ended May 1, 2004 includes $732 in US income taxes
recognized upon the receipt of a $1,922 intercompany dividend from the Company's
Villa Sistemi Medicali ("Villa") subsidiary located in Milan, Italy. The Company
estimates that it is more likely than not the remaining deferred asset will be
utilized against future operating profits; however, no assurances can be given
that results of operations will generate profits in the future.
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 2004 and 2003 was as follows:
Three Months Ended Nine Months Ended
May 1, May 3, May 1, May 3,
2004 2003 2004 2003
---------- ----------- ---------- -----------
Net loss $ (289) $(3,926) $(13,253) $ (10,787)
Foreign currency
translation adjustments (304) 202 286 493
-------- --------- -------- ---------
Comprehensive loss $ (593) $(3,724) $(12,967) $ (10,294)
========= ========= ======== ==========
12
LOSS PER SHARE
Three Months Ended Nine Months Ended
May 1, May 3, May 1, May 3,
2004 2003 2004 2003
---------- ----------- ---------- -----------
Numerator:
Net loss $ (289) $(3,926) $(13,253) $(10,787)
Denominator:
Denominator for basic
loss per share -
Weighted average shares
outstanding 10,332,548 10,338,140 10,332,548 10,344,390
Effect of dilutive
securities - - - -
----------- ---------- ----------- ----------
Denominator for diluted
loss per share 10,332,548 10,338,140 10,332,548 10,344,390
=========== ========== ========== ==========
(Loss) per basic and
diluted common share $ (0.03) $ (0.38) $ (1.28) $ (1.04)
=========== ========== =========== ==========
Common shares outstanding for the current period and prior period ended were
reduced by 643,533 shares of treasury stock. The computation of diluted shares
outstanding does not include 2,110,230 and 2,165,055 employee stock options and
1,065,000 and 1,065,000 warrants to purchase Company common stock, as of May 1,
2004 and May 3, 2003, respectively, because the effect of their assumed
conversion would be anti-dilutive.
13
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
May 1, 2004 Group Group Other Total
- ----------------------- --------- ---------- ------- -------
Net Sales to Unaffiliated Customers $17,417 $ 6,996 - $24,413
Cost of sales 13,346 5,026 - 18,372
------- -------- ------ ------
Gross margin 4,071 1,970 - $ 6,041
Operating expenses 2,482 1,463 $ 444 4,389
Litigation settlement costs - - - -
Impairment of Goodwill - - - -
------- -------- ------ ------
Total operating expenses 2,482 1,463 444 4,389
------- -------- ------ ------
Operating income / (loss) $ 1,589 $ 507 $ (444) $ 1,652
======= ======== ====== ======
Medical Power
For three months ended Systems Conversion
May 3, 2003 Group Group Other Total
- ----------------------- ------- ---------- ------ ------
Net Sales to Unaffiliated Customers $13,415 $ 9,624 - $23,039
Cost of sales 10,445 7,466 - 17,911
------- --------- ------ -------
Gross margin 2,970 2,158 - 5,128
Operating expenses 2,865 2,250 $1,065 6,180
Litigation settlement costs (recovery) - 2,347 (221) 2,126
Facilities reorganization costs - 175 78 253
------- --------- ------- -----
Total operating expenses 2,865 4,772 922 8,559
------- --------- ------- ------
Operating income / (loss) $ 105 $ (2,614) $ (922) $(3,431)
======= ========= ======= ======
Medical Power
For nine months ended Systems Conversion
May 1, 2004 Group Group Other Total
- ----------------------- ------- -------- ------- -------
Net Sales to Unaffiliated Customers $54,952 $ 21,006 - $75,958
Cost of sales 41,890 17,239 - 59,129
------- -------- ------ ------
Gross margin 13,062 3,767 - 16,829
Operating expenses 8,588 4,663 $1,758 15,009
Litigation settlement costs - 3,199 - 3,199
Impairment of Goodwill - 1,453 - 1,453
------- -------- ------ ------
Total operating expenses 8,588 9,315 1,758 19,661
------- -------- ------ ------
Operating income / (loss) $ 4,474 $ (5,548) $(1,758) $(2,832)
======= ======== ====== ======
14
Medical Power
For nine months ended Systems Conversion
May 3, 2003 Group Group Other Total
- ----------------------- ------- ---------- ------ --------
Net Sales to Unaffiliated Customers $40,757 $34,150 - $74,907
Cost of sales 31,510 27,505 - 59,015
------- --------- ------ --------
Gross margin 9,247 6,645 - 15,892
Operating expenses 8,534 6,472 $ 3,200 18,206
Litigation settlement costs (recovery) - 2,347 (221) 2,126
Facilities reorganization costs - 564 142 706
-------- -------- ------- ------
Total operating expenses 8,534 9,383 3,121 21,038
-------- ------- ------- ------
Operating income / (loss) $ 713 $(2,738) $(3,121) $(5,146)
======== ======= ======= =======
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 May 2004,the SEC's Commissioners approved a consent agreement the Company
signed with the Staff of the SEC in December 2003 for a settlement of the SEC's
claims against the Company that included 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 remains subject to court approval. We can
give no assurance that this settlement will receive 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 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 electro magnetic interference 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.
