UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 28, 2007
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.
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(Exact Name of Registrant as Specified in Its Charter)
New York 13-1784308
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
11550 WEST KING STREET, FRANKLIN PARK, IL 60131
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (847) 288-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 Par Value ("Common Stock")
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Rights to Purchase Common Stock, par value $0.10 per share, distributed
pursuant to Rights Agreement dated January 22, 2007
(Common Stock Purchase Rights)
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No[X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No[X]
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one).
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2). Yes [ ] No[X]
State the aggregate market value of the voting and non-voting common equity
held by non affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter.
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the Registrant as of January 27, 2007 was $21,499,215. Solely
for the purposes of this calculation, shares held by directors and executive
officers of the Registrant have been excluded. Such exclusion should not be
deemed a determination or an admission by the Registrant that such individuals
are, in fact, affiliates of the Registrant
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
As of September 7, 2007, there were 24,130,808 shares of the registrant's
common stock outstanding.
PART I.........................................................................1
ITEM 1 BUSINESS.............................................................1
ITEM 1A RISK FACTORS........................................................10
ITEM 1B UNRESOLVED STAFF COMMENTS...........................................15
ITEM 2 PROPERTIES..........................................................15
ITEM 3 LEGAL PROCEEDINGS...................................................15
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................17
PART II.......................................................................17
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES...................17
ITEM 6 SELECTED FINANCIAL DATA.............................................20
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...........................................21
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........29
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................29
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE............................................30
ITEM 9A CONTROLS AND PROCEDURES.............................................30
ITEM 9B OTHER INFORMATION...................................................30
PART III......................................................................30
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE..............30
ITEM 11 EXECUTIVE COMPENSATION..............................................32
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.....................................41
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE........................................................44
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES..............................45
PART IV.......................................................................46
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES..........................46
SIGNATURES....................................................................54
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PART I
ITEM 1 BUSINESS
Del Global Technologies Corp., a New York corporation, was incorporated in
1954. Unless otherwise specifically indicated, "Del Global", the "Company,"
"we," "our," "ours," and "us" refers to Del Global Technologies Corp. and its
consolidated subsidiaries. We are a leader in developing, manufacturing and
marketing medical and dental imaging systems and power conversion subsystems and
components worldwide. Our products include stationary and portable medical and
dental diagnostic imaging systems and electronic systems and components such as
electronic filters, transformers and capacitors.
The Company is headquartered in Franklin Park, IL. The mailing address of our
headquarters is 11550 West King Street, Franklin Park, IL. 60131 and our
telephone number is 847-288-7000. Our Website is www.delglobal.com. Through the
Investor Relations section of our Website, we make our filings with the
Securities and Exchange Commission ("SEC") available as soon as practicable
after they are electronically filed with the SEC. These include our Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form
8-K.
The sale of Del High Voltage Division ("DHV"), which was part of our Power
Conversion Group, was consummated on October 1, 2004 as described in Note 3 of
the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual
Report. Accordingly, this business is presented as a discontinued operation in
all fiscal years presented and throughout this Form 10-K.
EMPLOYEES
As of July 28, 2007, we had 331 employees. We believe that our employee
relations are good. None of our approximately 194 US based employees are
represented by a labor union. Employment by functional area as of July 28, 2007
is as follows:
Executive ................................................................ 2
Administration and finance ............................................... 31
Manufacturing ............................................................ 229
Engineering .............................................................. 35
Sales and Marketing ...................................................... 34
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Total .................................................................... 331
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OPERATING SEGMENTS
The operating businesses that we report as segments consist of the Medical
Systems Group and the Power Conversion Group. For fiscal 2007, the Medical
Systems Group segment accounted for approximately 87% of our revenues and the
Power Conversion Group segment accounted for approximately 13% of our revenues.
Our consolidated financial statements include a non-operating segment which
covers unallocated corporate costs. For the fiscal year ended July 28, 2007, one
of our Medical Systems Group customers accounted for approximately 12% of
consolidated revenues and 11% of gross accounts receivable at July 28, 2007. For
fiscal years ended July 29, 2006 and July 30, 2005, no individual customer
accounted for greater than 10% of total revenue or accounts receivable, nor was
either segment dependent upon a single customer or a few customers, the loss of
any one or more of which would have a material adverse effect on such segment.
For further information concerning our operating segments, see Note 10 of the
Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual
Report. Our operating segments and businesses are summarized in the following
table:
DIVISION BRANDS SUBSIDIARIES FACILITIES
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MEDICAL SYSTEMS GROUP:
Medical Imaging.................... Del.Medical, Villa, Del Medical Imaging Corp Franklin Park, IL
UNIVERSAL, DynaRad ("Del Medical")
Villa Sistemi Medicali Milan, Italy
S.p.A. ("Villa")
POWER CONVERSION GROUP:
Electronic Systems & Components.... RFI, Filtron, Sprague, RFI Corporation ("RFI") Bay Shore, NY
Stanley
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MEDICAL SYSTEMS GROUP
Our Medical Systems Group designs, manufactures, markets and sells medical
and dental diagnostic imaging systems consisting of stationary and portable
imaging systems, radiographic/fluoroscopic systems, dental imaging systems and
digital radiography systems. Approximately 70% of this segment's revenues are
attributed to Villa.
Prior to December 23, 2005, the Company owned 80% of the Villa subsidiary. On
December 23, 2005, the Company acquired the remaining 20% of Villa for $2.6
million plus 904,762 restricted shares of Company common stock which were valued
at $2.9 million. For further information concerning this acquisition, see Note 2
of the Notes to Consolidated Financial Statements in Part II, Item 8 of this
Annual Report.
Medical imaging systems of the types we manufacture use x-ray technology to
produce diagnostic images of matter beneath an opaque surface. An imaging system
principally consists of a high voltage power supply, an x-ray tube, a patient
positioning system, and an image recording system, which is either film or a
digital detector. X-rays are generated as a result of high voltage passing
through a filament, or cathode in an x-ray tube. The cathode emits energized
electrons which collide with a positively charged tungsten anode within the
tube. The collision of these energized electrons with the anode emits the x-ray
photons or x-rays. The x-ray tube is surrounded by a lead shield which contains
an opening and various filters to direct the x-rays towards the patient.
The performance of the x-ray system, including image resolution, is directly
linked to the precision performance of the high voltage power supply. The object
to be imaged is placed between the x-ray tube and the image recording system.
x-rays, which are not reflected by opaque surfaces, pass through the object and
expose the film or image recording system. However, if the object is comprised
of areas of varying densities or chemical compositions, x-rays will be absorbed
in proportion to the density or chemical composition of the matter. As a result,
the film will be exposed to a varying degree, thereby producing an image of the
density or chemical variation within the object. For example, because bone has a
greater density than the surrounding tissue in the body, x-rays can be used to
produce an image of a skeleton. x-ray systems are differentiated by a number of
key characteristics such as application, image capture technology, image
resolution, accuracy, portability, size and cost. The design of an x-ray system
requires complex engineering, which determines the performance factors required
of the various system components.
This segment designs, manufactures, markets and sells medical and dental
diagnostic imaging systems worldwide in the following markets:
MEDICAL SYSTEMS GROUP MARKETS SERVED
Hospitals Veterinary Clinics
Teaching Institutions Chiropractic Clinics
Medical Clinics Dental Offices
Private Practitioners Military/Government
Orthopedic Facilities Home Health Care Providers
Imaging Centers
Our medical imaging systems are sold under the Del Medical, Villa, UNIVERSAL,
and DynaRad brand names. The prices of our medical imaging systems range from
approximately $5,000 to $250,000 per unit, depending on the complexity and
flexibility of the system.
The following is a description of our product lines in this segment.
PRODUCTS
GENERAL RADIOGRAPHIC SYSTEMS - For more than 100 years, conventional
projection radiography has used film to create x-ray images. Conventional
technology requires that x-ray film be exposed and then chemically processed to
create a visible image for diagnosis.
General Radiography represents approximately 40%-60% of the Medical Systems
Group's revenues depending on the product mix within each period. We produce a
broad line of conventional radiographic products used in outpatient facilities,
as well as more sophisticated and expensive x-ray systems typically used in
hospitals and clinics. For example, our higher-end Advanced Radiography System
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(ARSII) and U-ARC DRT Digital Radiographic Systems are designed to meet the
broad requirements of a hospital or teaching university's radiographic room,
while our mid-range Del Medical and Villa Medical systems are suited more to the
needs of medium sized hospitals, outpatient clinics and private practitioners.
The Moviplan product line manufactured under the Villa brand includes a
variety of configurations that fit a wide range of markets, spanning from small
private practices to hospitals, with a specific accent on emerging countries. A
leading model is the tomographic version, which allows users to take images of
multiple sections of the body. This type of system is manufactured by relatively
few companies worldwide.
We also have a broad range of products serving medical practitioners,
veterinarians and chiropractors through our UNIVERSAL brand product line. These
units are designed for durability, are space efficient, rugged and are priced
more economically. Our UNIVERSAL medical products include a variety of
configurations that can be constructed to best suit the needs of the desired
work environment. Our UNIVERSAL AVchoice and DVChoice veterinary line of
products is designed with many of the same attributes as the medical line. Our
UNIVERSAL chiropractic line, consisting of our DCchoice, Raymaster and
PreciseView product, combine precision alignment and positioning with a
versatile Chiropractic imaging systems for both analog and digital applications.
During fiscal 2006, we expanded our product portfolio with the introduction
of the Del Medical U-ARC DRT Digital Radiographic System. This system enables
radiologists to obtain better patient images within a fraction of the time and
with lower overall costs than traditional film-based systems.
We also produce a full product line of high frequency medical x-ray
generators which economically provide superior quality x-ray generation,
resulting in lower patient dosage, extended tube life and less blurring due to
patient motion when compared to single phase generators. We continue to
investigate arrangements with generator suppliers on a global basis to further
upgrade our medical x-ray generator offerings.
RADIOGRAPHIC/FLUOROSCOPIC SYSTEMS - We produce a wide range of
radiographic/fluoroscopic, or R/F, systems that are able to perform complex
x-ray examinations with contrast liquids for sequential and real time images.
The Vision and Viromatic systems are based on the "classical approach" and
require the operator to stay in close contact to the equipment and the patient.
These systems are often used for diagnostic gastrointestinal procedures to image
the progress of a radiopaque solution (typically barium) as it travels through
the digestive tract. The Apollo Remote R/F system and Mercury systems are based
on the more modern "Remote control" technology and allow the technologist and
radiologist to operate the system and perform the entire examination from a
separate room, being totally shielded from the x-ray source. The remote
controlled system is also the most flexible x-ray imaging unit as it allows
skeletal, gastro-intestinal, vascular, urological and gynaecological studies in
the same room. Remote controlled systems (Apollo Remote R/F system and Mercury)
are also widely used in connection with our digital acquisition system DIVA, to
perform digital image acquisition and real time angiographic examinations with a
vast choice of image acquisition and post-processing tools. The DIVA system can
also be equipped with DICOM functionalities that enable images to be sent to
centralized archival units, image reviewing workstations, laser imagers, and in
general allow the system to be fully integrated into PACS (Picture Archival and
Communication Systems) networks within a hospital. As of today, the Apollo
Remote R/F system table, with a DIVA-D digital acquisition system represents the
most sophisticated system and technology produced by the Medical Group.
PORTABLE AND MOBILE MEDICAL X-RAY SYSTEMS - We sell portable x-ray equipment
under our DynaRad brand including the HF-110A and PHANTOM systems, for the
military and home health care provider markets. Both of these portable systems
utilize high frequency, microprocessor-controlled technology to produce
consistent quality x-rays with the added advantages of being smaller, lighter in
weight and more cost-effective than stationary x-ray systems.
Larger and more powerful mobile units are also manufactured and distributed
under the Villa brand and include the "Visitor" product line with high frequency
generators up to 30 kilowatts that are typically used in hospitals to take
radiographic images directly at the patient's bed.
DENTAL SYSTEMS - We produce a broad range of DC and AC powered intra-oral
(commonly known as bite wing) x-ray systems at our Villa facility. In addition,
our Rotograph Plus and Strato-2000 systems are utilized to perform panoramic
images for dental applications. The most recent addition to the dental product
line are Direct Digital versions of Strato 2000 and Rotograph, which capture
panoramic images directly in digital format and can be connected to a PC for
image reviewing and post-examination processing. The relatively small price
differential between digital and analog panoramic units has triggered a very
quick shift to digital technology in the marketplace which accounts for
approximately 11% of the volume of new units sold over the past two years.
The dental products are sold both with our own brand (Villa), as well as private
labelled units to selected OEM customers.
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MAMMOGRAPHY SYSTEMS - We currently resell the Melody system outside of the
US. The Melody unit is manufactured by a European-based manufacturer and sold
under the Villa brand. Although we have exclusive use of the "Melody" name, our
supplier markets a similar product in several competing markets.
SURGICAL C-ARMS - We sell a mobile C-arm unit called "Arcovis 2000" under the
Villa brand. The product is manufactured by a European company that also sells
similar products to other customers.
MARKETING AND DISTRIBUTION
Our medical imaging systems are sold in the US and internationally,
principally by a network of over 300 distributors worldwide. Medical imaging
system distributors are supported by our regional managers, area managers,
marketing managers and technical support groups, who train distributor sales and
service personnel and participate in customer calls. Due to the different
markets and end use customers for dental as compared to medical imaging systems,
dental products are distributed by a separate network of dental dealers who
target the dental practitioners market. In addition, we do some private label
manufacturing of dental product for certain OEM customers.
Technical support in the selection, use and maintenance of our products is
provided to distributors and professionals by customer service representatives.
We also maintain telephone hotlines to provide technical assistance to
distributors during regular business hours. Additional product and distributor
support is provided through participation in medical equipment exhibitions and
trade specific advertising.
We typically exhibit our products at annual conferences, including the RSNA
Conference in Chicago, the MEDICA Medical Conference in Dusseldorf, Germany, the
European College of Radiology (ERC) Conference in Vienna, Austria, and the
International Dental Show (IDS) in Cologne, Germany and other venues worldwide.
Sales of the Company's products in North America are typically on open account
with 30 day terms. Our products are sold worldwide and payment is therefore
secured by letter of credit to mitigate any potential credit risk, with longer
terms being given to non-US customers as is customary in international business.
Our Company also has the capacity to participate in and win large international
tenders, which require careful assessment of the commercial aspects, regulatory
requirements, production planning and financial exposure. Multi-million tenders
have been awarded to our Villa operation in the last two fiscal years in
countries, including Mexico, Lithuania, Romania, Russia and Vietnam.
RAW MATERIALS AND PRINCIPAL SUPPLIERS
The Medical Systems Group in most cases uses two or more alternative sources
of supply for each of its raw materials, which consist primarily of mechanical
subassemblies, electronic components, x-ray tubes and x-ray generators. In
certain instances, however, the Medical Systems Group will use a single source
of supply when directed by a customer or by need. In order to ensure the
consistent quality of the Medical System Group's products, the Company follows
strict supplier evaluation and qualification procedures, and where possible,
enters into strategic relationships with its suppliers to assure a continuing
supply of high quality critical components.
With respect to those items which are purchased from single sources, we
believe that comparable items would be available in the event that there was a
termination of our existing business relationships with any such supplier.
Actual experience could differ materially from this belief as a result of a
number of factors, including the time required to locate an alternate source for
the material.
The majority of the Medical System Group's raw materials are purchased on
open account from vendors pursuant to various individual or blanket purchase
orders. Procurement lead times are such that the Company is not required to hold
significant amounts of inventory in order to meet customer demand. The Company
believes its sources of supply for the Medical Systems Group are adequate to
meet its needs.
COMPETITION
Based on industry data, we believe our Medical Systems Group is either the
number one or number two supplier, measured by market share, to the independent
distributors of radiographic equipment in North America. Our Medical Systems
Group competes in two major segments of the highly competitive, world-wide
conventional radiographic and R/F products marketplace. Our top-tier
conventional radiographic products are sold through national, regional and
independent distributors. In 2006, the Medical Systems Group extended its access
to the US market by entering into relationships with a national Group Purchasing
Organization and several smaller multi-hospital networks. The three major
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competitors in this market segment are GE Healthcare Systems, a division of
General Electric Company, Siemens Medical Solutions, a division of Siemens AG
and Philips Medical Systems, a division of Philips Electronics N.V. They compete
with us on customer support, features and breadth of product offerings. These
larger competitors primarily sell directly to large hospitals and teaching
institutions and sell a broader range of products designed to outfit a
hospital's entire imaging requirements. In Europe, Africa, the Middle East and
the Far East, competition is also represented by other mid-tier European
companies, as well as local manufacturers who mainly address the middle and low
market tier.
Our lower-tier conventional radiographic products principally compete with
several small companies based primarily in the US and Europe. In some
price-driven markets, we also find competition from Korean and Chinese products.
Most of these companies sell through independent distributors and compete with
us primarily on price, quality and performance. We believe that we can be
differentiated from our competitors based on our combination of price, quality
and performance, together with the strength and breadth of our independent
distribution network, and the growth of our product portfolio.
The markets for our products are highly competitive and subject to
technological change and evolving industry requirements and standards. Cost
containment and pricing is also a critical driving factor, given the threat that
is being posed by the aggressive policies of Korean and Chinese manufacturers
attempting to capture market shares out of their boundaries. Price erosion is
not only a factor in the low-end tier, but also at top level, where all
companies, including the large multinationals such as GE, Philips and Siemens
are driving down their prices.We believe that these trends will continue into
the foreseeable future. Some of our current and potential competitors have
substantially greater financial, marketing and other resources than we do. As a
result, they may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
promotion and sale of their products than we can. Competition could increase if
new companies enter the market or if existing competitors expand their product
lines or intensify efforts within existing product lines. Although we believe
that our products are more cost-effective than those of our primary competitors,
certain competing products may have other advantages which may limit our market.
There can be no assurance that continuing improvements in current or new
competing products will not make them technically equivalent or superior to our
products in addition to providing cost or other advantages. There can be no
assurance that our current products, products under development or ability to
introduce new products will enable us to compete effectively.
PRODUCT DEVELOPMENT
It is generally accepted that digital radiography will continue to become the
dominant technology used in hospitals and imaging clinics throughout the world
over the next 10 to 15 years. Currently, there are a number of competing
technologies available in connection with the digitization of x-ray images. In
addition, there are substantial hurdles which need to be addressed in terms of
transitioning radiology practices from the current analog environment to a
digital environment. These ancillary issues include image storage and retrieval
and record keeping. However, due to the high cost of this technology, many
institutions have not yet adopted digital technology. In addition, there is
uncertainty as to which technology will be accepted as the industry-standard for
image capture, and communication and storage of digital image information.