14
In June 2003, the Company was advised that the US Government was willing to
enter into negotiations regarding a comprehensive settlement of this
investigation. 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 estimate of the low end of a range of
potential fines and legal and professional fees.
In February 2004, Del Global reached an agreement in principle with the US
Government regarding settlement of the civil and criminal aspects of the DOD's
investigation. The settlement would include the Company pleading guilty to one
criminal count and agreeing to pay fines and restitution to the US Government of
$4,600 if paid by June 30, 2004 and $5,000 if paid by September 30, 2004. There
can be no assurance that the Company will enter into a binding agreement with
the US Government regarding the proposed settlement, or that the terms will not
be changed. The Company will need to raise additional capital to fund this
settlement. There can be no assurance that additional capital will be available
to the Company on terms acceptable to the Company or at all. The Company does
not expect to have funds available as early as June 30,2004 in order to pay the
reduced settlement amount.
In connection with this settlement, Del Global recognized an additional charge
of approximately $3,199 in the second quarter of fiscal 2004. This charge
represents the difference between the $2,347 charge taken during the third
quarter of fiscal 2003, and the up to $5,000 in fines and restitution, plus
estimated legal and professional fees related to this settlement. The liability
associated with these charges is included in Litigation settlement reserves on
the accompanying balance sheet.
Del Global expects to work with the DOD to avoid any future limitations on the
ability of the Company to do business with U.S. Government entities. Such
limitations could include the U.S. Government seeking 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, the Company believes this settlement
will not limit or interrupt its ability to service the governmental and defense
sectors of its business. There can be no assurance that a debarment will be
avoided and that the Company will be able to generate sufficient funds to pay
either the $5,000 in fines or restitution or accelerate payment to pay a reduced
amount.
The Company's Board of Directors has retained Imperial Capital, LLC, an
investment bank, to assist the Company in exploring all strategic alternatives
to raise the additional funding necessary to fund the proposed settlement with
the US Government regarding the DOD investigation, and to maximize returns to
shareholders. In particular, such alternatives include potential financings and
asset sales. The Company would be required to obtain an amendment to, or other
accommodations in, its existing credit facility from its current U.S. lender
prior to the consummation of any additional financing or asset sales.
Shareholder Suit - On February 6, 2004, a motion was filed for summary judgment
to enforce a January 2002 class action settlement agreement entered into by the
Company. The motion seeks damages in the amount of $1,250 together with
16
interest, costs and disbursements, and a declaration that $2,000 in promissory
notes issued as part of the class action settlement are immediately due and
payable, as the value of damages due to the Company's failure to timely complete
a registration statement related to the common shares underlying certain
warrants granted in the class action settlement. The Company filed opposition to
this matter on March 5, 2004. Plaintiffs filed reply papers on March 19, 2004.
In addition, the Company filed a registration statement related to the warrant
shares on March 23,2004, and it was declared effective by the SEC on May 7,2004.
The Company believes that the motion for summary judgment is without merit and
intends to vigorously defend this matter. There can be no assurances, however,
that the Company will be successful in defending this motion.
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 May 3, 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 calendar 2004. At time of settlement, the Company expects to recognize a
related charge of approximately $500, including a cash disbursement of
approximately $200.
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 had 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 believed that the obligation to pay these amounts had 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. Mr. Park answered the complaint and asserted counterclaims
seeking payment from the Company based on his position that a "change in
control" occurred in June 2003. Mr. Park is also seeking other consideration he
17
believes he is owed under his employment agreement. The Company filed a reply to
Mr. Park's counterclaims denying that he is entitled to any of these payments.
If paid in a lump sum, these payments may have a material adverse effect on the
Company's liquidity. It is not possible to predict the outcome of these claims.
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.
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.
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.
SUBSEQUENT EVENTS
On April 7, 2004, the Company began employment termination proceedings against
the General Manager of its Villa Subsidiary, and on April 30, 2004, she was
removed from her position as Managing Director by resolution of Villa
shareholders. On April 29,2004 the former Managing Director took a preliminary
action which may ultimately allow her to institute legal proceedings alleging
certain damages based on a Change in Control provision of her contract and seek
various additional actions or damages available under Italian law. The Company
believes the former Managing Director's Change in Control provision has not been
violated and that her dismissal was justified in accordance with the provisions
of Italian law. The Company continues to evaluate this situation and has not
recorded a provision for possible charges associated with this matter in the
accompanying financial statements.
18
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 Annual Report on 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 August 2, 2003, this deferred income tax asset represented approximately 14%
of our total assets. The valuation of our deferred tax assets and the
recognition of tax benefits in each period assumes future taxable income and
profitability. We periodically evaluate the likelihood of the recoverability of
our deferred tax asset recognized, based upon our actual operating results and
expectations of future operating profits.
19
During February 2004, as part of its customary six month planning and review
cycle, management updated each business units' forecasts for the second half of
fiscal 2004. After reviewing the second half expectations, coupled with lower
than expected first half operating results and the uncertain economic outlook,
management concluded that it was prudent to record an additional valuation
allowance of $7.2 million, thereby increasing the total valuation allowance to
$17.2 million against both long and short-term deferred tax assets. The
valuation allowance was computed by estimating the amount of future taxable
income expected over the net operating loss carryforward period, and that
estimate was based principally on the Company's recent performance. The
valuation allowance recorded is the estimate of the amount of deferred tax
assets that are more likely than not to go unrealized by the Company.
A corresponding amount of $7.2 million was recorded as an income tax provision
for the three and six month periods ended January 31, 2004. We anticipate that
it is more likely than not the remaining deferred tax asset will be utilized
against future operating profits or as an offset to dividend income received
from our Villa subsidiary. However, we can make no assurances that our business
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 May 1, 2004, finished goods represented approximately 14.5%
of the gross carrying value of our total gross inventory. We believe the
estimation methodologies used to be appropriate and consistently applied.
20
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated net sales of $24.4 million for the third quarter of fiscal 2004
increased by $1.4 million or 6.0% from fiscal 2003 third quarter net sales of
$23.0 million, with decreases at the Power Conversion Group more than offset by
increases at our Medical Systems Group. The Medical Systems Group's third
quarter fiscal 2004 sales of $17.4 million improved by $4.0 million or 29.8%
from the prior year's third quarter with increases at international locations
partially offset by a $0.4 million decline at domestic locations, plus favorable
exchange rate effects from the translation of Villa's financial statements from
euros. The Power Conversion Group's third quarter fiscal 2004 sales of $7.0
million decreased by $2.6 million, or 27.3% 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.
Consolidated net sales of $76.0 million for the first nine months of fiscal 2004
were slightly higher than the $74.9 million reported in the first nine months of
fiscal 2003, with increases at our Medical Systems Group partially offset by
decreases at the Power Conversion Group. The Medical Systems Group's first nine
month fiscal 2004 sales of $55.0 million improved by $14.2 million, or 34.8%,
from the prior year's first nine months, with strong increases at international
locations offsetting a decline at domestic locations, plus favorable exchange
rate effects from the translation of Villa's financial statements from euros.
This increase in sales included the second quarter fiscal 2004 shipment of $8.5
million of medical equipment to the Ministry of Social Services in Mexico. The
Power Conversion Group's first nine month fiscal 2004 sales of $21.0 million
decreased by $13.1 million or 38.5% 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 fiscal year's third
quarter.