For the medical imaging market, we currently have two digital radiographic
solutions and are committed to expanding our selection to include a wider range
of low-cost offerings for customers. While many of our competitors have invested
heavily into developing a digital detector, we have chosen to align with
technology leaders who have already made digital investments and could benefit
from our x-ray platform design, our systems integration capabilities and our
worldwide dealer network. This strategy also accelerates our time-to-market with
new digital solutions and avoids the significant development costs being
incurred by our competitors.
Consequently, our current research and development spending is focused on
both enhancing our existing conventional radiographic products and continuing to
enhance our digital radiographic solutions and explore partnerships with
strategic vendors in the digital marketplace. The introduction of digital
imaging is growing much faster in dental application where the cost difference
between traditional and digital does not represent a significant barrier. In
order to more fully participate in the digital dental market, Villa has
initiated a strategic partnership with a French company, Owandy S.A.S., that
provides the digital solutions for dental panoramic units and Villa is offering
a full line of digital panoramic units.
Spending for research and development for our Medical Systems Group was
approximately $2.0 million for fiscal year 2007 and $1.6 million during each of
fiscal years 2006 and 2005.
5
TRADEMARKS AND PATENTS
The majority of the Medical System Group's products are based on technology
that is not protected by patent or other rights. Within the Medical System
Group, certain of our products and brand names are protected by trademarks, both
in the US and internationally. Because we do not have patent rights in our
products, our technology may not preclude or inhibit competitors from producing
products that have identical performance as our products. Our future success is
dependent primarily on the technological expertise and management abilities of
our employees and the strength of our relationship with our worldwide dealer
network.
GOVERNMENT REGULATION
Our medical imaging systems are medical devices and, therefore, are subject
to regulation by the US Food and Drug Administration (the "FDA") and to
regulation by foreign governmental authorities. We also are subject to various
state and local regulations. Regulatory requirements include registration as a
manufacturer, compliance with established manufacturing practices, procedures
and quality standards, strict requirements dealing with the safety,
effectiveness and other properties of the products, conformance with applicable
industry standards, product traceability, adverse event reporting, distribution,
record keeping, reporting, compliance with advertising and packaging standards,
labeling, and radiation emitting qualities of these products. Failure to comply
can result in, among other things, the imposition of fines, criminal
prosecution, recall and seizure of products, injunctions restricting or
precluding production or distribution, the denial of new product approvals and
the withdrawal of existing product approvals.
FDA'S PREMARKET CLEARANCE AND APPROVAL REQUIREMENTS
In the US, medical devices are classified into three different categories
over which the FDA applies increasing levels of regulation: Class I, Class II,
and Class III. Del Medical manufactures several Class I and Class II devices.
Before a new Class II device can be introduced into the US market, the
manufacturer must obtain FDA clearance or approval through either premarket
notification under Section 510(k) of the Federal Food, Drug, and Cosmetic Act,
or a premarket approval under Section 515 of that Act, unless the product is
otherwise exempt from the requirements.
A Section 510(k) premarket notification must contain information supporting
the claim of substantial equivalence, which may include laboratory results and
product comparisons to existing devices. Following submission of a 510(k)
application, a manufacturer may not market the device until the FDA finds the
product is substantially equivalent for a specific or general intended use. FDA
510(k) clearance generally takes 90 days and may take longer if FDA requests
additional information. There is no assurance the FDA will ultimately grant a
clearance. The FDA may determine that a device is not substantially equivalent
and may require submission and approval of a premarket approval application, or
require further information before it is able to make a determination regarding
substantial equivalence.
After a device receives 510(k) clearance, any modification made to the device
requires the manufacturer to determine whether the modification could
significantly affect its safety or effectiveness. If it does not, the
manufacturer's decision must be documented. If the modification could
significantly affect the device's safety and effectiveness, then the
modification requires at least a new 510(k) clearance or, in some instances,
could require a premarket approval. The FDA requires each manufacturer to make
this determination, but the FDA can review any manufacturer's decision. If the
FDA disagrees with a manufacturer's decision, the agency may retroactively
require the manufacturer to seek 510(k) clearance or premarket approval. The FDA
also can require the manufacturer to cease marketing the modified device or
recall the modified device (or both) until 510(k) clearance or premarket
approval is obtained. We have made minor modifications to our products and,
using the guidelines established by the FDA, have determined that these
modifications do not require us to file new 510(k) submissions. If the FDA
disagrees with our determinations, we may not be able to sell one or more of our
products until the FDA have cleared new 510(k) submissions for these
modifications.
All of our products marketed in the US have met the appropriate FDA
requirements for marketing, either because they were exempt from submission or
through 510(k) clearance. We continuously evaluate our products for any required
new submission for changes or modifications.
PERVASIVE AND CONTINUING FDA REGULATION
Numerous FDA regulatory requirements apply to our products as well as to
components manufactured by some of our suppliers. These requirements include:
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- The FDA's quality system regulation which requires manufacturers to create,
implement and follow numerous design, testing, control, documentation and
other quality procedures; and
- Medical device reporting regulations, which require that manufacturers
report to the FDA certain types of adverse and other events involving their
products.
Class II devices may also be subject to special controls, such as performance
standards, post-market surveillance, patient registries and FDA guidelines that
may not apply to Class I devices. Our products are currently subject to FDA
guidelines for 510(k) cleared devices and are not subject to any other form of
special controls. We believe we are in compliance with the applicable FDA
guidelines, but we could be required to change our compliance activities or be
subject to other special controls if the FDA changes its existing regulations or
adopts new requirements.
We and some of our suppliers are subject to inspection and market
surveillance by the FDA to determine compliance with regulatory requirements. If
the FDA finds that either we or a supplier have failed to adequately comply, the
agency can institute a wide variety of enforcement actions, ranging from a
public warning letter to more severe sanctions such as: fines, injunctions and
civil penalties; recall or seizure of our products; the imposition of operating
restrictions, partial suspension or total shutdown of production; the refusal of
our requests for 510(k) clearance or premarket approval of new products; the
withdrawal of 510(k) clearance or premarket approval already granted; and
criminal prosecution.
The FDA also has the authority to require repair, replacement or refund of
the cost of any medical device manufactured or distributed by us. Our failure to
comply with applicable requirements could lead to an enforcement action that may
have an adverse effect on our financial condition and results of operations.
OTHER FEDERAL AND STATE REGULATIONS
As a participant in the health care industry, we are subject to extensive and
frequently changing regulation under many other laws administered by
governmental entities at the federal, state and local levels, some of which are,
and others of which may be, applicable to our business. For example, our Del
Medical Imaging facility is also licensed as a medical product manufacturing
site by the state of Illinois and is subject to periodic state regulatory
inspections. Our health care service provider customers are also subject to a
wide variety of laws and regulations that could affect the nature and scope of
their relationships with us.
FOREIGN GOVERNMENT REGULATION
Our products are also regulated outside the US as medical devices by foreign
governmental agencies, similar to the FDA, and are subject to regulatory
requirements, similar to the FDA's, in the countries in which we plan to sell
our products. We work with our foreign distributors to obtain the foreign
regulatory approvals necessary to market our products outside of the US. In
certain foreign markets, it is necessary to obtain ISO 9001 certification, which
is analogous to compliance with the FDA's Good Manufacturing Practices
requirements. It is also necessary to obtain ISO 13485 certification, which
specifies requirements for a quality system to be used for design and
development, production, installation and servicing of medical devices. We have
obtained ISO 9001 certification and ISO 13485 certification, for both of our
medical systems manufacturing facilities. In many European Community and other
international locations it is necessary or desirable to have a "CE" (Communities
of Europe) mark on our products. This involves substantial testing by a third
party such as Underwriters Laboratories or Electronics Testing Laboratories and
for some devices, a certificate from a notified body declaring conformance to
applicable directives and regulations. We have completed the necessary third
party testing at both manufacturing locations, maintain the necessary
certifications and are qualified to place the CE mark on all products intended
for sale in such countries. The time and cost required obtaining market
authorization from other countries and the requirements for licensing a product
in another country may differ significantly from FDA requirements.
No assurance can be given that the FDA or foreign regulatory agencies will
give the requisite approvals or clearances for any of our medical imaging
systems and other products under development on a timely basis, if at all.
Moreover, after clearance is given, both in the case of our existing products
and any future products, these agencies can later withdraw the clearance or
require us to change the system or our manufacturing process or labeling, to
supply additional proof of its safety and effectiveness, or to withdraw, recall,
repair, replace or refund the cost of the medical system, if it is shown to be
hazardous or defective.
POWER CONVERSION GROUP
Our Power Conversion Group designs, manufactures, markets and sells high
voltage precision components and sub-assemblies and electronic noise suppression
components for a variety of applications. These products are utilized by
original equipment manufacturers ("OEMs") who build systems that are used in a
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broad range of markets. Our products are sold under the following industry
brands: RFI, Filtron, Sprague and Stanley. This segment is comprised of
Electronic Systems and Components.
This segment designs and manufactures key electronic components such as
transformers, noise suppression filters and high voltage capacitors for use in
precision regulated high voltage applications. Noise suppression filters and
components are used to help isolate and reduce the electromagnetic interference
(commonly referred to as "noise") among the different components in a system
sharing the same power source. Examples of systems that use our noise
suppression products include aviation electronics, mobile and land-based
telecommunication systems and missile guidance systems.
The Power Conversion Group provides subsystems and components which are used
in the manufacture of medical electronics, military and industrial applications
as follows:
POWER CONVERSION GROUP MARKETS SERVED
MILITARY INDUSTRIAL
Guidance & Weapons Systems Induction Heating
Communications Automotive
Capital Equipment
COMMERCIAL
Power Systems MEDICAL
Telecommunications Radiation Oncology
Satellite Magnetic Resonance Imaging ("MRI")
Meteorological
PRODUCTS
MILITARY APPLICATIONS - Through our relationships with many of the federal
government's top defense suppliers, such as Raytheon, Boeing, Lockheed Martin
and Northrop Grumman, we supply electronic components for various classified and
unclassified programs including radar systems, guidance systems, weapons systems
and communication electronics. On May 24, 2007, the Company's RFI subsidiary was
served with a subpoena to testify before a grand jury of the United States
District Court, Eastern District of New York to provide items and records from
its Bay Shore, NY offices in connection with U.S. DOD contracts. A search
warrant from the United States District Court, Eastern District of New York was
issued and executed with respect to such offices. The Company believes that it
is in full compliance with the quality standards that its customers require and
is fully cooperating with investigators to assist them with their review. The
Company's RFI subsidiary is continuing to ship products to the U.S. Government
as well as to its commercial customers.
INDUSTRIAL APPLICATIONS - Our high voltage power components and EMI filters
are used in many leading-edge high technology scientific and industrial
applications by OEMs, universities and private research laboratories. Some
industrial applications using high voltage subsystems include DNA sequencing,
molecular analysis, printed circuit board inspection, structural inspection,
food and mail sterilization and semiconductor capital equipment.
MARKETING, SALES AND DISTRIBUTION
We market our Power Conversion Group products through in-house sales
personnel, independent sales representatives in the US, and international agents
in Europe, Asia, the Middle East, Canada and Australia. Our sales
representatives are compensated primarily on a commission basis and the
international agents are compensated either on a commission basis or act as
independent distributors. Our marketing efforts emphasize our ability to custom
engineer products to optimal performance specifications. We emphasize team
selling where our sales representatives, engineers and management personnel all
work together to market our products. We also market our products through
catalogs and trade journals and participation in industry shows. Sales of the
Company's products are typically on open account with 30 day terms. New accounts
are established with cash on delivery or cash in advance terms.
RAW MATERIALS AND PRINCIPAL SUPPLIERS
The Power Conversion Group in most cases uses two or more alternative sources
of supply for each of its raw materials, which consist primarily of electronic
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components and subassemblies, metal enclosures for its products and certain
other materials. In certain instances, however, the Power Conversion Group will
use a single source of supply when directed by a customer or by need. In order
to ensure the consistent quality of the Power Conversion Group's products, the
Company performs certain supplier evaluation and qualification procedures, and
where possible, enters into strategic partnerships with its suppliers to assure
a continuing supply of high quality critical components.
With respect to those items which are purchased from single sources, we
believe that comparable items would be available in the event that there was a
termination of our existing business relationships with any such supplier.
Actual experience could differ materially from this belief as a result of a
number of factors, including the time required to locate an alternate source for
the material.
The majority of the Power Conversion Group's raw materials are purchased on
open account from vendors pursuant to various individual or blanket purchase
orders. Procurement lead times are such that the Company is not required to hold
significant amounts of inventory in order to meet customer demand. The Company
believes its sources of supply for the Power Conversion Group are adequate to
meet its needs
COMPETITION
Our Power Conversion Group competes with several small, privately owned
suppliers of electronic systems and components. From our perspective,
competition is primarily based on each company's design, service and technical
capabilities, and secondarily on price. Excluding the OEMs that manufacture
their own components, based on market intelligence we have gathered, we believe
that we are among the top two or three in market share in supplying these
products.
The markets for our products are subject to limited technological changes and
gradually evolving industry requirements and standards. We believe that these
trends will continue into the foreseeable future. Some of our current and
potential competitors may have substantially greater financial, marketing and
other resources than we do. As a result, they may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements, or to
devote greater resources to the promotion and sale of their products than we
can. Competition could increase if new companies enter the market or if existing
competitors expand their product lines or intensify efforts within existing
product lines. Although we believe that our products are more cost-effective
than those of our primary competitors, certain competing products may have other
advantages which may limit our market. There can be no assurance that continuing
improvements in current or new products will not make them technically
equivalent or superior to our products in addition to providing cost or other
advantages. There can be no assurance that our current products, products under
development or our ability to introduce new products will enable us to compete
effectively.
PRODUCT DEVELOPMENT
We have a well developed engineering and technical staff in our Power
Conversion Group. Our technical and scientific employees are generally employed
in the engineering departments at our RFI business unit, and split their time,
depending on business mix and their own technical background, between supporting
existing production and development and research efforts for new product
variations or new customer specifications. Our products include transformers,
noise suppression filters and high voltage capacitors for use in precision
regulated high voltage applications. Noise suppression filters and components
are used to help isolate and reduce the electromagnetic interference (commonly
referred to as "noise") among the different components in a system sharing the
same power source. Examples of systems that use our noise suppression products
include aviation electronics, mobile and land-based telecommunication systems
and missile guidance systems. No significant engineering related time was
charged to research and development spending for the continuing operations of
the Power Conversion Group in fiscal years 2007, 2006 or 2005. These time
allocations were minimal because our technical and scientific employees were
focused on reshaping our production and quality practices at our Bay Shore
plant.
TRADEMARKS AND PATENTS
The majority of the Power Conversion Group's products are based on technology
that is not protected by patent or other rights. Within the Power Conversion
Group, certain of our products and brand names are protected by trademarks, both
in the US and internationally. Our future success is dependent primarily on the
technological expertise and management abilities of our employees.
GOVERNMENT REGULATION
We are subject to various US government guidelines and regulations relating
to the qualification of our non-medical products for inclusion in
9
government-qualified product lists in order to be eligible to receive purchase
orders from a government agency or for inclusion of a product in a system which
will ultimately be used by a governmental agency. We have had many years of
experience in designing, testing and qualifying our products for sale to
governmental agencies. Certain government contracts are subject to cancellation
rights at the Government's election. We have experienced no material termination
of any government contract and are not aware of any pending terminations of
government contracts.
DISCONTINUED OPERATION
As of July 31, 2004, the DHV division was classified as a discontinued
operation. This division manufactured and sold high voltage power systems,
primarily for security, medical, scientific, military and industrial OEM
applications. The results of this operation are segregated on the accompanying
financial statements as income or loss from discontinued operation. See Note 3
of the Notes to Consolidated Financial Statements included in Part II, Item 8,
of this Annual Report.
SEASONALITY
Revenue in both operating segments is typically lower during the first
quarter of each fiscal year due to the shutdown of operations in our Milan,
Italy (Medical Systems Group) and Bay Shore, New York (Power Conversion Group)
facilities for part of August as a result of both vacation schedules and
year-end physical inventories.
BACKLOG
Consolidated backlog at July 28, 2007 was $28.4 million versus backlog at
July 29, 2006 of approximately $22.4 million. The backlog in the Power
Conversion Group of $16.6 million increased $0.3 million from levels at
beginning of the fiscal year while there was a $5.7 million increase in the
fiscal year end backlog of our Medical Systems Segment from July 29, 2006
reflecting strong booking during the twelve month period in international
markets. Substantially all of the backlog should result in shipments within the
next 12 months.
GEOGRAPHIC AREAS
For further information about Geographic areas the Company operates in as
well as other Segment related disclosures refer to Note 10 of the Notes to
Consolidated Financial Statements in Part II, Item 8 of this Annual Report.
ITEM 1A RISK FACTORS
Prospective investors should carefully consider the following risk factors,
together with the other information contained in this Annual Report, in
evaluating the Company and its business before purchasing our securities. In
particular, prospective investors should note that this Annual Report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934
and that actual results could differ materially from those contemplated by such
statements. The factors listed below represent certain important factors which
we believe could cause such results to differ. These factors are not intended to
represent a complete list of the general or specific risks that may affect us.
It should be recognized that other risks may be significant, presently or in the
future, and the risks set forth below may affect us to a greater extent than
indicated.
WE DO NOT INTEND TO PAY DIVIDENDS ON SHARES OF OUR COMMON STOCK IN THE
FORESEEABLE FUTURE.
We currently expect to retain our future earnings, if any, for use in the
operation and expansion of our business. We do not anticipate paying any cash
dividends on shares of our common stock in the foreseeable future. Our credit
facility with our U.S. lender restricts our ability to pay dividends.
COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC
DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.
Changing laws, regulations and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002, are creating
uncertainty for companies such as ours. We are committed to maintaining high
standards of corporate governance and public disclosure. As a result, we intend
10
to invest reasonably necessary resources to comply with evolving standards, and
this investment may result in increased general and administrative expenses and
a diversion of management time and attention from revenue-generating activities
to compliance activities, which could harm our business prospects.
OUR COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ NATIONAL MARKET AND WE CANNOT
PREDICT WHEN OR IF IT EVER WILL BE LISTED ON ANY NATIONAL SECURITIES EXCHANGE.
Due to our past failure to comply with the United States Securities Laws, our
common stock was suspended from trading on the NASDAQ National Market in
December 2000. Current pricing information on our common stock has been
available on the over the counter bulletin board (the "OTC") published by
National Quotation Bureau, LLC. The OTC is an over-the-counter market which
generally provides significantly less liquidity than established stock exchanges
or the NASDAQ National Market, and quotes for stocks included in the OTC are not
listed in the financial sections of newspapers. Therefore, prices for securities
traded solely in the OTC may be difficult to obtain, and shareholders may find
it difficult to resell their shares. In order to be re-listed, we will need to
meet certain listing requirements. There can be no assurance that we will be
able to meet such listing requirements.