Consolidated backlog at May 1, 2004 was $35.5 million versus backlog at August
2, 2003 of approximately $26.3 million. The backlog in the Medical Systems
Segment increased $12.3 million on strong international orders, partially offset
by a $3.0 million decrease in the Power Conversion Group backlog from levels at
beginning of the fiscal year. Substantially all of the backlog should result in
shipments within the next 12 months.
Gross margins as a percent of sales were 24.7% for the third quarter of fiscal
2004, compared to 22.3% in the third quarter of fiscal 2003. The Power
Conversion Group's margins for the third quarter of fiscal 2004 were 28.2%,
versus 22.4% in the prior year quarter. The fiscal 2004 third quarter margins
increased due to improvements in procurement practices resulting in lower
average material costs. The Medical Systems Group's fiscal 2004 third quarter
gross margins of 23.4% were slightly higher than the 22.1% level in the prior
year third quarter due to higher margins domestically as a result of cost
control measures.
21
Selling, General and Administrative expenses ("SG&A") for the third quarter of
fiscal 2004 were $4.0 million (16.3% of sales), compared to $5.5 million (23.8%
of sales) in the prior year's third quarter. The decline in SG&A as a percent of
sales is due to reduced headcount and lower legal and accounting fees.
SG&A expenses for the first nine months of fiscal 2004 were $13.9 million (18.3%
of sales), compared to $16.5 million (22.0% of sales) in the same period in the
prior year. The decline in SG&A during the first nine months of fiscal 2004 is a
result of reduced corporate legal and accounting costs, reductions in headcount
and cost savings due to the consolidation of the Company's Hicksville, NY
facility into the Valhalla NY facility during fiscal 2003.
We have reached an agreement in principal with the U.S. Government regarding a
settlement of the civil and criminal aspects of the previously disclosed
Department of Defense ("DOD") investigation of our RFI subsidiary (See Part II
Item 1 "Legal Proceedings"). The settlement would include the Company pleading
guilty to one criminal count and agreeing to pay fines and restitution to the US
Government of $4.6 million if paid by June 30, 2004 and $5.0 million if paid by
September 30, 2004.
In connection with this settlement, Del Global recognized an additional charge
for Litigation settlement costs of approximately $3.2 million in the second
quarter of fiscal 2004. This charge represents the difference between the $2.3
million charge taken during the third quarter of fiscal 2003, and the up to $5.0
million in fines and restitution, plus estimated legal and professional fees,
related to this settlement. The liability associated with these charges is
included in Litigation settlement reserves on the accompanying balance sheet
There can be no assurance that the Company will enter into a binding agreement
with the US Government regarding the proposed settlement, or that the terms will
not be changed. The Company will need to raise additional capital to fund this
settlement. There can be no assurance that additional capital will be available
to the Company on terms acceptable to the Company or at all.
During the second quarter of fiscal 2004, due to the continued operating losses
at the High Voltage division, we wrote off $1.5 million in goodwill and
intangible assets associated with this business. The High Voltage division is
part of the Power Conversion Group.
As a result of the foregoing, we recognized third quarter fiscal 2004 operating
income of $1.7 million compared to an operating loss of $3.4 million in the
third quarter of fiscal 2003. The third quarter fiscal 2004 operating income was
comprised of $1.6 million in income at the Medical Systems Group and $0.5
million in income at the Power Conversion Group, partially offset by unallocated
corporate costs of $0.4 million. For the first nine months, we recognized an
operating loss of $2.8 million, compared to an operating loss of $5.1 million in
the first nine months of fiscal 2003. The Medical Systems Group posted operating
income of $4.5 million in the first nine months of fiscal 2004, offset by a $5.6
million operating loss at the Power Conversion Group and unallocated corporate
costs of $1.8 million.
Interest expense for third quarter and first nine months of fiscal 2004 was
higher than the prior year's comparable periods reflecting $0.6 million in fees
related to a revolving credit loan amendment.
During the first nine months 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. During the first nine months of fiscal 2004, the
22
Company recognized other income of $0.1 million, which included $0.2 million of
income related to favorable settlements of product royalty disputes, offset by
foreign exchange losses at the Villa subsidiary.
Provision for income taxes for the three and six month period ended January 31,
2004 reflects the establishment of a $7.2 million deferred tax valuation
allowance as discussed in Critical Accounting Policies, above. Management
periodically evaluates the likelihood of the recoverability of the deferred tax
asset recognized on our balance sheet. Based on management analysis, we believe
it is more likely than not that the remaining deferred tax assets will be
realized. Other than the establishment of a valuation allowance, we recorded no
adjustments to our current or deferred tax accounts during the first nine months
of fiscal 2004 with the exception of current tax provision amounts recorded at
Villa Sistemi, our foreign subsidiary, and an amount of $0.7 million related to
US income taxes due upon the receipt of the Company's $2.0 million share of a
dividend paid by Villa during the third quarter. During the three and nine month
periods of fiscal year 2003, we had recorded a deferred tax valuation allowance
of $4.7 million.
Reflecting the above, we recorded a net loss of $0.3 million or $0.03 per share
in the third quarter of fiscal 2004, as compared to a net loss of $3.9 million,
or $0.38 per share, in the third quarter of the prior year. Our loss was $13.3
million or $1.28 per share in the first nine months of this year compared to a
loss of $10.8 million or $1.04 per share for the first nine months of fiscal
2003.
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 May 1, 2004 and August 2, 2003, our working capital was
approximately $8.2 million and $13.6 million, respectively. At such dates, we
had approximately $6.8 million and $1.4 million, respectively, in cash and cash
equivalents. As of May 1, 2004 we had approximately $2.1 million of excess
borrowing availability under our domestic revolving credit facility compared to
$3.8 million at August 2, 2003.
In addition, as of May 1, 2004, our Villa subsidiary had an aggregate of
approximately $7.0 million of excess borrowing availability under its various
short-term credit facilities compared to $6.7 million of excess borrowing
availability at August 2, 2003. 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 nine months ended May 1, 2004 the
Company generated approximately $7.5 million of cash from operations, compared
to a generation of $4.8 million in the nine months of the prior fiscal year.
Contributing to cash generation in the first nine months of fiscal 2004 were
increases in trade payables and accrued liabilities as well as decreases in
inventories The first nine months of fiscal 2003 included the collection of
approximately $4.0 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 carry-backs of
five years from two years.
23
Cash Flows from Investing Activities - We have expended approximately $0.3
million for facility improvements and capital equipment for the nine months
ended May 1, 2004. We anticipate fiscal 2004 capital expenditures will continue
to 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 nine months of fiscal
2004, we repaid a total of approximately $1.6 million of indebtedness on our
domestic and Italian borrowings. In addition the Villa subsidiary paid a
dividend of approximately $2.5 million, of which $0.5 million was paid to
Villa's minority shareholders. The remaining $2.0 million, net of withholding
taxes was an intercompany transaction with the Parent Company and eliminated in
the accompanying financial statements.
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 in
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 US
Credit Facility matures in December 2004. The maturity of the US Credit
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 entered into on June 10, 2002 with Transamerica Corporation. In
January 2004, General Electric Credit Corporation ("GECC") completed the
acquisition of Transamerica Corporation and assumed the ownership and
administration of our US credit facility. This facility, as amended, expires on
December 31, 2004. Interest under this US credit facility is based on thirty day
commercial paper rates plus a margin of 3.5%. The interest rate on the revolving
line of credit was 4.75% at August 2, 2003 and May 1, 2004. The GECC Facility is
subject to commitment fees of 3/8% on the daily unused portion of the facility,
payable monthly. Under terms of the GECC Facility, interest is calculated based
on the higher of the actual balance, or a floor revolving credit balance of $5
million. The GECC Facility is secured by substantially all of the Company's
accounts receivable, inventory, and fixed assets in the U.S. The terms of the
GECC 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.