FAILURE BY US TO ADHERE TO OUR ADMINISTRATIVE AGREEMENT WITH THE DEFENSE
LOGISTICS AGENCY COULD RESULT IN OUR DEBARMENT FROM DOING BUSINESS WITH THE
U.S. GOVERNMENT.
On April 5, 2005, the Company announced that it had reached an administrative
agreement with the U.S. Defense Logistics Agency (the "DLA"), a component of the
US Department of Defense (the "DOD"), which provides that RFI will not be
debarred from doing business with the U.S. Government entities as long as RFI
maintains its compliance program and adheres to the terms of the administrative
agreement. If RFI fails to maintain its compliance program or RFI or the Company
fails to adhere to the terms of the administrative agreement, the DLA could
debar the Company from doing business with U.S. Government entities.
On May 24, 2007, the Company's RFI subsidiary was served with a subpoena to
testify before a grand jury of the United States District Court, Eastern
District of New York and to provide items and records from its Bay Shore, NY
offices in connection with U.S. Department of Defense contracts. A search
warrant from the United States District Court, Eastern District of New York was
issued and executed with respect to such offices. The Company believes that it
is in full compliance with the quality standards that its customers require and
is fully cooperating with investigators to assist them with their review. The
Company's RFI subsidiary is continuing to ship products to the U.S. Government
as well as to its commercial customers.
OUR BUSINESS IS BASED ON TECHNOLOGY THAT IS NOT PROTECTED BY PATENT OR OTHER
RIGHTS.
The technology and designs underlying our products are unprotected by patent
rights. Our future success is dependent primarily on unpatented trade secrets
and on the innovative skills, technological expertise and management abilities
of our employees. Because we do not have patent rights in our products, our
technology may not preclude or inhibit competitors from producing products that
have identical performance as our products. In addition, we cannot guarantee
that any protected trade secret could ultimately be proven valid if challenged.
Any such challenge, with or without merit, could be time consuming to defend,
result in costly litigation, divert management's attention and resources and, if
successful, require us to pay monetary damages.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
A number of foreign and domestic companies have developed, or are expected to
develop, products that compete or will compete with our products. Many of these
competitors offer a range of products in areas other than those in which we
compete, which may make such competitors more attractive to hospitals, radiology
clients, general purchasing organizations and other potential customers. In
addition, many of our competitors and potential competitors are larger and have
greater financial resources than we do and offer a range of products broader
than our products. Some of the companies with which we now compete or may
compete in the future have or may have more extensive research, marketing and
manufacturing capabilities and significantly greater technical and personnel
resources than we do, and may be better positioned to continue to improve their
technology in order to compete in an evolving industry.
OUR DELAY OR INABILITY TO OBTAIN ANY NECESSARY US OR FOREIGN REGULATORY
CLEARANCES OR APPROVALS FOR OUR PRODUCTS COULD HARM OUR BUSINESS AND PROSPECTS.
Our medical imaging products, with the exception of certain veterinary lines,
are the subject of a high level of regulatory oversight. Any delay in our
11
obtaining or our inability to obtain any necessary US or foreign regulatory
approvals for new products could harm our business and prospects. There is a
limited risk that any approvals or clearances, once obtained, may be withdrawn
or modified which could create delays in shipping our product, pending
re-approval. Medical devices cannot be marketed in the US without clearance or
approval by the FDA. Our Medical Systems Group businesses must be operated in
compliance with FDA Good Manufacturing Practices, which regulate the design,
manufacture, packing, storage and installation of medical devices. Our
manufacturing facilities and business practices are subject to periodic
regulatory audits and quality certifications and we do self audits to monitor
our compliance. In general, corrective actions required as a result of these
audits do not have a significant impact on our manufacturing operations; however
there is a limited risk that delays caused by a potential response to extensive
corrective actions could impact our operations. Virtually all of our products
manufactured or sold overseas are also subject to approval and regulation by
foreign regulatory and safety agencies. If we do not obtain these approvals, we
could be precluded from selling our products or required to make modifications
to our products which could delay bringing our products to market. Because our
US products lines are mature, new product changes are in general relatively
minor, and accordingly regulatory approval is more streamlined.
WE MUST RAPIDLY DEVELOP NEW PRODUCTS IN ORDER TO COMPETE EFFECTIVELY.
Technology in our industry, particularly in the x-ray and medical imaging
businesses, evolves rapidly, and making timely product innovations is essential
to our success in the marketplace. The introduction by our competitors of
products with improved technologies or features may render our existing products
obsolete and unmarketable. If we cannot develop products in a timely manner in
response to industry changes, or if our products do not perform well, our
business and financial condition will be adversely affected. Also, our new
products may contain defects or errors which give rise to product liability
claims against us or cause the products to fail to gain market acceptance.
It is generally accepted that digital radiography will become the dominant
technology used in hospitals and imaging clinics throughout the world over the
next 10 to 15 years. Currently, there are a number of competing technologies
available in connection with the digitization of x-ray images. However, due to
the high cost of this technology, many institutions have not yet adopted digital
technology. In addition, there is uncertainty as to which technology system will
be accepted as the industry-leading protocol for image digitization and
communication. Lack of an adequate digital capability could impact our business
and result in a loss of market share.
A SHORTAGE OF AN ADEQUATE SUPPLY OF RAW MATERIALS COULD INCREASE OUR COSTS AND
CAUSE A DELAY IN OUR ABILITY TO SHIP PRODUCT AND FULFILL ORDERS. A LARGE PORTION
OF OUR MANUFACTURING COSTS CONSIST OF THE COST OF MATERIALS AND AN INCREASE IN
THESE COSTS COULD ADVERSELY IMPACT OUR GROSS MARGINS.
We rely on external sources to supply raw materials, which consist primarily
of mechanical subassemblies, electronic components, x-ray tubes and x-ray
generators in the Medical Systems Group and electronic components and
subassemblies and, metal enclosures for its products in the Power Conversion
Group. Our ability to meet future demand and manufacture our product is
dependent on these sources of supply. If disruptions in these sources of supply
cause shortages of raw materials, our ability to ship products to customers will
be impacted. In addition, due to the high material cost component of our
manufactured goods, our gross margins would be adversely impacted by increases
in raw material costs we may be unable to pass along to our customers due to
market conditions.
DUE TO THE SIGNIFICANCE OF OUR INTERNATIONAL OPERATIONS, POLITICAL OR ECONOMIC
CHANGES IN THE VARIOUS COUNTRIES OR REGIONS WE MANUFACTURE IN OR SELL OUR
PRODUCTS TO COULD IMPACT OUR FINANCIAL CONDITION.
International sales, including product manufactured at our facility in Milan,
Italy, as well as product manufactured in the US, comprised 66% and 64% of
consolidated revenues for fiscal years 2007 and 2006, respectively. Our future
results could be adversely affected by a variety of international risks,
including unfavorable foreign currency exchange rates; difficulties in managing
and staffing international operations, political or social unrest; economic
instability or natural disasters; environmental or trade protection measures;
changes in governmental or other entities buying patterns and tender order
procedures; changes in other regulatory or certification requirements. In
addition any changes in Italian tax laws including changes in withholding on
dividends from our Italian subsidiary or other restrictions on transfers of
funds to the US could impact our financial condition.
THE COMPANYS WORKING CAPITAL NEEDS ARE FINANCED IN PART BY CREDIT FACILITIES
WITH U.S. AND ITALIAN BANKS. THE COMPANY HAS NEEDED TO OBTAIN WAIVERS FROM
ITS U.S. LENDERS FOR COVENANT VIOLATIONS DUE TO LESS THAN ANTICIPATED
OPERATING RESULTS.
12
On December 6, 2006, the Company and its U.S. lender signed an amendment
to its U.S. revolving credit and term loan credit facility which waived covenant
violations existing as of October 28. 2006 and adjusted the financial covenants
for future periods based on a business plan the Company provided to its lender.
Although the Company was in compliance with all covenants of its revolving
credit and term loan facility as of July 28. 2007 and the Company had no
outstanding borrowings under these agreements, should the Company's results be
less that anticipated in the business plan, the Company could have future
covenant violations. If the Company and its lender were unable to cure the
violations by signing a waiver agreement, or through other means, the Company
could be in default under its foreign and domestic credit agreements and the
banks would have the ability to stop revolving credit borrowings under the
facility or accelerate the maturity of any outstanding balances. If additional
sources of debt or equity capital were not available at that point, such
acceleration could have a material adverse impact on the Company's financial
position.
WE MUST CONDUCT OUR BUSINESS OPERATIONS WITHOUT INFRINGING ON THE PROPRIETARY
RIGHTS OF THIRD PARTIES.
Although we believe our products do not infringe on the intellectual property
rights of others, there can be no assurance that infringement claims will not be
asserted against us in the future or that, if asserted, any infringement claim
will be successfully defended. A successful claim, or any claim, against us
could distract our management's attention from other business concerns and
adversely affect our business, financial condition and results of operations.
POTENTIAL PAYMENTS REQUIRED UNDER A CHANGE OF CONTROL AGREEMENT WITH A FORMER
CEO COULD UNDULY BURDEN OUR COMPANY.
The Company's employment agreement with Samuel E. Park, a former CEO of the
Company, provides for payments upon certain changes of control. The Company's
Board of Directors elected at the Company's Annual Meeting of Shareholders held
on May 29, 2003, had reviewed the "change of control", provisions regarding
payments totaling up to approximately $1,800,000 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 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 of control
payments. On November 17, 2003, the Company filed a complaint in the United
States District Court, Southern District of New York, 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. Discovery in this matter
was conducted and completed. Following discovery, the Company and Mr. Park filed
motions for summary judgment on the issues related to change in control and the
amendment to the employment agreement, which motions have been fully submitted
to the Court for consideration. To date, no decision has been issued by the
Court on these motions. If Mr. Park prevails on his claims and the payments he
seeks are required to be paid in a lump sum, these payments may have a material
adverse effect on the Company's liquidity.
THERE IS A RISK THAT OUR INSURANCE WILL NOT BE SUFFICIENT TO PROTECT US FROM
PRODUCT LIABILITY CLAIMS, OR THAT IN THE FUTURE PRODUCT LIABILITY INSURANCE WILL
NOT BE AVAILABLE TO US AT A REASONABLE COST, IF AT ALL.
Our business involves the risk of product liability claims inherent to the
medical device business. We maintain product liability insurance subject to
certain deductibles and exclusions. There is a risk that our insurance will not
be sufficient to protect us from product liability claims, or that product
liability insurance will not be available to us at a reasonable cost, if at all.
An uninsured or underinsured claim could materially harm our operating results
or financial condition.
WE FACE RISKS ASSOCIATED WITH HANDLING HAZARDOUS MATERIALS AND PRODUCTS.
Our research and development activity involves the controlled use of
hazardous materials, such as toxic and carcinogenic chemicals. Although we
believe that our safety procedures for handling and disposing of such materials
comply with the standards prescribed by federal, state and local regulations, we
13
cannot completely eliminate the risk of accidental contamination or injury from
these materials. In the event of an accident, we could be held liable for any
resulting damages, and such liability could be extensive. We are also subject to
substantial regulation relating to occupational health and safety, environmental
protection, hazardous substance control, and waste management and disposal. The
failure to comply with such regulations could subject us to, among other things,
fines and criminal liability.
OUR BUSINESS COULD BE HARMED IF OUR PRODUCTS CONTAIN UNDETECTED ERRORS OR
DEFECTS OR DO NOT MEET CUSTOMER SPECIFICATIONS.
We are continuously developing new products and improving our existing
products. Newly introduced or upgraded products can contain undetected errors or
defects. In addition, these products may not meet their performance
specifications under all conditions or for all applications. If, despite our
internal testing and testing by our customers, any of our products contains
errors or defects, or any of our products fails to meet customer specifications,
we may be required to recall or retrofit these products. We may not be able to
do so on a timely basis, if at all, and may only be able to do so at
considerable expense. In addition, any significant reliability problems could
result in adverse customer reaction and negative publicity and could harm our
business and prospects.
THE SEASONALITY OF OUR REVENUE MAY ADVERSELY IMPACT THE MARKET PRICES FOR OUR
SHARES.
Our revenue is typically lower during the first quarter of each fiscal year
due to the shut-down of operations in our Milan, Italy and Bay Shore, New York
facilities for part of August. This seasonality causes our operating results to
vary from quarter to quarter and these fluctuations could adversely affect the
market price of our common stock.
A SIGNIFICANT NUMBER OF OUR SHARES WILL BE AVAILABLE FOR FUTURE SALE AND COULD
DEPRESS THE MARKET PRICE OF OUR STOCK.
As of September 7, 2007, an aggregate of 24,130,808 shares of our common
stock were outstanding. In addition, as of September 7, 2007, there were
outstanding warrants to purchase 537,304 shares of our common stock and options
to purchase 1,913,995 shares of our common stock, 1,522,245 of which were fully
vested. Sales of large amounts of our common stock in the market could adversely
affect the market price of the common stock and could impair our future ability
to raise capital through offerings of our equity securities. A large volume of
sales by holders exercising the warrants or options could have a significant
adverse impact on the market price of our common stock.
WE HAVE A LIMITED TRADING MARKET AND OUR STOCK PRICE MAY BE VOLATILE.
There is a limited public trading market for our common stock in the
Over-the-Counter "OTC" Market. We cannot assure you that a regular trading
market for our common stock will ever develop or that, if developed, it will be
sustained.
The experiences of other small companies indicate that the market price for
our common stock could be highly volatile. Many factors could cause the market
price of our common stock to fluctuate substantially, including:
- future announcements concerning us, our competitors or other companies with
whom we have business relationships;
- changes in government regulations applicable to our business;
- overall volatility of the stock market and general economic conditions;
- changes in our earnings estimates or recommendations by analysts; and
- changes in our operating results from quarter to quarter.
Accordingly, substantial fluctuations in the price of our common stock could
limit the ability of our current shareholders to sell their shares at a
favorable price.
THE COMPANY MAY SUBMIT, FROM TIME TO TIME, PROPOSALS TO SHAREHOLDERS TO AMEND
THE COMPANY'S CERTIFICATE OF INCORPORATION OR TO INCREASE THE NUMBER OF COMMON
SHARES AUTHORIZED.
At a special meeting of shareholders of the Company held on November 17,
2006, the Company's shareholders approved an Amendment of the Certificate of
14
Incorporation of the Company to increase the number of authorized shares of the
Company's common stock, par value $0.10 per share, from twenty million
(20,000,000) shares to fifty million (50,000,000) shares in order to have a
sufficient number of shares of Common Stock to provide a reserve of shares
available for issuance to meet business needs as they may arise in the future.
Such business needs may include, without limitation, rights offerings,
financings, acquisitions, establishing strategic relationships with corporate
partners, providing equity incentives to employees, officers or directors, stock
splits or similar transactions. Issuances of any additional shares for these or
other reasons could prove dilutive to current shareholders or deter changes in
control of the Company, including transactions where the shareholders could
otherwise receive a premium for there shares over then current market prices.
ITEM 1B UNRESOLVED STAFF COMMENTS
Not applicable
ITEM 2 PROPERTIES
The following is a list of our principal properties, classified by segment
and subsidiary:
APPROX.
FLOOR OWNED/LEASED
AREA IN (EXPIRATION
SEGMENT LOCATION SQ. FT. PRINCIPAL USES DATE IF LEASED)
- --------------------------------- ------------------- ---------- ---------------- ---------------
MEDICAL SYSTEMS GROUP:
Del Medical Imaging Corp........ Franklin Park, IL 68,000 Corporate Leased (2009)
headquarters,
Design and
manufacturing
Villa........................... Milan, Italy 67,000 Design and Leased (2011)(1)
manufacturing
POWER CONVERSION GROUP:
RFI............................. Bay Shore, NY 55,000 Design and Owned
manufacturing
(1) Villa has the option to purchase this property at the conclusion of this
lease.
We believe that our current facilities are sufficient for our present and
anticipated future requirements. The Company's manufacturing operations run on
one shift and we have the ability to add a second shift, if needed. The
Company's domestic credit facilities are secured, in part, by a mortgage on
RFI's property.
ITEM 3 LEGAL PROCEEDINGS
DOD INVESTIGATION - On March 8, 2002, RFI, a subsidiary of the Company and
the remaining part of the Power Conversion Group segment, was served with a
subpoena by the US Attorney for the Eastern District of New York in connection
with an investigation by the DOD. RFI supplies electro-magnetic interference
filters for communications and defense applications. The DOD had investigated
certain past practices at RFI which dated back to before 1996 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 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 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.
15
Accordingly, during the third quarter of fiscal 2003, the Company recorded a
charge of $2.3 million, which represented its estimate of the low end of a range
of potential fines and legal and professional fees.
Following negotiations, the Company reached a global settlement in February
2004 with the US Government that resolved the civil and criminal matters
relating to the DOD's investigation. The settlement included 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, the Company 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 up to $5.0 million in fines and
restitution, plus estimated legal and professional fees related to this
settlement.
On September 30, 2004, pursuant to the terms of the settlement, the Company
fulfilled its obligation under this agreement by paying to the US Government the
sum of $5.0 million representing fines and restitution. On October 7, 2004, RFI
entered a guilty plea to a single count conspiracy charge pursuant to the
settlement and a criminal plea agreement. Sentencing occurred on March 15, 2005.
At sentencing, the Court imposed an additional fine of $0.3 million to be paid
within 30 days. The Company paid this additional fine on April 8, 2005.
The Company worked with the US Defense Logistics Agency ("DLA"), a component
of the DOD, to avoid any future limitations on the ability of the Company to do
business with US Government entities. Such limitations could have included the
US Government seeking a "debarment" or exclusion of the Company from doing
business with US Government entities for a period of time.
On April 5, 2005, the Company announced that it had reached an administrative
agreement with the DLA which provides that RFI will not be debarred from doing
business with U.S. Government entities so long as RFI maintains its compliance
program and adheres to the terms of the administrative agreement. This agreement
with the DLA is the final component of the Company's previously announced
settlement of an investigation by the DOD into practices at RFI.
On May 24, 2007, the Company's RFI subsidiary was served with a subpoena to
testify before a grand jury of the United States District Court, Eastern
District of New York to provide items and records from its Bay Shore, NY offices
in connection with U.S. DOD contracts. A search warrant from the United States
District Court, Eastern District of New York was issued and executed with
respect to such offices. The Company believes that it is in full compliance with
the quality standards that its customers require and is fully cooperating with
investigators to assist them with their review. The Company's RFI subsidiary is
continuing to ship products to the U.S. Government as well as to its commercial
customers.