As of January 31, 2004, the Company was out of compliance with the Adjusted
Earnings, Adjusted US Earnings, Senior Debt Ratio, and Fixed Charge Coverage
Ratio covenants of the GECC Facility. In March 2004, the Company received a
waiver of these covenant defaults from GECC and signed a Fourth Amendment to the
credit facility with GECC. This Fourth Amendment (i) includes revisions to the
24
financial covenants, (ii) provides for a $100,000 waiver fee payable immediately
and a $500,000 fee payable to GECC earned immediately but payable on the earlier
to occur of (a) the expiration date of the GECC Facility and/or (b) the date of
repayment of all amounts outstanding under and the termination of the GECC
Facility, (iii) includes the elimination of the early termination fee under the
GECC facility, (iv) contains the consent of GECC for the Company to obtain
funding from a junior lender to fund the proposed settlement regarding the DOD
matter, (v) replaces the existing prime rate and LIBOR pricing with pricing
based on 30 day Commercial Paper plus 3.5% and (vi) requires the Company to have
entered into a written settlement agreement regarding the DOD matter on terms
acceptable to GECC and to have paid the US Government an amount not to exceed
$5.0 million with respect to such settlement by September 30, 2004. While the
Company expects to be able to meet these revised covenants, there can be no
assurance that the Company will be able to continue to meet them. If the Company
were to breach the covenants, GECC could accelerate the amounts due under and
foreclose on assets securing the GECC Facility and the Company would be forced
to seek alternative sources of funding for its debt repayment obligations.
Previously, the Company has breached certain financial covenants in the GECC
Facility, including in the fourth quarter of fiscal 2003, for which it has
obtained waivers of non-compliance.
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 May 1, 2004, the Company has a frozen defined benefit plan that is under
funded. In accordance with SFAS No. 88, at the time of final settlement of the
pension plan, the Company will recognize an expense to recognize its unfunded
status. This plan has not been terminated yet, but the Company expects to start
the process of terminating this plan in calendar 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.
On March 23, 2004, we filed 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. The SEC declared this registration statement effective on May 7,
2004. Shareholders are 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 subject to compliance with applicable blue sky laws. 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 GECC Facility.
As described in "Legal Proceedings" Part II, Item 1 below, on February 6, 2004,
a motion was filed for summary judgment to enforce a January 2002 class action
settlement agreement entered into by the Company. The motion seeks damages in
the amount of $1,250,000, together with interest, costs and disbursements, and a
25
declaration that $2,000,0000 in promissory notes issued as part of the class
action settlement are immediately due and payable, as the value of damages due
to the Company's failure to complete the registration statement noted above. The
Company filed opposition to this matter on March 5, 2004. Plaintiffs filed reply
papers on March 19, 2004. On March 23, 2004, the Company filed a Form S-3
Registration Statement with the Securities and Exchange Commission to register
the shares of the Company's common stock underlying the warrants at issue. This
Form S-3 Registration was declared effective on May 7, 2004 by the Securities
and Exchange Commission. The Company believes that the motion for summary
judgment is without merit and intends to vigorously defend this matter. There
can be no assurances however that the Company will be successful in defending
this motion.
As described in "Legal Proceedings" Part II, Item 1 below, management had
previously 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, based on available information as of that time, we
recorded a charge of $2.3 million, which represented 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 February 2004, Del Global reached an agreement in principle with the US
Government regarding a settlement of the civil and criminal aspects of the DOD's
investigation. The settlement would include the Company pleading guilty to one
criminal count and agreeing to pay fines and restitution to the US Government of
$4.6 million if paid by June 30, 2004 and $5.0 million if paid by September 30,
2004. There can be no assurance that the Company will enter into a binding
agreement with the US Government regarding the proposed settlement, or that the
terms will not be changed. The Company will need to raise additional capital to
fund this settlement. There can be no assurance that additional capital will be
available to the Company on terms acceptable to the Company, or at all. The
Company does not expect to have funds available as early as June 30,2004 in
order to pay the reduced settlement amount.
The Company's Board of Directors has retained Imperial Capital, LLC, an
investment bank, to assist the Company in exploring all strategic alternatives
to raise the additional funding necessary to meet its obligations under the
potential DOD settlement, and to maximize returns to shareholders. In
particular, such alternatives include potential financings and asset sales. The
Company would be required to obtain an amendment to, or other accommodations in,
its existing credit facility from its current U.S. lender prior to the
consummation of any additional financing or asset sales.
In connection with this settlement, Del Global recognized an additional charge
of approximately $3.2 million in the second quarter of Fiscal 2004. This charge
represents the difference between the $2.3 million charge taken during the third
quarter of Fiscal 2003, and the up to $5 million in fines and restitution, plus
estimated legal and professional fees, related to this settlement. The liability
associated with these charges is included in Litigation settlement reserves on
the accompanying balance sheet.