EMPLOYMENT MATTERS - The Company had an employment agreement with Samuel Park, a
previous Chief Executive Officer ("CEO"), for the period May 1, 2001 to April
30, 2004. The employment agreement provided for certain payments in the event of
a 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 $0.2 million during the first
quarter of fiscal 2004 to accrue the balance remaining under Mr. Park's
employment agreement.
The Company's employment agreement with Mr. Park, provided for payments upon
certain changes of control. The Company's Board of Directors elected at the
Company's Annual Meeting of Shareholders held on May 29, 2003, had reviewed the
"change of control", provisions regarding payments totaling up to approximately
$1,800,000 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 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 of control payments. On November 17, 2003, the Company filed a complaint
in the United States District Court, Southern District of New York, 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.
16
Discovery in this matter was conducted and completed. Following discovery, the
Company and Mr. Park filed motions for summary judgment on the issues related to
change in control and the amendment to the employment agreement, which motions
have been fully submitted to the Court for consideration. To date, no decision
has been issued by the Court on these motions. If Mr. Park prevails on his
claims and the payments he seeks are required to be 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 Company has not recorded an accrual for any potential settlement of
this claim as it has no basis upon which to estimate either the outcome or
amount of loss, if any.
On June 28, 2002, Jeffrey N. Moeller, the former Director of Quality
Assurance and Regulatory Affairs of Del Medical, commenced an action in the
Circuit Court of Cook County, Illinois, against the Company, Del Medical and
Walter Schneider, the former President of Del Medical. In the most current
iteration of this pleading, the third amended complaint, Mr. Moeller alleges
four claims against the defendants in the action: (1) retaliatory discharge from
employment with Del Medical, allegedly in response to Mr. Moeller's complaints
to officers of Del Medical about purported prebilling and his stopping shipment
of a product that allegedly did not meet regulatory standards, (2) defamation,
(3) intentional interference with his employment relationship with Del Medical
and prospective employers, and (4) to hold the Company liable for any misconduct
of Del Medical under a theory of piercing the corporate veil. By order dated
September 15, 2006, the Court denied in part and granted in part defendants'
motion requesting summary judgment dismissing the third amended complaint. The
Court granted the motion only to the extent of dismissing that part of Mr.
Moeller's claim of interference with his employment relationship with Del
Medical and his relationship with prospective employers, addressed to alleged
interference with his relationship with prospective employers. The parties
appeared for mediation in January 2007 but the mediation did not result in a
disposition of the action. Accordingly, it appears that the action will proceed
to trial. A status conference before the Court was held March 8, 2007, and
subsequently, a trial date had been scheduled for October 1, 2007. The trial
date has been postponed due to the unavailability of a witness for the
plaintiff. A trial date has been scheduled of January 28, 2008. The Company and
Del Medical intend to defend vigorously against Mr. Moeller's claims. Mr.
Moeller is seeking $2.37 million in damages consisting of alleged income loss,
including salary and benefits, and the present value of his alleged lost income
and benefits in the future after lump sum tax adjustments. The Company has
recorded an accrual of $0.1 million relating to potential liability in the
settlement of these claims.
OTHER LEGAL MATTERS - The Company is a defendant in several other legal
actions in various US and foreign jurisdictions arising from the normal course
of business. 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.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Effective May 11, 2007, our common stock commenced trading on the Over the
Counter "OTC" Bulletin Board under the symbol "DGTC.OB" and our warrants are
traded under the symbol "DGTCW.OB." Prior to that, they had been traded on the
"pink sheets,", under the symbol "DGTC.PK" and "DGTCW.PK", respectively. The OTC
is an over-the-counter market which provides significantly less liquidity than
established stock exchanges or the NASDAQ National Market, and quotes for stocks
included in the OTC are not listed in the financial sections of newspapers as
are those for established stock exchanges and the NASDAQ National Market. Our
securities had been suspended from trading on the NASDAQ National Market on
December 19, 2000 because we had not filed an annual report for the year ended
July 29, 2000 within the SEC's prescribed time period.
At a special meeting of shareholders of the Company held on November 17,
2006, the Company's shareholders approved an Amendment of the Certificate of
Incorporation of the Company to increase the number of authorized shares of the
Company's common stock, par value $0.10 per share, from twenty million
(20,000,000) shares to fifty million (50,000,000) shares in order to have a
sufficient number of shares of common stock to provide a reserve of shares
available for issuance to meet business needs as they may arise in the future.
Such business needs may include, without limitation, rights offerings,
financings, acquisitions, establishing strategic relationships with corporate
partners, providing equity incentives to employees, officers or directors, stock
splits or similar transactions. Issuances of any additional shares for these or
other reasons could prove dilutive to current shareholders or deter changes in
17
control of the Company, including transactions where the shareholders could
otherwise receive a premium for there shares over then current market prices.
On December 12, 2006, the Company filed a registration statement for a
subscription rights offering with the SEC that became effective January 30,
2007. Under terms of this rights offering, the Company distributed to
shareholders of record as of February 5, 2007, non-transferable subscription
rights to purchase one share of the Company's common stock for each share owned
at that date at a subscription price of $1.05 per share. On March 12, 2007, the
Company completed the rights offering, selling 12,027,378 shares of its common
stock at $1.05 per share. Total proceeds to the Company, net of $275,000 of
expenses related to the rights offering, were $12,354,000.
The purpose of this rights offering was to raise equity capital in a
cost-effective manner. Approximately $7,564,000 of the proceeds were used for
debt repayment and the remainder invested in short-term money market securities
for anticipated working capital needs and general corporate purposes. A portion
of the net proceeds may also ultimately be used to acquire or invest in
businesses, products and technologies that our management believes are
complementary to the Company's business. Remaining unused proceeds are currently
invested in short-term money market securities.
In addition, on January 22, 2007, the Company entered into a stockholders
rights plan (the "Rights Plan"). The Rights Plan provides for a dividend
distribution of one common stock purchase right for each outstanding share of
the Company's common stock. The Company's Board of Directors adopted the Rights
Plan to protect stockholder value by protecting the Company's ability to realize
the benefits of its net operating losses ("NOLs") and capital loss
carryforwards. The Company has experienced substantial operating and capital
losses in previous years. Under the Internal Revenue Code and rules promulgated
by the Internal Revenue Service, the Company may "carry forward" these losses in
certain circumstances to offset current and future earnings and thus reduce its
federal income tax liability, subject to certain requirements and restrictions.
Assuming that the Company has future earnings, the Company may be able to
realize the benefits of NOLs and capital loss carryforwards. These NOLs and
capital loss carryforwards constitute a substantial asset to the Company. If the
Company experiences an "Ownership Change," as defined in Section 382 of the
Internal Revenue Code, its ability to use the NOLs and capital loss
carryforwards could be substantially limited or lost altogether. The Rights Plan
imposes a significant penalty upon any person or group that acquires more than a
certain percentage of the Company's common stock by allowing other shareholders
to acquire equity securities at half their fair values.
As of September 4, 2007, there were approximately 797 holders of record of
our common stock. The following table shows the high and low sales prices per
share of our common stock for the past eight quarters, as reported by the over
the counter market. The over-the-counter market quotations listed below reflect
inter-dealer prices, without retail mark-up, mark down or commission and may not
represent actual transactions.
FISCAL PERIOD HIGH LOW
- ---------------------------------------------------------------- ------- -------
FISCAL 2007
First Quarter................................................. $ 2.05 $ 0.60
Second Quarter................................................ 2.30 1.55
Third Quarter................................................. 2.40 1.20
Fourth Quarter................................................ 2.90 1.35
FISCAL 2006
First Quarter................................................. $ 3.15 $ 2.00
Second Quarter................................................ 3.95 2.80
Third Quarter................................................. 4.50 2.95
Fourth Quarter................................................ 3.35 1.70
We have not paid any cash dividends, except for the payment of cash in lieu
of fractional shares, since 1983. The payment of cash dividends is prohibited
under our US credit facility. We do not intend to pay any cash dividends in the
foreseeable future.
The following table summarizes the securities authorized for issuance under
equity compensation plans as of the end of Fiscal Year 2007
18
EQUITY COMPENSATION PLAN INFORMATION
NUMBEROF NUMBER OF
SECURITIES TO BE SECURITIES
ISSUED UPON WEIGHTED-AVERAGE REMAINING AVAILABLE
EXERCISE OF EXERCISE PRICE OF FOR FUTURE ISSUANCE
OUTSTANDING OUTSTANDING UNDER EQUITY
OPTIONS, WARRANTS OPTIONS, WARRANTS COMPENSATION
PLAN CATEGORY AND RIGHTS AND RIGHTS PLANS(1)
- ---------------------------------------------------------------- ------------------- ------------------ -------------------
Equity compensation plans approved by security holders:
Stock Option Plan ............................................ 1,913,995 $ 3.51 941,000
Equity compensation plans not approved by security holders:
Warrants issued in settlement of class action lawsuit (2) .... 573,516 $ 1.50 Not applicable
(1) Excludes securities to be issued upon exercise of outstanding options,
warrants and rights.
(2) Pursuant to our class action settlement with our shareholders concerning
allegations that the Company had violated federal Securities laws, we issued 2.5
million shares of our common stock and one million warrants to purchase our
common stock at $2.00 per share. The issuance of these securities was pursuant
to a court order issued in connection with the settlement of this class action
lawsuit in January 2002, and therefore was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Section 3(a) (10)
thereof. These warrants were originally set to expire in March 2008.
In a motion filed in February 2004, a plaintiff class claimed damages due to
Del Global's failure to timely complete a registration statement for the shares
of common stock issuable upon exercise of these warrants. The class sought
damages of $1.25 million together with interest and costs, and a declaration
that $2 million in subordinated notes issued as part of the 2002 class action
settlement were immediately due and payable. In settlement of this matter, Del
Global modified the exercise, or "strike," price of the warrants issued in 2002
from $2.00 to $1.50 per share, and extended the expiration date of such warrants
by one year to March 28, 2009.
PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the cumulative
shareholder return on the Common Stock with The Nasdaq Market Index and the peer
group index for the Standard Industrial Classification Code ("SIC Code") 3844
for the period commencing August 3, 2002 and ending July 28, 2007. The peer
group for SIC Code 3844 (X-Ray Apparatus and Tubes) consists of 3 companies and
includes: American Science Engineering Inc., Hologic Inc., and Sirona Dental
Systems, Inc. The graph assumes that $100 was invested on August 3, 2002 in the
Common Stock and in each of the other indices and assumes monthly reinvestment
of all dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE
COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS
------------------------ FISCAL YEAR ENDING ---------------------
COMPANY/INDEX/MARKET 8/03/2002 8/02/2003 7/31/2004 7/30/2005 7/29/2006 7/28/2007
DEL GLOBAL TECH CORP 100.00 71.43 82.54 86.00 53.97 74.60
X-RAY APPARATUS & TUBES 100.00 86.96 113.06 162.45 281.96 312.28
NASDAQ US ONLY 100.00 129.39 144.22 166.10 164.41 202.67
19
This stock price performance graph shall not be deemed to be "soliciting
material" or "filed" or incorporated by reference in future filings with the
Commission, or subject to the liabilities of Section 18 of the Exchange Act,
except to the extent that the Company specifically incorporates it by reference
into a document filed under the Securities Act or the Exchange Act.
ITEM 6 SELECTED FINANCIAL DATA
The selected income statement data presented for the fiscal years ended July
28, 2007, July 29, 2006 and July 30, 2005 and the balance sheet data as of July
28, 2007 and July 29, 2006 have been derived from our audited consolidated
financial statements included elsewhere in this Annual Report. The income
statement data for the years ended July 31, 2004 and August 2, 2003 and the
balance sheet data as of July 30, 2005, July 31, 2004 and August 2, 2003 have
been derived from audited financial statements not included herein. This
selected financial data should be read in conjunction with the Consolidated
Financial Statements and related notes included in Part II, Item 8, "Financial
Statements and Supplementary Data" thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of
this Form 10-K.
FISCAL YEARS ENDED
---------------------------------------------------------
JULY 28, JULY 29, JULY 30, JULY 31, AUGUST 2,
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) 2007 2006 2005 2004(1) 2003(2)
- -------------------------------------------------- --------- --------- --------- --------- ---------
INCOME STATEMENT DATA:
Net sales ........................................ $104,167 $ 83,014 $ 84,872 $ 83,827 $ 68,212
Gross margin ..................................... 25,017 19,358 22,281 21,315 15,670
Selling, general and administrative .............. 14,590 13,619 16,452 15,907 17,904
Research and development ......................... 2,013 1,562 1,636 1,562 1,593
Litigation settlement costs ...................... -- 697 300 3,652 2,126
Facilities reorganization costs .................. -- -- -- -- 128
Operating income (loss) .......................... 8,414 3,480 3,893 194 (6,081)
Minority interest ................................ -- 108 393 559 115
Provision for income taxes ....................... 3,553 1,758 2,054 8,691 8,233
Income (loss) from continuing operation .......... 3,816 269 193 (10,729) (15,173)
Discontinued operation ........................... -- (175) 199 (5,095) 128
Net income (loss) ................................ 3,816 94 392 (15,824) (15,045)
Net income (loss) per share - Basic
Continuing operations ............................ $ 0.24 $ 0.02 $ 0.02 $ (1.04) $ (1.46)
Discontinued operation ........................... -- (0.01) 0.02 (0.49) 0.01
-------- -------- -------- -------- --------
Net income (loss) per basic share ................ $ 0.24 $ 0.01 $ 0.04 $ (1.53) $ (1.45)
Net income (loss) per share - Diluted
Continuing operations ............................ $ 0.23 $ 0.02 $ 0.01 $ (1.04) $ (1.46)
Discontinued operation ........................... -- (0.01) 0.02 (0.49) 0.01
-------- -------- -------- -------- --------
Net income (loss) per diluted share .............. $ 0.23 $ 0.01 $ 0.03 $ (1.53) $ (1.45)
======== ======== ======== ======== ========
Weighted average shares outstanding - Basic ...... 16,155 11,244 10,490 10,334 10,376
Weighted average shares outstanding - Diluted .... 16,455 12,076 11,465 10,334 10,376
AS OF
---------------------------------------------------------
JULY 28, JULY 29, JULY 30, JULY 31, AUGUST 2,
2007 2006 2005 2004 2003
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital .................................. $24,977 $ 6,935 $10,122 $ 7,764 $13,598
Total assets ..................................... 66,339 49,153 40,776 49,261 60,492
Long-term debt and subordinated note ............. 5,398 5,133 6,454 7,038 7,100
Shareholders' equity ............................. 30,196 12,814 9,228 7,775 22,979
(1) Net loss for the year ended July 30, 2004 includes a $9,794 income tax
provision related to the establishment of a deferred tax valuation allowance. In
addition, the net loss reflects the accrual of a $3,199 charge related to the
DOD investigation of our RFI subsidiary and $454 related to a motion filed in
February 2004 related to the warrants to purchase common stock that were issued
in fiscal year 2002. For more information about these legal charges, see Part I,
Item 3 "Legal Proceedings" of this Annual Report.
(2) Net loss for the year ended August 2, 2003 includes approximately $7,967
income tax provision related to the establishment of a deferred tax valuation
20
allowance. In addition, the net loss reflects the accrual of a $2,347 charge
related to an ongoing DOD Investigation of our RFI subsidiary. For more
information about the DOD investigation, see Part I, Item 3, and "Legal
Proceedings" of this Annual Report. See Notes to Consolidated Financial
Statements included in Part II, Item 8," of this Annual Report.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
In addition to other information in this Annual Report, this Management's
Discussion and Analysis of Financial Condition and Results of Operations contain
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 and favorable determinations
in various legal and regulatory matters. 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 SEC including the Company's Quarterly Reports and
Current Reports on Form 8-K.
OVERVIEW
The Company is primarily engaged in the design, manufacture and marketing of
cost-effective medical and dental diagnostic imaging systems consisting of
stationary and portable imaging systems, radiographic/ fluoroscopic systems,
dental imaging systems and digital radiography systems. The Company also
manufactures electronic filters, high voltage capacitors, pulse modulators,
transformers and reactors, and a variety of other products designed for
industrial, medical, military and other commercial applications. 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.
See Part I, Item 1, "Business-Operating Segments" of this Annual Report for
discussions of the Company's segments.
On October 1, 2004, we sold the Del High Voltage division, which manufactured
proprietary high voltage power conversion subsystems, for a purchase price of
$3.1 million, plus the assumption of approximately $0.8 million of liabilities.
Accordingly, the results of operations have been restated to show this division
as a discontinued operation.
At a special meeting of shareholders of the Company held on November 17,
2006, the Company's shareholders approved an Amendment of the Certificate of
Incorporation of the Company to increase the number of authorized shares of the
Company's common stock, par value $0.10 per share, from twenty million
(20,000,000) shares to fifty million (50,000,000) shares in order to have a
sufficient number of shares of common stock to provide a reserve of shares
available for issuance to meet business needs as they may arise in the future.
Such business needs may include, without limitation, rights offerings,
financings, acquisitions, establishing strategic relationships with corporate
partners, providing equity incentives to employees, officers or directors, stock
splits or similar transactions. Issuances of any additional shares for these or
other reasons could prove dilutive to current shareholders or deter changes in
control of the Company, including transactions where the shareholders could
otherwise receive a premium for there shares over then current market prices.
CRITICAL ACCOUNTING POLICIES
Complete descriptions of significant accounting policies are outlined in Note
1 of the Notes to Consolidated Financial Statements included in Part II, Item 8,
"Financial Statements and Supplementary Data" of this Annual Report. Within
these policies, we have identified the accounting for revenue recognition,
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.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment, provided there is persuasive
evidence of an arrangement, there are no uncertainties concerning acceptance,
21
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 maintains a sales return allowance, based upon historical patterns, to
cover estimated normal course of business returns, including defective or out of
specification product. 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 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. 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. These repairs are billed to the customers at
market rates.
DEFERRED 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 deferred tax assets and liabilities for temporary
differences between financial reporting basis and income tax reporting basis and
for net operating loss carry forwards.
We periodically assess the realization of our net deferred tax assets. This
evaluation is primarily based upon current operating results and expectations of
future operating results. A valuation allowance is recorded if we believe our
net deferred tax assets will not be realized. Our determination is based on what
we believe will be the more likely than not result.
During fiscal years 2007 and 2006 and 2005, the Company reported operating
income on a consolidated basis. For tax reporting purposes, the Company's
foreign tax reporting entity was profitable and its US tax reporting entities
incurred a taxable loss. Based on these results and expectations of future
results, the Company concluded that it should maintain a 100% valuation
allowance on its net U.S. deferred tax assets.
Because the Company's foreign tax reporting entity was profitable, the
Company recorded a non-U.S. tax provision in all periods presented. While the
Company can make no assurances that our foreign subsidiary will generate profits
in the future, the Company believes that it is more likely than not that its
$1.0 million Villa-related net deferred tax assets at July 28, 2007 will be
realized.
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 occur.
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 July 28, 2007, finished goods represented approximately
25.8% of the gross carrying value of our total gross inventory. We believe the
estimation methodologies used to be appropriate and are consistently applied.
CONSOLIDATED RESULTS OF OPERATIONS
FISCAL 2007 COMPARED TO FISCAL 2006
Consolidated net sales of $104.2 million for fiscal year 2007 increased by
$21.2 million, or 25.5%, from fiscal 2006 net sales of $83.0 million, with
increases at both the Power Conversion Group and Medical Systems Group. The
Medical Systems Group's sales for fiscal 2007 of $91.0 million increased $20.7
million, or 29.5 %, from the prior fiscal year, with increases primarily due to
increased international sales as well as stronger than expected dental sales and
increased sales of higher priced digital products. The Power Conversion Group's
sales for fiscal 2007 of $13.2 million increased by $.5 million, or 3.6%, from
the prior year's levels, reflecting increased sales in the transformer business.
22
Consolidated backlog at July 28, 2007 was $28.4 million versus backlog at
July 29, 2006 of approximately $22.4 million. The backlog in the Power
Conversion Group of $16.6 million increased $0.3 million from levels at
beginning of the fiscal year while there was a $5.7 million increase in the
fiscal year end backlog of our Medical Systems Segment from July 29, 2006
reflecting strong booking during the twelve month period in international
markets. Substantially all of the backlog should result in shipments within the
next 12 to 15 months.
Gross margins as a percent of sales were 24.0% in fiscal 2007, compared to
23.3% in fiscal 2006. The Power Conversion Group margins were 37.3 % in fiscal
2007 as compared to 35.5% in fiscal 2006 reflecting increased margins in product
mix and decreased production cost. For the Medical Systems Group, fiscal 2007
gross margins of 22.1% were higher than gross margins of 21.1% in the prior year
due primarily to the reversal of warranty reserves as the warranty period on
several specific items expired. This impact was partially offset by lower
margins associated with increased sales of digital products. Generally digital
product have a higher selling price, as well as a higher cost than the non-
digital product offerings, resulting in lower gross margin percentage
Selling, General and Administrative expenses ("SG&A") for fiscal 2007 were
$14.6 million (14.0% of sales) compared to $13.6 million (16.4% of sales) in
fiscal 2006. The increase is primarily due to increased corporate legal and bad
debt expense offset by reduced selling cost in the Power Conversion Group.
Litigation settlement costs of $0.7 million recorded in fiscal 2006 include
the accrual of $0.6 million based on a November 2005 settlement of litigation
filed during fiscal 2005 by the potential buyers of the Company's Medical
Systems Group. The Company previously disclosed this litigation but had not
recorded any affiliated expense during fiscal 2005, as it had no basis at that
time upon which to estimate either the outcome or amount of loss. The fiscal
2006 cost also includes the settlement of two employment actions at our foreign
subsidiary totaling $0.2 million net of the reversal of a $0.1 million accrual
related to a previously settled litigation. No additional litigation settlement
costs were incurred during 2007.
As a result of the above, we recognized fiscal 2007 operating income of $8.4
million compared to operating income of $3.5 million in fiscal 2006. The Medical
Systems Group had an operating profit of $7.5 million in fiscal 2007 and the
Power Conversion Group achieved an operating profit of $2.4 million, offset by
unallocated corporate costs of $1.5 million. We recognized fiscal 2006 operating
income of $3.5 million. The Medical Systems Group had an operating profit of
$3.6 million in fiscal 2006 and the Power Conversion Group achieved an operating
profit of $2.4 million, offset by unallocated corporate costs of $2.5 million.
Interest expense of $1.0 million for fiscal 2007 was $0.3 million lower than
the prior year due to a reduction in borrowings resulting from the paydown of US
based debt with the proceeds of our March 2007 Right Offering partially offset
by additional borrowings in Italy to support it's day to day operations.
On a consolidated basis, the Company recorded fiscal 2007 pretax income of
$7.4 million, comprised of foreign pretax income of $8.2 million offset by a US
pre-tax loss of $0.8 million. The related fiscal 2007 income tax expense of $3.6
million was due to foreign taxes on the profits of Villa. During fiscal 2006,
the Company recorded pretax income of $2.1 million which included foreign pretax
income of $3.7 million, offset by a US pretax loss of $1.6 million. The Company
has not provided for any income tax benefits related to the US pretax losses in
either fiscal 2007 or fiscal 2006 due to uncertainty regarding the realizability
of its US net operating loss carry forwards as explained in Critical Accounting
Policies above.
Fiscal 2006 Discontinued Operations reflects the accrual of an estimated
liability of $0.2 million related to a New York State Sales tax audit of the
Company's prior DHV business sold in October 2004.
Reflecting the above, we recorded net income of $3.8 million, or $0.24 per
basic share and $0.23 per diluted share, in fiscal 2007, as compared to a net
income of $0.1 million, or $0.01 per basic and diluted share, in fiscal 2006.
FISCAL 2006 COMPARED TO FISCAL 2005
Consolidated net sales of $83.0 million for fiscal year 2006 decreased by
$1.9 million, or 2.2%, from fiscal 2005 net sales of $84.9 million, with
decreases at both the Power Conversion Group and Medical Systems Group. The
Medical Systems Group's sales for fiscal 2006 of $70.3 million decreased $0.5
million, or 0.7%, from the prior fiscal year, with increases at our
international location across several product lines, more than offset by
decreases at its domestic location. International sales for the prior fiscal
period included shipments of $8.8 million under an international Romanian sales
order. The Power Conversion Group's sales for fiscal 2006 of $12.7 million
23
decreased by $1.4 million, or 9.9%, from the prior year's levels, reflecting
catch-ups of late orders from fiscal 2004 during fiscal 2005 and decreased
demands from an OEM customer in fiscal 2006 due to a planned move of this
production to a customer owned facility.
Consolidated backlog at July 28, 2006, was $22.4 million, compared to backlog
at July 30, 2005 of approximately $14.6 million. The backlog in the Power
Conversion Group increased $0.2 million from levels at the beginning of the
fiscal year, and there was a $7.6 million increase in the backlog at our Medical
Systems Segment, reflecting increases of $0.4 million at our domestic location
and $7.2 million at our international location due to increased bookings during
the fiscal 2006 period. Substantially all of the backlog should result in
shipments within the next twelve months.
Gross margins as a percent of sales were 23.3% in fiscal 2006, compared to
26.3% in fiscal 2005. The Power Conversion Group margins were 35.5% in fiscal
2006 as compared to 41.0% in fiscal 2005 reflecting the $1.4 million decrease in
sales volume during the fiscal 2006 period. For the Medical Systems Group,
fiscal 2006 gross margins of 21.1% were lower than gross margins of 23.3% in the
prior year due to volume reductions at its domestic location and internationally
due both to the effect of product mix and pricing pressure in the fiscal 2006
period.
Selling, General and Administrative expenses ("SG&A") for fiscal 2006 were
$13.6 million (16.4% of sales) compared to $16.5 million (19.4% of sales) in
fiscal 2005. The decrease in SG&A in fiscal 2006 is primarily due to reduced
corporate legal and accounting costs of $0.7 million, and reduced selling costs
in both the Power Conversion Group and the Medical Systems Group of $0.6, as
well as due to higher costs in fiscal 2005 related to a review of strategic
alternatives of $1.0 million.
Litigation settlement costs of $0.7 million recorded in fiscal 2006 include
the accrual of $0.6 million based on a November 2005 settlement of litigation
filed during fiscal 2005 by the potential buyers of the Company's Medical
Systems Group. The Company previously disclosed this litigation but had not
recorded any affiliated expense during fiscal 2005, as it had no basis at that
time upon which to estimate either the outcome or amount of loss. The fiscal
2006 cost also includes the settlement of two employment actions at our foreign
subsidiary totaling $0.2 million and the reversal of a $0.1 million accrual
related to a previously settled litigation. Fiscal 2005 included $0.3 million
related to the final settlement of the previously disclosed DOD investigation of
our RFI subsidiary.
As a result of the above, we recognized fiscal 2006 operating income of $3.5
million compared to operating income of $3.9 million in fiscal 2005. The Medical
Systems Group had an operating profit of $3.6 million in fiscal 2006 and the
Power Conversion Group achieved an operating profit of $2.4 million, offset by
unallocated corporate costs of $2.5 million. In fiscal 2005, the Medical Systems
Group had an operating profit of $5.6 million and the Power Conversion Group
achieved an operating profit of $2.8 million, offset by unallocated corporate
costs of $4.5 million.
Interest expense for fiscal 2006 was slightly lower than the prior year as
increased borrowings and higher interest rates were offset by decreases due to
fees incurred in the prior year in conjunction with modifications to the
Company's domestic revolving credit facility. In addition, the Company's new
credit facility entered into on August 1, 2005, eliminated an unfavorable floor
borrowing interest calculation and certain monthly fees that were in effect
under the previous lending facility.
On a consolidated basis, the Company recorded fiscal 2006 pretax income of
$2.1 million, comprised of foreign pretax income of $3.6 million offset by a US
pre-tax loss of $1.5 million. The related fiscal 2006 income tax expense of $1.7
million was primarily due to foreign taxes on the profits of Villa and includes
a provision of $0.4 million in the US to provide for deferred taxes on the
undistributed earnings of Villa. During fiscal 2005, the Company recorded pretax
income of $2.6 million which included foreign pre-tax income of $3.8 million,
offset by a US pretax loss of $1.2 million. The Company has not provided for any
income tax benefits related to the US pretax losses in either fiscal 2006 or
fiscal 2005 due to uncertainty regarding the realizability of its US net
operating loss carry forwards as explained in Critical Accounting Policies
above.
Fiscal 2006 Discontinued Operations reflects the accrual of an estimated
liability of $0.2 million related to a New York State Sales tax audit of its
Valhalla location, including the DHV business sold in October 2004. The
Discontinued Operations operating results for fiscal 2005 reflect income from
operations of $0.2 million from the DHV division.
Reflecting the above, we recorded net income of $0.1 million, or $0.01 per
basic and diluted share, in fiscal 2006, as compared to a net income of $0.4
million, or $0.04 per basic share and $0.03 per diluted share, in fiscal 2005.
24
LIQUIDITY AND CAPITAL RESOURCES
FISCAL 2007 COMPARED TO FISCAL 2006
We fund our investing and working capital needs through a combination of cash
flow from operations and short-term credit facilities and the proceeds from our
Right Offering discussed below.
Working Capital -- At July 28, 2007 and July 29, 2006, our working capital
was approximately $25.0 million and $6.9 million, respectively. The increase in
ending working capital for fiscal 2007 as compared to fiscal 2006 relates
primarily to unused cash and cash equivalents from the Rights Offering discussed
below, increases in ending inventories and accounts receivable and decreases in
short-term debt offset by an increase in trade accounts payable.
At July 28, 2007 and July 29, 2006 we had approximately $8.0 million and $0.3
million, respectively, in cash and cash equivalents. The increase is primarily
due to cash generated from operations, the net proceeds of the Rights Offering
discussed below, offset by domestic revolver and debt repayments. As of July 28,
2007, we had approximately $9.0 million of excess borrowing availability under
our domestic revolving credit facility compared to $1.0 million at July 29,
2006.
In addition, as of July 28, 2007 and July 29, 2006, our Villa subsidiary had
an aggregate of approximately $11.0 million and $4.4 million, respectively, of
excess borrowing availability under its various short-term credit facilities.
Terms of the Italian credit facilities do not permit the use of borrowing
availability to directly finance operating activities at our US subsidiaries.
Cash Flows from Operating Activities -- For the year ended July 28, 2007, the
Company generated approximately $4.0 million of cash for continuing operations,
compared to $0.3 million in the prior fiscal year due primarily to an increase
in net income and a larger increase in accounts and income taxes payable
partially offset by a larger increase in inventories.
Cash Flows from Investing Activities -- We made approximately $0.8 million in
facility improvements and capital equipment expenditures for the fiscal year
ended July 28, 2007 and for the comparable prior fiscal year period. We also
used approximately $2.6 million to fund the cash portion of the purchase of the
minority interest in our Italian subsidiary in fiscal 2006.
Cash Flows from Financing Activities - During the year ended July 28, 2007,
we generated $4.2 million in net cash from financing activities versus $2.1
million for the fiscal year ended July 29, 2006 due primarily to the net
proceeds of our Rights Offering completed in March of 2007, The Rights Offering,
discussed below, generated total proceeds to the Company, net of expenses
related of $12.4 million. Approximately $7.6 million of the proceeds were used
for debt repayment and the remainder invested in short-term money market
securities. In addition, the Company received $0.7 million in payment of the
exercise price of stock options and warrants. During the year ended July 29,
2006, the Company refinanced its domestic credit agreement and borrowed $2.0
million under a term loan. In addition, the Company borrowed a net $0.8 million
under revolving credit facilities and received $0.2 million in payment of the
exercise price of stock options. The Company made a total of $1.0 million in
payments of long term debt during fiscal 2006.
The following table summarizes our contractual obligations, including debt
and operating leases at July 28, 2007 (in thousands):
WITHIN 2-3 4-5 AFTER 5
TOTAL (1) 1 YEAR YEARS YEARS YEARS
----------- ------ ------ ------ --------
Long-Term Debt Obligations ............ $3,834 $ 698 $1,968 $ 899 $ 269
Capital Lease Obligations ............. 2,650 389 860 1,401 --
Interest ............................. 479 166 250 63 --
Operating Lease Obligations ........... 759 329 355 75 --
------ ------ ------ ------ ------
Total Contractual Cash Obligations .... $7,722 $1,582 $3,433 $2,438 $ 269
(1) As of July 28, 2007, we did not have any outstanding borrowings under our
revolving credit facilities in the US or in Italy.
Credit Facility and Borrowing -- On August 1, 2005, the Company entered into a
three-year revolving credit and term loan facility with North Fork Business
Capital (the "North Fork Facility") and repaid the prior facility. The North
Fork Facility provides for a $6 million formula based revolving credit facility
based on the Company's eligible accounts receivable and inventories as defined
in the credit agreement. In addition, the Company borrowed $2 million under a
term loan facility secured by the Company's Bay Shore, New York building.
Interest on the revolving credit borrowings is payable at prime plus 0.5% or
alternatively at a LIBOR rate plus 2.5%. The $2 million term loan was repayable
in 36 monthly installments of $16,667 with a balloon payment of the remaining
balance due at the maturity in 2008. Interest on the term loan was payable
25
monthly at prime plus 0.75% or a LIBOR rate plus 2.75%. As of July 28, 2007, the
Company had approximately $6.7 million of availability under the North Fork
Facility, of which North Fork has reserved $1 million against possible
litigation settlements. The term loan was extinguished and the revolver was paid
down to $0 with a portion of the proceeds received from a March 2007 Rights
Offering discussed below. The North Fork Facility is subject to commitment fees
of 0.5% per annum on the daily-unused portion of the facility, payable monthly.
The Company granted a security interest to the lender on its US credit facility
in substantially all of its accounts receivable, inventories, property plant and
equipment, other assets and intellectual property in the US.
As of the end of the fourth quarter of fiscal 2006, the Company was
non-compliant with the following covenants: the Adjusted US Earnings, Adjusted
Earnings, Senior US Debt Ratio and Fixed Charge Coverage Ratio covenants under
the North Fork Facility, due to the lower than anticipated performance during
fiscal 2006. On October 25, 2006, the Company and North Fork signed an amendment
to the facility that waived the non-compliance with these covenants for the
fourth quarter of fiscal 2006 and adjusted the covenant levels going forward
through the maturity of the credit facility. In addition the amendment reversed
$0.3 million of a sinking fund reserved for the March 2007 maturity of the
subordinated shareholder notes and eliminated additional sinking fund reserves
provisions related to the subordinated notes.
As of the end of the first quarter of fiscal 2007, the Company was
non-compliant with the tangible net worth covenant under the North Fork
Facility. On December 6, 2006, North Fork waived the non-compliance with this
covenant for the first quarter of fiscal 2007 and adjusted the covenant levels
going forward through the maturity of the credit facility.
As of the end of fiscal 2007, the Company was in compliance with all
covenants under the North Fork Facility.
On June 1, 2007, the North Fork Facility was amended and restated. The
amendment increases the revolving credit facility to a maximum amount of $7.5
million and provides a capital expenditure loan facility up to $1.5 million.
Other changes to the terms and conditions of the original loan agreement include
the modification of covenants, removal of the Villa stock as loan collateral and
the removal of daily collateral reporting which was part of the previous
asset-based facility requirements.
The Company received a dividend from its Villa subsidiary in October 2006 of
approximately $1.560 million which was used to pay down amounts outstanding
under the North Fork Facility, in accordance with provisions of the facility.
Our Villa subsidiary maintains short term credit facilities which are renewed
annually with Italian banks. Currently, these facilities are not being utilized
and the balance due at July 28, 2007 is $0. Interest rates on these facilities
are variable and currently range from 3.7-13.75%.
In October 2006, Villa entered into a 1.0 million Euro loan for financing of
R&D projects, with an option for an additional 1 million Euro upon completion of
50% of the projects. Interest payable is at Euribor 3 months plus 1.3 points,
currently 5.475%. The spread may be reduced to 1.04 points upon completion of
the project if objectives are achieved. The note is repayable over a 7 year
term, with reimbursement starting in September 2008. The note contains a
financial covenant which provides that the net equity of Villa cannot fall below
5.0 million Euros. This covenant could limit Villa's ability to pay dividends to
the US parent company in the event of future losses, future dividends or other
events should cause Villa's equity to fall below the defined level.
In December 2006, Villa entered into a 1.0 million Euro loan with interest
payable at Euribor 3 months plus 0.95 points, currently 5.125%. The loan is
repayable in 4 years.
Villa was party to a 1.6 million Euro loan which was extinguished in March
2007. Two final installments for a total of 0.3 million Euro were repaid in
fiscal year 2007.
Villa is also party to two Italian government long-term loans with a fixed
interest rate of 3.425% with principal payable annually through maturity in
February and September 2010. At the end of fiscal year 2007, total principal due
is 2.3 million Euro. Villa 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.
In connection with the settlement reached on January 29, 2002 with the
plaintiffs in the class action litigation, the Company recorded the present
value at 12% of the $2 million of subordinated notes that were issued in April
2002 and matured in March 2007. The subordinated notes did not pay interest
currently, but accrued interest at 6% per annum, and were recorded at issuance
at a discounted present value of $1.5 million. The balance was paid on March 29,
2007 with a portion of the proceeds from a Rights Offering described below.