Del Global expects to work with the DOD to avoid any future limitations on the
ability of the Company to do business with US Government entities. Such
limitations could include the US Government 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
26
affected RFI in the past, the Company believes this settlement will not limit or
interrupt its ability to service the governmental and defense sectors of its
business. There can be no assurance that a debarment will be avoided and that
the Company will be able to generate sufficient funds to pay either the $5
million in fines or restitution or accelerate payment to pay a reduced amount.
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 believed 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. Mr. Park answered the complaint and
asserted counterclaims seeking payment from the Company based on his position
that a "change in control" occurred in June 2003. Mr. Park is also seeking other
consideration he believes he is owed under his employment agreement. The Company
filed a reply to Mr. Park's counterclaims denying that he is entitled to any of
these payments. If paid in a lump sum, these payments may have a material
adverse effect on the Company's liquidity. It is not possible to predict the
outcome of these claims; 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.
We anticipate that cash generated from strategic alternatives, including asset
sales and additional financings, operations and amounts available from credit
facilities will be sufficient to satisfy our obligations under the DOD
Settlement and currently projected operating cash needs for at least the next
twelve months, and for the foreseeable future. However, there is no assurance
that any alternatives will be available to the Company on acceptable terms at
such time or at all. The GECC Facility expires on December 31, 2004. No
assurances can be given that the Company will be able to renew or replace the
GECC facility on terms acceptable to the Company, or at all.
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.
27
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
third fiscal quarter ended May 1, 2004 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.
28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Securities and Exchange Commission ("SEC") Investigation - On December 11, 2000,
the Division of Enforcement of the SEC issued an 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 May 2004,the SEC's Commissioners approved a consent agreement the Company
signed with the Staff of the SEC in December 2003 for a settlement of the SEC's
claims against the Company that included a previously announced penalty of
$400,000 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 remains subject to court approval. We can
give no assurance that this settlement will receive 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 $685,000 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 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 electromagnetic interference 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 was willing to
enter into negotiations regarding a comprehensive settlement of this
investigation. 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 $2,347,000 which represented its estimate of the low end of a range of
potential fines and legal and professional fees.
In February 2004, Del Global reached an agreement in principle with the US
Government regarding a settlement of the civil and criminal aspects of the DOD's
29
investigation. The settlement would include the Company pleading guilty to one
criminal count and agreeing to pay fines and restitution to the US Government of
$4.6 million if paid by June 30, 2004 and $5.0 million if paid by September 30,
2004. There can be no assurance that the Company will enter into a binding
agreement with the US Government regarding the proposed settlement, or that the
terms will not be changed. The Company will need to raise additional capital to
fund this settlement. There can be no assurance that additional capital will be
available to the Company on terms acceptable to the Company or at all. The
Company does not expect to have funds available as early as June 30,2004 in
order to pay the reduced settlement amount.
In connection with this settlement, Del Global recognized an additional charge
of approximately $3.2 million in the second quarter of Fiscal 2004. This charge
represents the difference between the $2.3 million charge taken during the third
quarter of Fiscal 2003, and the up to $5 million in fines and restitution, plus
estimated legal and professional fees, related to this settlement. The liability
associated with these charges is included in Litigation settlement reserves on
the accompanying balance sheets as of August 2, 2003 and May 1, 2004.
Del Global expects to work with the DOD to avoid any future limitations on the
ability of the Company to do business with US Government entities. Such
limitations could include the US Government 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, the Company believes this settlement will not limit or
interrupt its ability to service the governmental and defense sectors of its
business. There can be no assurance that a debarment will be avoided and that
the Company will be able to generate sufficient funds to pay either the $5
million in fines or restitution or accelerate payment to pay the reduced amount.
The Company's Board of Directors has retained Imperial Capital, LLC, an
investment bank, to assist the Company in exploring all strategic alternatives
to raise the additional funding necessary to meet its obligations under the DOD
settlement, and to maximize returns to shareholders. In particular, such
alternatives include potential financings and asset sales. The Company would be
required to obtain an amendment to, or other accommodations in, its existing
credit facility from its current U.S. lender prior to the consummation of any
additional financing or asset sales.
Shareholder Litigation - On February 6, 2004, a motion for summary judgment to
enforce a settlement agreement entered into by the Company in January 2002,
related to a class action suit filed against the Company, was filed in the
United States District Court, Southern District of New York by Philip Maley,
Gene Waters and Patsy Waters, on behalf of themselves and all others similarly
situated. The motion seeks an order and judgment that the Company has breached
the settlement agreement and seeks damages in the amount of $1,250,000 together
with interest, costs and disbursements, and a declaration declaring that
promissory notes, in the aggregate amount of $2,000,000 that were part of the
settlement, are immediately due and payable, as the value of damages suffered by
the Class due to the Company's failure to timely register with the Securities
and Exchange Commission shares of the Company's common stock underlying the
1,000,000 warrants issued in settlement of the action. The Company filed
30
opposition to this matter on March 5, 2004, which set forth numerous procedural,
legal, and factual opposition to the motion. Plaintiffs filed reply papers on
March 19, 2004. On March 23, 2004, the Company filed a Form S-3 Registration
Statement with the Securities and Exchange Commission to register the shares of
the Company's common stock underlying the warrants at issue. This Form S-3
Registration was declared effective on May 7, 2004 by the Securities and
Exchange Commission.
The Company believes that the motion for summary judgment is without merit and
intends to vigorously defend this matter. There can be no assurances however
that the Company will be successful in defending this motion.
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 May 3, 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 calendar 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.
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 $200,000 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 $1.8
million 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 believed 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
31
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 was
invalid and unenforceable. Mr. Park answered the complaint and asserted
counterclaims seeking payment from the Company based on his position that a
"change in control" occurred in June 2003. Mr. Park is also seeking other
consideration he believes he is owed under his employment agreement. The Company
filed a reply to Mr. Park's counterclaims denying that he is entitled to any of
these payments. If paid in a lump sum, these payments may have a material
adverse effect on the Company's liquidity. It is not possible to predict the
outcome of these claims.
Other Employment Matters On April 7, 2004, the Company began employment
termination proceedings against the General Manager of its Villa Subsidiary, and
on April 30, 2004, she was removed from her position as Managing Director by
resolution of Villa shareholders. On April 29, 2004, the former Managing
Director took a preliminary action which may ultimately allow her to institute
legal proceedings alleging certain damages based on a Change in Control
provision of her contract and seek various additional actions or damages
available under Italian law. The Company believes the former Managing Director's
Change in Control provision has not been violated and that her dismissal was
justified in accordance with the provisions of Italian law.
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 $310,000 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.
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.
32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a: Exhibits
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 March 12, 2004, the Company filed a Current Report on Form 8-K
under Item 5. "Other Events," and Item 7. "Financial Statements,
Pro Forma Financial Information and Exhibits," to announce that
the Company planned to issue financial results for its fiscal 2004
second quarter and six-month period ended January 31, 2004 on
March 15, 2004 and host a conference call to discuss the financial
results.
On March 15, 2004, the Company filed a Current Report on Form 8-K
under Item 5. "Other Events," Item 7. "Financial Statements, Pro
Forma Financial Information and Exhibits," and Item 12. "Results
of Operations and Financial Condition" to report that () it had
reached and agreement in principle with the U.S. government
regarding a settlement of the civil and criminal aspects of the
previously disclosed Department of Defense investigation, (ii) it
had received a waiver from its U.S. lender of certain financial
covenant defaults and signed a fourth amendment to its U.S. Credit
facility, (iii) the Company's Board of Directors has retained
Imperial Capital, LLC, an investment bank, to assist the Company
in exploring all strategic alternatives and (iv) it will host a
conference call to discuss its Fiscal year 2004 second quarter
financial results.
On April 23, 2004, the Company filed a Current Report on Form 8-K
under Item 5. "Other Events," and Item 7. "Financial Statements,
33
Pro Forma Financial Information and Exhibits," to report the Del
Medical Systems Group, a unit of the Company, and Source One
Healthcare Technologies, Inc. have signed a contract giving Source
One national marketing, distribution and service rights to the
Company's radiographic and imaging systems product lines.
On April 23, 2004, the Company filed a Current Report on Form 8-K
under Item 5. "Other Events, and" Item 7. "Financial Statements,
Pro Forma Financial Information and Exhibits," to announce that
its Medical Systems Group had delivered 22 remote R/F systems for
installation in 18 Social Security healthcare facilities in Mexico
and to announce the initial delivery schedule for delivery of
remote R/F Systems to the ministry of Health in Romania.
34
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: June 15, 2004
35