26
During fiscal 2005, the Company applied to the Pension Benefit Guaranty Corp
and to the IRS for a determination letter and approval to terminate this plan.
In the fourth quarter of fiscal 2005, the Company recognized a related non-cash
charge of approximately $0.5 million to write off the pension assets on its
balance sheet in recognition of the formal decision to terminate the plan. In
preparation for the plan termination, during fiscal 2005 the Company fully
funded the expected cash disbursement of $0.2 million dollars. The Company
received the IRS determination letter approving the final settlement during the
second quarter of fiscal 2006 and fully paid out all of the plan participants in
March 2006.
On December 12, 2006, the Company filed a registration statement for a
subscription Rights Offering with the SEC that became effective January 30,
2007. Under the terms of this Rights Offering, the Company distributed to
shareholders of record as of February 5, 2007, non-transferable subscription
rights to purchase one share of the Company's common stock for each share owned
at that date at a subscription price of $1.05 per share. On March 12, 2007, the
Company completed the Rights Offering, selling 12,027,378 shares of its common
stock at $1.05 per share. Total proceeds to the Company, net of expenses related
to the Rights Offering, were $12.4 million.
The purpose of this Rights Offering was to raise equity capital in a
cost-effective manner. Approximately $7.6 million of the proceeds were used for
debt repayment and the remainder invested in short-term money market securities
for anticipated working capital needs and general corporate purposes. A portion
of the net proceeds may also ultimately be used to acquire or invest in
businesses, products and technologies that Company management believes are
complementary to the Company's business.
In addition, on January 22, 2007, the Company entered into a stockholders
rights plan (the "Rights Plan"). The Rights Plan provides for a dividend
distribution of one Common Stock purchase right for each outstanding share of
the Company's Common Stock. The Company's Board of Directors adopted the Rights
Plan to protect stockholder value by protecting the Company's ability to realize
the benefits of its net operating losses ("NOLs") and capital loss
carryforwards. The Company has experienced substantial operating and capital
losses in previous years. Under the Internal Revenue Code and rules promulgated
by the IRS, the Company may "carry forward" these losses in certain
circumstances to offset current and future earnings and thus reduce its federal
income tax liability, subject to certain requirements and restrictions. Assuming
that the Company has future earnings, the Company may be able to realize the
benefits of NOLs and capital loss carryforwards. These NOLs and capital loss
carryforwards constitute a substantial asset to the Company. If the Company
experiences an "Ownership Change," as defined in Section 382 of the Internal
Revenue Code, its ability to use the NOLs and capital loss carryforwards could
be substantially limited or lost altogether. In general terms, the Rights Plan
imposes a significant penalty upon any person or group that acquires certain
percentages of the Company's common stock by allowing other shareholders to
acquire equity securities at half their fair values.
The Company had an employment agreement with Samuel Park, a previous Chief
Executive Officer ("CEO"), for the period May 1, 2001 to April 30, 2004. The
employment agreement provided for certain payments in the event of a 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 $0.2 million during the first
quarter of fiscal 2004 to accrue the balance remaining under Mr. Park's
employment agreement.
The Company's employment agreement with Mr. Park provided for payments upon
certain changes of control. The Company's Board of Directors elected at the
Company's Annual Meeting of Shareholders held on May 29, 2003, had reviewed the
"change of control", provisions regarding payments totaling up to approximately
$1,800,000 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 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 of control payments. On November 17, 2003, the Company filed a complaint
in the United States District Court, Southern District of New York, 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
27
Mr. Park's counterclaims denying that he is entitled to any of these payments.
Discovery in this matter was conducted and completed. Following discovery, the
Company and Mr. Park filed motions for summary judgment on the issues related to
change in control and the amendment to the employment agreement, which motions
have been fully submitted to the Court for consideration. To date, no decision
has been issued by the Court on these motions. If Mr. Park prevails on his
claims and the payments he seeks are required to be 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 Company has not recorded an accrual for any potential settlement of
this claim as it has no basis upon which to estimate either the outcome or
amount of loss, if any.
On June 28, 2002, Jeffrey N. Moeller, the former Director of Quality
Assurance and Regulatory Affairs of Del Medical, commenced an action in the
Circuit Court of Cook County, Illinois, against the Company, Del Medical and
Walter Schneider, the former President of Del Medical. In the most current
iteration of this pleading, the third amended complaint, Mr. Moeller alleges
four claims against the defendants in the action: (1) retaliatory discharge from
employment with Del Medical, allegedly in response to Mr. Moeller's complaints
to officers of Del Medical about purported prebilling and his stopping shipment
of a product that allegedly did not meet regulatory standards, (2) defamation,
(3) intentional interference with his employment relationship with Del Medical
and prospective employers, and (4) to hold the Company liable for any misconduct
of Del Medical under a theory of piercing the corporate veil. By order dated
September 15, 2006, the Court denied in part and granted in part defendants'
motion requesting summary judgment dismissing the third amended complaint. The
Court granted the motion only to the extent of dismissing that part of Mr.
Moeller's claim of interference with his employment relationship with Del
Medical and his relationship with prospective employers, addressed to alleged
interference with his relationship with prospective employers. The parties
appeared for mediation in January 2007 but the mediation did not result in a
disposition of the action. Accordingly, it appears that the action will proceed
to trial. A status conference before the Court was held March 8, 2007, and
subsequently, a trial date had been scheduled for October 1, 2007. The trial
date has been postponed due to the unavailability of a witness for the
plaintiff. A trial date has been scheduled of January 28, 2008. The Company and
Del Medical intend to defend vigorously against Mr. Moeller's claims. Mr.
Moeller is seeking $2.37 million in damages consisting of alleged income loss,
including salary and benefits, and the present value of his alleged lost income
and benefits in the future after lump sum tax adjustments. The Company has
recorded an accrual of $0.1 million relating to potential liability in the
settlement of these claims.
On May 24, 2007, the Company's RFI subsidiary was served with a subpoena to
testify before a grand jury of the United States District Court, Eastern
District of New York and to provide items and records from its Bay Shore, NY
offices in connection with U.S. Department of Defense contracts. A search
warrant from the United States District Court, Eastern District of New York was
issued and executed with respect to such offices. The Company believes that it
is in full compliance with the quality standards that its customers require and
is fully cooperating with investigators to assist them with their review. The
Company's RFI subsidiary is continuing to ship products to the U.S. Government
as well as to its commercial customers.
The Company is a defendant in several other legal actions in various US and
foreign jurisdictions arising from the normal course of business. 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.
On December 23, 2005, the Company acquired the remaining 20% of Villa for
$2.6 million plus 904,762 restricted shares of Company common stock. These
shares were valued at $3.26 a share, or $3.0 million, and are subject to SEC
Rule 144 limitations as to holding periods and trading volume limitations.
Goodwill in the amount of $4.5 million was recorded and $0.9 million of minority
interest was reversed after recognition of a $0.4 million dividend. Due to the
previous 80% ownership interest existing at the time of the original
acquisition, the assets and liabilities of the Villa subsidiary were fully
consolidated before the transaction and considered to be at fair market value
with no additional adjustments necessary.
The Company did not have any investments in unconsolidated variable interest
entities or other off balance sheet arrangements during any of the periods
presented in this Annual Report on Form 10K.
The Company anticipates that cash generated from the Rights Offering noted
above, operations and amounts available from credit facilities will be
sufficient to satisfy currently projected operating cash needs for at least the
next twelve months.
28
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No. 109, "Accounting for Income Taxes"
("SFAS 109")", to clarify the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with SFAS 109.
This Interpretation prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not
expected to have a material impact on the Company's results of operations or its
financial position.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Current Year Misstatements." SAB 108 requires
analysis of misstatements using both an income statement (rollover) approach and
a balance sheet (iron curtain) approach in assessing materiality and allows for
a one-time cumulative effect transition adjustment. SAB 108 was effective for
our fiscal year 2007 annual financial statements, and did not have any impact on
our results of operations or our financial position.
In September 2006, the FASB issued SFAS No 157, "Fair Value Measurements,"
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the information. This
statement is effective for the Company beginning July 1, 2008. The Company has
not evaluated the impact that the adoption of SFAS No. 157 will have on its
financial statements at this time.
In February 2007, the FASB released SFAS No. 159, "Fair Value Option for
Financial Assets and Financial Liabilities." This statement permits entities to
choose to measure many financial instruments and certain other items at fair
value. This Statement is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those years.
The Company has not evaluated the impact that the adoption of SFAS No. 159 will
have on its financial statements at this time.
ITEM 7A 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.
INTEREST RATE RISK
Our US revolving credit and Italian subsidiary's long-term debt incur
interest charges that fluctuate with changes in market interest rates. See Note
8 of Notes to Consolidated Financial Statements included in Part II, Item 8 of
this Annual Report. Based on the balances as of July 28, 2007, an increase of
1/2 of 1% in interest rates would increase interest expense by approximately
$32,000 annually. There is no assurance that interest rates will increase or
decrease over the next fiscal year. Because we believe this risk is not
material, we do not undertake any specific steps to reduce or eliminate this
risk.
FOREIGN CURRENCY RISK
The financial statements of Villa are denominated in Euros. Based on our
historical results and expected future results, Villa accounts for approximately
54% to 61% of our total revenues, based in part on the rate at which Villa's
Euro denominated financial statements have been or will be converted into US
dollars. In addition, over the last three years, Villa has contributed positive
operating income, as compared to our consolidated operating losses. Having a
portion of our future income denominated in Euros exposes us to market risk with
respect to fluctuations in the US dollar value of future Euro earnings. A 5%
decline in the value of the Euro in fiscal 2007, for example, would have reduced
sales by approximately $3.1 million, and would have decreased our consolidated
income from continuing operations by approximately $440,000 (due to the
reduction in the US dollar value of Villa's operating income.)
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, including the notes to
all such statements and other supplementary data are included in this report
beginning on page F-1.
29
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
ITEM 9A CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of the
Company's management, including James A. Risher, Chief Executive Officer, and
Mark A. Zorko, 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 Annual Report. 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 Annual Report 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.
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.
INTERNAL CONTROL OVER FINANCIAL REPORTING
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
fourth quarter ended July 28, 2007, that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
ITEM 9B OTHER INFORMATION
Not applicable.
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The names and ages of each director and executive officers of the Company,
each of their principal occupations at present and for the past five (5) years
and certain other information about each, are set forth below:
Name Age All Offices With the Company Director Since
- ----------------------------- ----- ---------------------------------- --------------
Gerald M. Czarnecki 67 Director 2003
James R. Henderson 49 Chairman of the Board and Director 2003
General Merrill A. McPeak 71 Director 2005
James A. Risher 65 Director, President and Chief 2005
Executive Officer
Officer Since
-------------
Mark A. Zorko 55 Chief Financial Officer 2006
Mark A. Koch 48 Former Treasurer and Principal 2004
Accounting Officer Resigned 2006
30
GERALD M. CZARNECKI has been a member of the Company's Board of Directors since
June 3, 2003. He has served as the Chairman of The Deltennium Corporation,
a privately held holding company ("Deltennium"), since November 1995. Mr.
Czarnecki is also currently serving as President & CEO of Junior
Achievement Worldwide, Inc. and is Managing Director of O2Media Inc. Mr.
Czarnecki had a broad career as a corporate executive including serving as
Chairman & CEO of Honfed Bank, a multi-billion dollar bank; President of
UNC Inc., a manufacturing and services company in the aviation industry;
and Senior Vice President of Human Resources and Administration of IBM,
the world's largest computer company. Mr. Czarnecki is a frequent speaker
and seminar leader on a broad range of corporate governance issues and
serves on a number of corporate boards. He has served as a member of the
Board of Directors and Chairman of the Audit Committee of State Farm
Insurance Companies since 1998; He is Chairman of the Board of Directors
of the National Association of Corporate Directors, Florida Chapter and is
Chairman of The National Leadership Institute, a non-profit organization
committed to improving non-profit Leadership and Corporate Governance. Mr.
Czarnecki has a B.S. in Economics from Temple University and an M.A. in
Economics from Michigan State University and is a CPA.
JAMES R. HENDERSON has been a member of the Company's Board of Directors since
November 20, 2003 and Chairman of the Board since May 12, 2005. Mr.
Henderson has served as a Vice President of Steel Partners, Ltd., a
management and advisory company, since March 2002. Mr. Henderson served as
a Vice President of Steel Partners Services, Ltd. from August 1999 through
March 2002. Mr. Henderson has served as President and Chief Operating
Officer of WebFinancial Corporation ("WebFinancial"), which, through its
operating subsidiaries, operates in niche banking markets, since November
2003 and as Chief Operating Officer and Director since June 2005. Mr.
Henderson has served as a director of Angelica Corporation, an outsourced
linen management services provider to the healthcare industry, since
September 2006. He has also served as President of Gateway Industries,
Inc., a provider of database development and website design and
development services, since December 2001. Mr. Henderson has served as a
director of SL Industries, Inc. ("SLI"), a manufacturer and marketer of
power and data quality systems and equipment for industrial, medical,
aerospace and consumer applications since January 2002. Mr. Henderson has
served as a director of BNS Corporation since June 2004. Mr. Henderson
served as a director of ECC International Corp., a manufacturer and
marketer of computer controlled simulators for training personnel to
perform maintenance and operation procedures on military weapons, from
December 1999 until September 2003, and as acting Chief Executive Officer
from July 2002 until March 2003. From January 2001 to August 2001, Mr.
Henderson served as President of MDM Technologies, Inc., a direct mail and
marketing company. From 1996 to July 1999, Mr. Henderson was employed in
various positions with Aydin Corporation which included tenure as
President and Chief Operating Officer from October 1998 to June 1999.
Prior to his employment with Aydin Corporation, Mr. Henderson was employed
as an executive with UNISYS Corporation, an e-business solutions provider.
Mr. Henderson earned a B.S. in Accounting from the University of Scranton.
GENERAL MERRILL A. MCPEAK has been a member of the Company's Board of Directors
since April 27, 2005. General McPeak is the President of McPeak and
Associates, a management-consulting firm he founded in 1995. General
McPeak was Chief of Staff of the Air Force from November 1990 to October
1994, when he retired from active military service. General McPeak was for
several years Chairman of ECC, International, a Florida-based simulation
and training company. He has served as a director of several other public
companies, including Tektronix and TWA. Currently, General McPeak is
Chairman of the Board of Ethicspoint, Inc., a company providing
confidential corporate governance compliance and whistleblower reporting
services. He is a director of Sensis Corp., a privately held manufacturer
of military radars and civilian air traffic control systems. He is an
investor in and director of several public and private companies in the
early development stage, including: Gigabeam (NASDAQ: GGBM), a supplier of
high performance, high availability fiber-speed wireless communications;
MathStar (NasdaqGM: MATH), a designer and marketer of specialized
semiconductor integrated circuits; and Quintessence Photonics (OTC BB:
QPCI.OB), a designer and manufacturer of high performance semiconductor
laser diodes. General McPeak received a Bachelor of Arts degree in
economics from San Diego State College and a Master of Science degree in
international relations from George Washington University. He is a member
of the Council on Foreign Relations, New York City.
JAMES A. RISHER has been a member of the Company's Board of Directors since
April 27, 2005. On July 22, 2006, Mr. Risher became the Interim President
and CEO of Del Global. On August 31, 2006 Mr. Risher became the President
and CEO of the Company. Mr. Risher has been the Managing Partner of Lumina
Group, LLC, a private company engaged in the business of consulting and
investing in small and mid-size companies, since 1998. From February 2001
to May 2002, Mr. Risher served as Chairman and Chief Executive Officer of
BlueStar Battery Systems International, Inc., a Canadian public company
that is an e-commerce distributor of electrical and electronic products to
selected automotive aftermarket segments and targeted industrial markets.
From 1986 to 1998, Mr. Risher served as a director, Chief Executive
Officer and President of Exide Electronics Group, Inc. ("Exide"), a global
leader in the uninterruptible power supply industry. He also served as
Chairman of Exide from December 1997 to July 1998. Mr. Risher has also
been a director of SLI since May 2003 and a director of New Century Equity
Holdings Corp., a holding company seeking to acquire a new business, since
October 2004.
31
ADDITIONAL EXECUTIVE OFFICERS OF THE COMPANY WHO ARE NOT DIRECTORS.
MARK A. ZORKO, 55, has served as our Chief Financial Officer from August 30,
2006. He continues as a CFO Partner at Tatum, LLC, a professional services firm
where he has held financial leadership positions with public and private client
companies. From 1996 to 1999, Mr. Zorko was Chief Financial Officer and Chief
Information Officer for Network Services Co., a privately held distribution
company. His prior experience includes Vice President, Chief Financial Officer
and Secretary of Comptronix Corporation, a publicly held electronic system
manufacturing company, corporate controller for Zenith Data Systems Corporation,
a computer manufacturing and retail electronics company, and finance manager
positions with Honeywell, Inc. Mr. Zorko was a senior staff consultant with
Arthur Andersen & Co. Mr. Zorko served in the Marine Corps. from 1970 to 1973.
He has served as a director of Guardian Technologies International, Inc. Mr.
Zorko is on the audit committee for Opportunity Int'l, a microenterprise
development organization, and on the Board of Directors for St. Alexius Medical
Center. Mr. Zorko earned a BS degree in Accounting from The Ohio State
University, an MBA from the University of Minnesota, and completed the FEI's
Chief Financial Officer program at Harvard University. He is a certified public
accountant and a member of the National Association of Corporate Directors.
MARK A KOCH, 48, served as our Treasurer and Principal Accounting Officer from
August 24, 2004 and our Secretary from September 17, 2004, until his resignation
from all positions held with the Company on October 30, 2006. Prior to his
appointment as Treasurer and Principal Accounting Officer, Mr. Koch served as
our Corporate Controller and Assistant Secretary since February 2003.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS; IDENTIFICATION OF AUDIT COMMITTEE
FINANCIAL EXPERT.
The Board of Directors has a standing Audit Committee, the members of which
are Gerald M. Czarnecki and General Merrill McPeak. The Board of Directors has
determined that Mr. Czarnecki is an "audit committee financial expert" as
defined in Item 401(h) of Regulation S-K. Although the Company is currently not
listed on any exchange, both Mr. Czarnecki and Gen. McPeak are considered to be
an "independent director" as defined in Rule 4200 of the Marketplace Rules of
the National Association of Securities Dealers, Inc.
CODE OF BUSINESS CONDUCT AND ETHICS.
The Company has adopted a Code of Business Conduct and Ethics that applies to
the Company's Chief Executive Officer and Principal Accounting Officer. The
Company's Code of Business Conduct and Ethics is posted on the Company's
website, HTTP://WWW.DELGLOBAL.COM.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the
Securities and Exchange Commission (the "Commission"). Such officers, directors
and 10% stockholders are also required by Commission rules to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on its
review of the copies of such forms received by it, or written representations
from certain reporting persons, the Company believes that during the fiscal year
ended July 28, 2007, there was compliance with all Section 16(a) filing
requirements applicable to its officers, directors and 10% stockholders. The
Company knows of no failures to file a required Section 16(a) form during the
fiscal year ended July 28, 2007.
ITEM 11 EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
This compensation discussion and analysis describes the elements of
compensation paid to each of the named executive officers who served in the
fiscal year ended July 28, 2007. The discussion focuses primarily on the
information contained in the following tables and related footnotes but may also
describe compensation actions taken before or after the last completed fiscal
year to the extent that such discussion enhances understanding of our
compensation philosophy or policies. The Compensation Committee of the Board
oversees the design and administration of our executive compensation program.
32
THE ROLE OF THE COMPENSATION COMMITTEE
The Compensation Committee is responsible for ensuring that the Company's
executive compensation policies and programs are competitive within the markets
in which the Company competes for talent and reflect the long-term investment
interests of our shareholders. The Compensation Committee reviews and approves
the executive compensation and benefits programs for all the Company's executive
officers annually, usually in first quarter of each fiscal year. Any options
that are granted as a result of the Compensation Committee's executive
compensation review and approval process are only granted upon full Board
approval of the option grant. The strike price of such options is set at the
closing price of the Company's stock on the day the options were granted.
With respect to the Chief Executive Officer ("CEO"), the Compensation
Committee reviews and approves corporate goals and objectives, evaluates the
CEO's performance against these objectives, and makes recommendations to the
Board regarding the CEO's compensation level based on that evaluation.
The CEO participates, together with the Compensation Committee, in the executive
compensation process by:
o approving perquisites valued at less than $10,000 per year (all
perquisites valued at greater than this amount are still approved by
the Compensation Committee);
o participating in informal discussions with the Compensation
Committee regarding satisfaction of performance criteria by
executive officers, other than the CEO;
o providing the Board with recommendations as to who should
participate in the Del Global Incentive Stock Plan and the size of
option grants to such participants; and
o assigning annual budget goals and other objectives that determine
bonus awards for the CFO.
COMPENSATION PHILOSOPHY AND OBJECTIVES
The Compensation Committee is responsible for ensuring that the Company's
executive compensation policies and programs are competitive within the markets
in which the Company competes for talent and reflect the long-term investment
interests of our shareholders. The goal of the executive compensation program is
to (a) attract, retain and reward executive officers who contribute to the
Company's success and (b) align executive compensation with the achievement of
the Company's business objectives and the creation of longer-term value for
shareholders. The Compensation Committee also strives to balance short and
long-term incentive objectives by establishing goals, performance criteria,
evaluating performance and determining actual incentive awards that are both
effective and efficient. While the Compensation Committee believes that stock
ownership by executive officers is an effective way of aligning the common
interests of management and shareholders to enhance shareholder value, the
Company has not established equity ownership guidelines for its executive
officers.
RELATIONSHIP OF COMPANY PERFORMANCE TO EXECUTIVE COMPENSATION
When determining executive compensation, the Compensation Committee also
takes into account the executives' performance in special projects undertaken
during the past fiscal year, contribution to improvements in our financial
situation, development of new products, marketing strategies, manufacturing
efficiencies and other factors. During the 2007 fiscal year, the Compensation
Committee focused particularly on progress with respect to improvement in the
Company's revenue growth, operating earnings and the development of a long-term
strategic plan for the Company that provides a platform for growth and a return
to shareholders.
Satisfaction of certain performance criteria (including initiative,
contribution to overall corporate performance and managerial ability) is
evaluated after informal discussions with other members of the Board and, for
all of the executives other than the CEO, after discussions with the CEO. No
specific weight or relative importance was assigned to the various qualitative
factors and compensation information considered by the Compensation Committee.
Accordingly, the Company's compensation policies and practices may be deemed
subjective, within an overall published framework based on both the financial
and non-financial factors.
ELEMENTS OF COMPENSATION
The Company's compensation program is comprised primarily of four
elements: base salary, annual cash bonuses, long-term equity incentives and
perquisites. Together, these four elements are structured by the Compensation
Committee to provide our named executive officers with cumulative total
compensation consistent with our executive compensation philosophy described
above. Each of these elements plays an important role in balancing executive
rewards over short- and long-term periods, based on our program objectives.
33
1. BASE SALARY
Our base salary levels reflect a combination of factors, including
competitive pay levels relative to our peers, the executive's experience and
tenure, our overall annual budget for merit increases and pre-tax profit, the
executive's individual performance, and changes in responsibility. We review
salary levels annually to recognize these factors. We do not target base salary
at any particular percent of total compensation. The base salary for our CEO and
CFO is set forth in their employment agreements, which are described in more
detail below.
Our executive salary levels are intended to be consistent with competitive
salary levels and job responsibilities of each executive. Salary increases
reflect competitive and economic trends, our overall financial performance and
the performance of the individual executive.
2. ANNUAL CASH BONUSES
The purpose of the annual cash bonus is to provide a competitive annual
cash incentive opportunity that rewards both the Company's performance toward
corporate goals and objectives and also individual achievements. The annual
bonus is a short-term annual incentive paid in cash pursuant to arrangements
that cover all executive officers, including the CEO, and provide that a bonus
will be paid upon the achieving the Company's annual budget and attaining
specific objectives assigned by the Board of Directors of the Company. For
fiscal year 2007, our CEO and CFO were eligible to receive an annual bonus with
a target of 60% and 45% of their annual base salary respectively.
3. LONG TERM EQUITY INCENTIVES
A. DEL GLOBAL STOCK OPTION PLAN
The purpose of the Del Global Amended and Restated Stock Option Plan (the
"DGTC Plan"), is to provide for the granting of incentive stock options and
non-qualified stock options to the Company's executive officers, directors,
employees and consultants. The Compensation Committee administers the DGTC Plan.
Among other things, the Compensation Committee: (i) determines participants to
whom options may be granted and the number of shares to be granted pursuant to
each option, based upon the recommendation of our chief executive officer; (ii)
determines the terms and conditions of any option under the DGTC Plan, including
whether options will be incentive stock options, within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-qualified stock options; (iii) may vary the vesting schedule of options; and
(iv) may suspend, terminate or modify the DGTC Plan. Any Compensation Committee
recommendations of awards, options or compensation levels for senior executive
officers are approved by the entire Board, excluding any management directors.
Under the DGTC Plan, incentive stock options have an exercise price equal
to their fair market value as of the grant date and, unless earlier terminated,
are exercisable for a period of ten (10) years from the grant date.
Non-qualified stock options may have an exercise price that is less than, equal
to or more than the fair market value on the grant date and, unless earlier
terminated, are exercisable for a period of up to ten (10) years from their
grant date.
For the fiscal year ended July 28, 2007, under the terms of the DGTC Plan,
the Company granted (a) James A. Risher an option to purchase 120,000 shares of
the Company's common stock and (b) Mark A. Zorko, through two separate option
grants, the first being options to purchase 60,000 shares of the Company's
common stock and the second being options to purchase 20,000 shares of the
Company's common stock.
B. 2007 INCENTIVE STOCK PLAN
The 2007 Incentive Stock Plan (the "2007 Plan") is designed to provide an
incentive to, and to retain in the employ of the Company and any Subsidiary of
the Company, within the meaning of Section 424(f) of the United States Internal
Revenue Code of 1986, as amended, directors, officers, consultants, advisors and
employees with valuable training, experience and ability; to attract to the
Company new directors, officers, consultants, advisors and employees whose
services are considered valuable and to encourage the sense of proprietorship
and to stimulate the active interest of such persons in the development and
financial success of the Company and its Subsidiaries.
34
The 2007 Plan is administered by the Compensation Committee, which has
full power and authority to designate recipients of options (as defined in the
2007 Plan) and restricted stock under the 2007 Plan and to determine the terms
and conditions of the respective option and restricted stock agreements and to
interpret the provisions and supervise the administration of the 2007 Plan. The
Compensation Committee also has the authority to designate which options granted
under the 2007 Plan will be incentive options and which shall be nonqualified
options.
4. PERQUISITES
The Company's compensation program also includes other benefits and
perquisites. These benefits include annual matching contributions to certain
executive officers' 401(k) plan accounts, car allowances, living allowances and
tax gross-ups to cover taxes on certain benefits. We are selective in our use of
perquisites, attempting to utilize perquisites that are within range of modest
to competitive within our industry. The Compensation Committee has delegated
authority to the CEO to approve such perquisites for other executive officers,
but the Compensation Committee must separately approve any perquisites that
exceed $10,000 per year.
IMPACT OF TAX AND ACCOUNTING
As a general matter, the Compensation Committee always considers the
various tax and accounting implications of compensation elements employed by the
Company and attempts to structure such compensation in a tax efficient manner.
When determining amounts of long-term incentive grants to executives and
employees, the Compensation Committee examines the accounting cost associated
with the grants.
Current compensation levels for our named executive officers are
significantly lower than $1 million at which tax deductions are limited under
Internal Revenue Code Section 162(m). In the event that future annual total
compensation for any named executive officer exceeds the $1 million threshold,
the Compensation Committee intends to balance tax deductibility of executive
compensation with its responsibility to retain and motivate executives with
competitive compensation programs. As a result, the Compensation Committee may
take such actions as it deems in the best interests of shareholders, including:
(i) provide non-deductible compensation above the $1 million threshold; (ii)
require deferral of a portion of the bonus or other compensation to a time when
payment may be deductible by the Company; and/or (iii) modify existing programs
to qualify bonuses and other performance-based compensation to be exempt from
the deduction limit.
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation awarded to, paid to or
earned by the following type of executive officers for the fiscal year ended
July 28, 2007: (i) individuals who served as, or acted in the capacity of, the
Company's principal executive officer for the fiscal year ended July 28, 2007;
(ii) individuals who served as, or acted in the capacity of, the Company's
principal financial officer for the fiscal year ended July 28, 2007; (iii) the
Company's most highly compensated executive officers, other than the chief
executive and chief financial officer, who were serving as executive officers at
the end of the fiscal year ended July 28, 2007 (of which there were none) and
(iv) up to two additional individuals for whom disclosure would have been
provided but for the fact that the individual was not serving as an executive
officer of the Company at the end of the fiscal year ended July 28, 2007 (of
which there was one). We refer to these individuals collectively as our "named
executive officers."
35
SUMMARY COMPENSATION TABLE
Annual Compensation
----------------------------------------------------
Bonus Stock Option All Other
Name and Principal Position Year Salary ($)(1) ($)(1) Awards Awards(5) Compensation(2) Total
- --------------------------- ---- ------------- -------- ------ --------- --------------- --------
James A. Risher, Chief
Executive Officer 2007 $274,615 $224,324 $-- $ 51,171 $167,686 $717,796
Mark A. Zorko, Chief
Financial Officer 2007 $214,300 $131,291 $-- $ 23,526 $ 6,844 $375,961
Mark A. Koch(3)
Treasurer and Principal
Accounting Officer 2007 $ 52,990 $ -- $-- $ -- $120,577(4) $173,567
(1) The figures reported in the salary and bonus columns represent amounts
earned and accrued for each year.
(2) The amounts in this column include the following executive perquisites and
other compensation for fiscal year 2007:
-------------------------------------------------------------------
Benefit James A. Mark A. Mark A.
Risher Zorko Koch
-------------------------------------------------------------------
(a) Living allowance $ 67,357 -- --
-------------------------------------------------------------------
(b) Car Allowance -- $ 5,750 --
-------------------------------------------------------------------
(c) 401(k) Match -- $1,094 (2(c)) --
-------------------------------------------------------------------
(d) Tax Gross-Ups $ 41,162 -- --
-------------------------------------------------------------------
(e) Other $59,167(2(e)) -- $120,577 (4)
-------------------------------------------------------------------
(f) Annual Total $167,686 $ 6,844 $120,577
-------------------------------------------------------------------
NOTES:
2(c) Company-matching contribution of 50% of the first 4% of salary.
Accelerated vesting schedule (100% vested in Company contributions after
three (3) years of employment).
2(e) During fiscal year 2007, but prior to Mr. Risher's appointment as CEO, Mr.
Risher received $4,167 as compensation for his service to the Company as a
Director and $55,000 for his service to the Company as a consultant.
(3) Mr. Koch served as the Company's Treasurer and Principal Accounting
Officer until October 30, 2006.
(4) Mr. Koch received separation payments totaling $120,577 in fiscal year
2007.
(5) Refer to Footnote 11 Shareholder Equity in Item 8 "Stock Option Plan And
Warrants" for details of stock option plan terms, SFAS 123R valuation
techniques and assumptions and the fair value of stock options granted.
36
Grants Of Plan-Based Awards:
- --------------------------------------------------------------------------------
(a) (b) (i) (j) (k) (l)
- --------------------------------------------------------------------------------
All Other All Other
Stock Option
Awards: Awards:
Exercise
Number Number of or Base
of Shares Securities Price of Grant Date
of Stock Underlying Option Fair Value
or Units Options Awards of Stock
Grant and Option
Name Date (#) (#) ($/sh) Awards ($)
- --------------------------------------------------------------------------------
James A. Risher, Chief 8/31/2006 -- 120,000(1) 1.50 118,800
Executive Officer
- --------------------------------------------------------------------------------
Mark A. Zorko, Chief 8/31/2006 -- 60,000(2) 1.50 59,400
Financial Officer -------------------------------------------------------
11/17/2006 -- 20,000(2) 2.00 26,200
- --------------------------------------------------------------------------------
Mark A. Koch -- -- -- -- --
Treasurer and Principal
Accounting Officer
- --------------------------------------------------------------------------------
(1) Granted pursuant to the Company's DGTC Plan.
These stock options vest and become exercisable as to one-half of such
shares on the first anniversary of the date of the grant and as to an
additional 25% of such shares on the second and third anniversaries of the
date of the grant, respectively.
(2) Granted pursuant to the Company's DGTC Plan.
These stock options vest and become exercisable as to 25% of such shares
on the date of the option grant and 25% on each of the first, second and
third anniversaries of the date of the grant.
EMPLOYMENT AGREEMENTS
A. JAMES A. RISHER EMPLOYMENT AGREEMENTS
The Company and Mr. Risher entered into a Letter Agreement, dated August 31,
2006 (the "Risher Employment Agreement"), providing for Mr. Risher's employment
with the Company as its CEO and President. Pursuant to the Risher Employment
Agreement, Mr. Risher was entitled to an annual salary of $300,000 and received
an option grant to purchase 120,000 shares of the Company's common stock
pursuant to and in accordance with the Company's DGTC Plan. Such stock options
vest and become exercisable as to one-half of such shares on the first
anniversary of the date of the grant and as to an additional 25% of such shares
on the second and third anniversaries of the date of the grant, respectively.
Under the terms of the Risher Employment Agreement, Mr. Risher also received a
living allowance of $6,200 per month. In addition, Mr. Risher was eligible to
receive an annual bonus with a target of 60% of his annual base salary based
upon achieving the Company's annual budget and attaining specific objectives
assigned by the Board. As a result of achieving these specific objectives in
fiscal year 2007, Mr. Risher received a bonus of $224,324.
37
The Risher Employment Agreement has been superseded by Letter Agreement
between the Company and Mr. Risher, dated September 19, 2007, setting forth the
terms of Mr. Risher's continued employment by the Company as its CEO and
President. For fiscal year 2008, Mr. Risher shall receive an annual base salary
of $320,000 as well as a living allowance of $6,200 per month, which amount
shall be "grossed up" for tax purposes. In addition, Mr. Risher will be eligible
to receive an annual bonus with a target of 70% of his annual base salary, based
on achieving the Company's annual budget and attaining specific objectives
assigned by the Board. The annual bonus can be anywhere from 0% to 150% of the
target.
B. MARK A. ZORKO EMPLOYMENT AGREEMENT
The Company and Mr. Zorko entered into a Letter Agreement, dated August 30,
2006 (the "Zorko Employment Agreement), which remains in effect as of the date
hereof, and provides for Mr. Zorko's employment with the Company as its Chief
Financial Officer. Pursuant to the Zorko Employment Agreement, Mr. Zorko is
entitled to an annual salary of $245,000 and received an option grant to
purchase 60,000 shares of the Company's common stock pursuant to and in
accordance with the Company's DGTC Plan. Mr. Zorko is also entitled to receive
an automobile allowance of $575 per month. In addition, Mr. Zorko was eligible
to receive an annual bonus with a target of 45% of his annual base salary based
upon achieving the Company's annual budget and attaining specific objectives
assigned by the CEO of the Company. As a result of achieving these specific
objectives in fiscal year 2007, Mr. Zorko received a bonus of $ 131,291.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END:
Option Awards Stock Awards
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity
Incentive
Plan
Awards:
Equity Market or
Equity Incentive Payout
Incentive Number of Market Plan Awards: Value of
Plan Awards: Shares Value of Number of Unearned
Number of Number of Number of or Shares or Unearned Shares,
Securities Securities Securities Units of Units of Shares, Units Units or
Underlying Underlying Underlying Stock That Stock or Other Other
Unexercised Unexercised Unexercised Option Have That Rights That Rights
Options Options Unearned Exercise Option Not Have Not Have Not That Have
(#) (#) Options Price Expiration Vested Vested Vested Not Vested
Name Exercisable Unexercisable (#) ($)(1) Date (#) ($) (#) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
James A.
Risher, Chief 18,750(2) 6,250(2) -- 2.70 4/26/15
Executive 5,000(2) 5,000(2) -- 2.26 6/16/16 -- -- -- --
Officer 30,000(2) 90,000(2) -- 1.50 8/31/16
- ------------------------------------------------------------------------------------------------------------------------------------
Mark A. Zorko,
Chief Financial
Officer 15,000(2) 45,000(2) -- 1.50 8/31/16
5,000(2) 15,000(2) -- 2.00 11/17/16 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Mark A Koch,
former
Treasurer and
Principal
Accounting
Officer 10,000(2) -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
38
(1) The exercise price per share of each option was equal to the closing price
of the shares of Common Stock on the date of grant.
(2) Granted pursuant to the Company's DGTC Plan.
POTENTIAL PAYMENTS UPON TERMINATION OR A CHANGE IN CONTROL
SEPARATION AGREEMENTS WITH CURRENT AND CERTAIN FORMER NAMED EXECUTIVE
OFFICERS.
MARK A. ZORKO
Pursuant to the Zorko Employment Agreement, Mr. Zorko is entitled to a
severance payment in the event his employment is terminated by the Company
without cause. The severance payment is equal to one-year base salary,
(currently $245,000). The Company will make no such payment if employment is
terminated for cause.
MARK A. KOCH
MR. KOCH SERVED AS THE COMPANY'S TREASURER AND PRINCIPAL ACCOUNTING OFFICER
UNTIL OCTOBER 30, 2006.
The Company entered into a Separation Agreement and General Release dated as
of September 7, 2006, (the "Koch Separation Agreement") with Mark A. Koch, the
Company's former Principal Accounting Officer. The Koch Separation Agreement was
filed as Exhibit 99.01 to the Company's Current Report on Form 8-K filed on
September 7, 2006. The Koch Separation Agreement provided that Mr. Koch's last
day of employment with the Company will be the first business day following the
filing by the Company with the SEC of its Annual Report on Form 10-K for the
fiscal year ending July 29, 2006, but in no event later than November 30, 2006,
unless mutually agreed in writing by the parties (the "Termination Date"). The
Separation Agreement also provided for a payment of one (1) year's base salary
payable pro-rata over 12 months by the Company to Mr. Koch commencing with the
first pay-day following the Termination Date; provided, however, that in the
event the Company sells any of its assets or the assets of any of its U.S.
Subsidiaries for cash and such sale results in net cash proceeds to the Company
of at least $5.0 million, then the Company shall pay to Mr. Koch any balance
outstanding of the severance payment within ten (10) days after receipt by the
Company of such net cash proceeds from such asset sale. Mr. Koch agreed to
release and discharges the Company, as more fully described in the Koch
Separation Agreement. Pursuant to the Koch Separation Agreement, Mr. Koch's last
day of employment with the Company was October 30, 2006. The total amount to be
paid to Mr. Koch in connection with the termination of his employment is
$165,000, $120,577 of which was paid in fiscal 2007 and the remainder of which
will be paid by October 30, 2007.
The Koch Separation Agreement supersedes a certain former Severance Benefits
Agreement, dated May 23, 2005, between the Company and Mr. Koch, except that the
terms and conditions of Article IV of the former Severance Benefits Agreement
which concern obligations with respect to Company confidential information and
trade secrets, survive and remain in full force and effect.
DIRECTOR COMPENSATION
The Company seeks highly qualified individuals to serve as outside
directors and compensates them with a combination of cash fees and stock options
grants. The Company also reimburses Directors for, or pays, travel costs
associated with meeting attendance. There is no retirement plan for outside
directors, and no program of perquisites. The Compensation Committee
periodically assesses whether its compensation structure is competitive in terms
of attracting and retaining the type and quality of outside directors needed.
STOCK OPTION AND COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Stock Option and Compensation Committee consists of Merrill A.
McPeak as Chairman, Gerald M. Czarnecki and James R. Henderson. None of these
individuals were at any time during the fiscal year ended July 28, 2007 or at
any other time one of our officers or employees. Other than Mr. Risher, the
39
Company's CEO, none of our executive officers serve as a member of the Board
or the Compensation Committee of any other entity which has one or more
executive officers serving as a member of our Board or Compensation Committee
DIRECTOR COMPENSATION:
(a) (b) (d) (g) (h)
- ------------------------------------------------------------------------------
Fees Earned
or Paid in Option All Other
Cash(1) Awards(2) Compensation Total
Name ($) ($) ($) ($)
- ------------------------------------------------------------------------------
Gerald M. Czarnecki (5) 33,500 12,114 -- 45,614
- ------------------------------------------------------------------------------
James R. Henderson 41,000(3) 32,877 -- 73,877
(Chairman) (5)
- ------------------------------------------------------------------------------
General Merrill A. 33,500 21,890 -- 55,390
McPeak (5)
- ------------------------------------------------------------------------------
James A. Risher (5) 4,167(4) (4) 55,000(4) 59,167 (4)
- ------------------------------------------------------------------------------
(1) Fees consist of:
o Each non-employee director receives an annual retainer of $20,000;
o Each non-employee director receives an additional fee of $1,000 per each
full length Board meeting attended (with lesser compensation for
telephonic meetings, at the discretion of the chair of the Board or
committee, as applicable);
o Each non-employee member of each standing committee receives a fee of $500
per each full-length committee meeting attended; and $250 for shorter
duration committee meetings attended; and
o Chairs of the Board and the various standing committees, excepting the
Audit Committee, receives double meeting fees. In lieu of the foregoing,
the Chair of the Audit Committee receives an additional $1,000 per Audit
Committee meeting.
(2) During fiscal 2007, Mr. Czarnecki received a grant to purchase 12,500
shares of the Company's common stock at an exercise price of $2.11 per share and
an aggregate fair value of $18,625; Mr. Henderson received grants to purchase
50,000 shares of the Company's common stock at an exercise price of $1.65 per
share and 15,000 shares of the Company's common stock at an exercise price of
$2.11 per share and aggregate fair values of $54,500 and $22,350 respectively
and General McPeak received a grant to purchase 11,500 shares of the Company's
common stock at an exercise price of $2.11 per share and an aggregate fair value
of $17,135. Upon election to the Board, each non-employee member of the Board
receives a one-time grant of 25,000 options to purchase the Company's Common
Stock, with an exercise price equal to the fair market value on the date of
grant. Effective as of June 13, 2006, Directors also received annual grants of
10,000 options commencing after their first year of service as a director. The
Chairman of the Audit Committee receives an additional annual grant of 2,500
options. The Chairman of the Stock Option and Compensation Committee receives an
additional annual grant of 1,500 options. The Chairman of the Governance and
Nominating Committee receives an additional annual grant of 1,000 options (as
long as such person is not the Chair of any other committee of the Board). The
Chairman of the Board receives an additional annual grant of 5,000 options. The
annual grants of stock options to directors in fiscal year 2007 were made
pursuant to the DGTC Plan. Directors are also eligible to receive restricted
stock and option awards under the terms of the Company's 2007 Plan. No awards
were granted to directors under the 2007 Plan in Fiscal 2007. Refer to Footnote
11 Shareholder Equity in Item 8 "Stock Option Plan And Warrants" for details of
stock option plan vesting terms, SFAS 123R valuation techniques and assumptions
and the fair value of stock options granted.
(3) In addition to the above meeting fees, the Chairman of the Board receives
$750 per each day other than Board meeting days where he or she spends more than
half of such day working at the Company facilities. This amount is included in
the amount reflected in Column (b).
(4) As Mr. Risher is the Company's CEO, he is no longer eligible to receive
any compensation for his service as a Director. Mr. Risher did receive
compensation for his service to the Company as a Director prior to his
appointment as CEO. Prior to Mr. Risher's appointment as CEO, he also provided
advisory work to the company as a consultant. The amounts set forth in the table
of Director Compensation reflect compensation received by Mr. Risher's prior to
his appointment as CEO
(5) At July 28, 2007, Mr. Czarnecki held an aggregate of 50,000 options to
purchase the Company's Common Stock, of which 34,375 were exercisable; Mr.
Henderson held an aggregate of 106,000 options to purchase the Company's Common
Stock, of which 49,250 exercisable; Mr. McPeak held an aggregate of 48,000
40
options to purchase the Company's Common Stock, of which 27,375 were
exercisable; Mr. Risher held an aggregate of 155,000 options to purchase the
Company's Common Stock, of which 53,750 exercisable.
RESTRICTED STOCK AND OPTION AWARDS
Upon election to the Board, each non-employee member of the Board receives a
one-time grant of 25,000 options to purchase the Company's Common Stock. The
exercise price for such options is equal to the fair market price per share on
the date of the grant, which is approved by the Compensation Committee. These
options vest and become exercisable as to 25% of such shares on the date of the
option grant, 25% on the first anniversary of the date of the grant and as to an
additional 25% of such shares on the second and third anniversaries of the date
of the grant, respectively, based on continued service through the applicable
vesting date. Effective as of June 13, 2006, Directors also received annual
grants of 10,000 options commencing after their first year of service as a
director. The Chairman of the Audit Committee receives an additional annual
grant of 2,500 options. The Chairman of the Stock Option and Compensation
Committee receives an additional annual grant of 1,500 options. The Chairman of
the Governance and Nominating Committee receives an additional annual grant of
1,000 options (as long as such person is not the Chair of any other committee of
the Board). The Chairman of the Board receives an additional annual grant of
5,000 options. Directors are also eligible to receive restricted stock and
option awards under the terms of the Company's 2007 Plan. No awards were granted
to directors under the 2007 Plan in fiscal 2007. The annual grants of stock
options to directors in fiscal year 2007 were made pursuant to the DGTC Plan.
COMPENSATION COMMITTEE REPORT
We have reviewed and discussed with management certain Executive
Compensation and Compensation Discussion and Analysis provisions to be included
in the Company's Annual Report filed on Form 10K, filed pursuant the Securities
Exchange Act of 1934, as amended (the "Annual Report"). Based on the reviews and
discussions referred to above, we recommend to the Board of Directors that the
Executive Compensation and Compensation Discussion and Analysis provisions
referred to above be included in the Company's Annual Report.
Submitted by the Compensation Committee of the Board of Directors
General Merrill A. McPeak, Chairman
Gerald M. Czarnecki
James R. Henderson
This Compensation Committee Report is not deemed incorporated by reference by
any general statement incorporating by reference this Annual Report into any
filing under the Securities Act of 1933, as Amended, or the Exchange Act, except
to the extent that the Company specifically incorporates this information by
reference, and shall not otherwise be deemed filed under either such Acts.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes the securities authorized for issuance under
equity compensation plans as of the end of Fiscal 2007:
41
Number of Securities
Number of Securities to be Weighted-Average Remaining Available for
Issued Upon Exercise of Exercise Price of Future Issuance Under
Outstanding Options, Outstanding Options, Equity Compensation
Plan Category Warrants and Rights Warrants and Rights Plans(1)
- ---------------------------------------------- -------------------------- -------------------- -----------------------
Equity compensation plans approved by
security holders:
Stock Option Plan............................ 1,913,993 $ 3.51 941,000
Equity compensation plans not approved by
security holders: 573,516 $ 1.50 Not applicable
Warrants issued in settlement of class action
lawsuit(2)...................................
(1) Excludes securities to be issued upon exercise of outstanding options,
warrants and rights.
(2) Pursuant to our class action settlement with our shareholders concerning
allegations that the Company had violated federal Securities laws, we
issued 2.5 million shares of our Common Stock and one million warrants to
purchase our Common Stock at $2.00 per share. The issuance of these
securities was pursuant to a court order issued in connection with the
settlement of this class action lawsuit in January 2002, and therefore was
exempt from the registration requirements of the Securities Act of 1933
pursuant to Section 3(a) (10) thereof. These warrants were originally set
to expire in March 2008. In a motion filed in February 2004, a plaintiff
class claimed damages due to Del Global's failure to timely complete a
registration statement for the shares of Common Stock issuable upon
exercise of these warrants. The class sought damages of $1.25 million
together with interest and costs, and a declaration that $2 million in
subordinated notes issued as part of the 2002 class action settlement were
immediately due and payable. In settlement of this matter, Del Global
modified the exercise, or "strike," price of the warrants issued in 2002
from $2.00 to $1.50 per share, and extended the expiration date of such
warrants by one year to March 28, 2009.
42
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information concerning beneficial ownership of
common stock of the Company outstanding at September 7, 2007 by each person or
entity (including any "Group" as such term is used in Section 13(d) (3) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), known by the
Company to be the beneficial owner of more than five percent of its outstanding
common stock. The percentage ownership of each beneficial owner is based upon
24,130,808 shares of common stock issued and outstanding as of September 7,
2007, plus shares issuable upon exercise of options, warrants or convertible
securities (exercisable within 60 days after said date) that are held by such
person or entity, but not those held by any other person or entity. The
information presented in this table is based upon the most recent filings with
the Commission by such persons or upon information otherwise provided by such
persons to the Company.
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership(1) Percent of Class
- ---------------------------- ----------------------- ----------------
Warren G. Lichtenstein 5,037,943(2) 20.88%
c/o Steel Partners II, L.P.
590 Madison Avenue
32nd Floor
New York, NY 10022
Wellington Management Co. LLP 2,737,021(3) 11.34%
75 State Street
Boston, MA 02109
(1) Unless otherwise noted, each beneficial owner has sole voting and
investment power with respect to the shares shown as beneficially owned by
him or it
(2) According to information contained in Amendment No. 11 to a Schedule 13D
dated March 16, 2007, Steel Partners II, L.P., a Delaware limited
partnership ("Steel Partners"), Warren G. Lichtenstein, and Steel
Partners, LLC, a Delaware limited liability corporation ("Partners LLC")
collectively is the beneficial owner of 5,037,943 shares of our Common
Stock. Partners LLC is the general partner of Steel Partners. Mr.
Lichtenstein is the sole executive officer and managing member of Partners
LLC. By virtue of his positions with Steel Partners and Partners LLC, Mr.
Lichtenstein has the sole power to vote and dispose of the 5,037,943
shares of our Common Stock owned by Steel Partners and Partners LLC.
(3) According to information contained in Amendment No. 7 to a Schedule 13G
dated March 12, 2007, Wellington Management Company, LLP ("Wellington"),
an investment advisor registered under the Investment Act, may be deemed
the beneficial owner of 2,737,021 shares of Common Stock of the Company.
Clients of Wellington are the owners of record of the shares held by
Wellington. Accordingly, in its role as investment advisor, Wellington has
shared power to vote as to 1,955,166 of our Common Stock and shared power
to dispose of all 2,737,021 shares of our Common Stock owned by Wellington
SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT
The following table sets forth information concerning beneficial ownership
of Common Stock of the Company outstanding at September 7, 2007 by (i) each
director; (ii) each executive officer of the Company and (iii) by all directors
and executive officers of the Company as a group. The percentage ownership of
each beneficial owner is based upon 24,130,808 shares of Common Stock issued and
outstanding as of September 7, 2007, plus shares issuable upon exercise of
options, warrants or convertible securities (exercisable within 60 days after
said date) that are held by such person or entity, but not those held by any
other person or entity. The information presented in this table is based upon
the most recent filings with the Commission by such persons or upon information
otherwise provided by such persons to the Company
43
Amount and Nature of
Name and Address of Beneficial Owner Beneficial Ownership(1) Percent of Class
- ------------------------------------ ----------------------- ----------------
Mark A Koch (4) 10,000(2) *
Mark A. Zorko 35,000(2) *
Gerald M. Czarnecki 66,168(2) *
James A. Risher 53,750(2) *
James R. Henderson (3) 61,750(2) *
Merrill A. McPeak 68,491(2) *
All Directors and Named Executive 295,159(2) 1.2%
Officers as a group (6 persons)
* Represents less than 1% of the outstanding shares of our Common Stock
(1) Unless otherwise noted, each director and executive officer has sole
voting and investment power with respect to the shares shown as
beneficially owned by him.
(2) Includes shares of our common stock which may be acquired upon the
exercise of stock options which are presently exercisable or will become
exercisable within 60 days of September 7, 2007, in the following amounts:
Mark A. Koch -- 10,000, Mark A. Zorko -- 35,000, Gerald M. Czarnecki --
34,375, James A. Risher -- 53,750, James R. Henderson -- 61,750 and
Merrill A. McPeak --27,375.
(3) Mr. Henderson is a Vice President of Steel Partners, Ltd., an entity of
which Warren G. Lichtenstein is an affiliate by virtue of his ownership of
Steel Partners, Ltd. directly and through Steel Partners II, L.P.
(collectively, the "Group"). Mr. Henderson disclaims beneficial ownership
of the 5,037,943 shares of our common stock collectively owned by the
Group.
(4) Mr. Koch resigned as Treasurer and Principal Accounting Officer, effective
October 30, 2006.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
REVIEW, APPROVAL OR RATIFICATION OF TRANSACTIONS WITH RELATED PERSONS
During fiscal 2007, the Company had a policy for the review of
transactions in which the Company was a participant, the amount involved
exceeded $120,000 and in which any of the Company's directors or executive
officers, or their immediate family members, had a direct or indirect material
interest. Any such related person transaction was to be for the benefit of the
Company and upon terms no less favorable to the Company than if the related
person transaction was with an unrelated party. While this policy was not in
writing during fiscal 2007, the Company's Board of Directors was responsible for
approving any such transactions and the CEO was responsible for maintaining a
list of all existing related person transactions. There were no related person
transactions during fiscal 2007.
DIRECTOR INDEPENDENCE
Although the Company is currently not listed on any exchange, the Board of
Directors has determined that three of the members of the Board of Directors,
Mr. Czarnecki , Mr. Henderson and Gen. McPeak, are "independent" as defined in
Rule 4200 of the Marketplace Rules of the National Association of Securities
Dealers, Inc. Committee membership of the Company's directors is as follows:
44
- -------------------------------------------------------------------------
Director Audit Compensation Nominating and
Committee and Stock Governance
Option Committee Committee
- -------------------------------------------------------------------------
Gerald M. Czarnecki* Chair X X
- -------------------------------------------------------------------------
James R. Henderson * X Chair
- -------------------------------------------------------------------------
General Merrill A. Mcpeak* X Chair X
- -------------------------------------------------------------------------
James A. Risher
- -------------------------------------------------------------------------
*Independent
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES The aggregate fees billed by BDO Seidman, LLP for professional
services rendered for the audit of our annual financial statements set forth in
our Annual Report on Form 10-K for the fiscal years ended July 28, 2007 and July
29, 2006 for the reviews of the interim financial statements included in our
Quarterly Reports on Form 10-Q for those fiscal years and for assistance with
other registration statement filings made by the Company during those fiscal
years were $290,650, and $277,000, respectively.
AUDIT-RELATED FEES There were no fees billed by BDO Seidman, LLP for
Audit-Related services for the fiscal years ended July 28, 2007 and July 29,
2006.
TAX FEES The aggregate fees billed by BDO Seidman, LLP for tax services for the
fiscal years ended July 28, 2007 and July 29, 2006 were $71,665 and $139,737,
respectively. In both fiscal years, these fees related to tax planning and
consulting work.
ALL OTHER FEES There were no fees for other professional services rendered
during the fiscal years ended July 28, 2007 or July 29, 2006.
45
The Audit Committee's policy is to pre-approve services to be performed by
the Company's independent public accountants in the categories of audit
services, audit-related services, tax services and other services. Additionally,
the Audit Committee will consider on a case-by-case basis and, if appropriate,
approve specific engagements that are not otherwise pre-approved. The Audit
Committee has approved all fees and advised us that it has determined that the
non-audit services rendered by BDO Seidman, LLP during our most recent fiscal
year are compatible with maintaining the independence of such auditors.
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PAGE NUMBER
(a) 1. FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF DEL GLOBAL TECHNOLOGIES CORP. AND
SUBSIDIARIES:
Report of Independent Registered Public Accounting Firm..................... F-1
Consolidated Balance Sheets as of July 28, 2007 and July 29, 2006........... F-2
Consolidated Statements of Operations for the Fiscal Years Ended July 28,
2007, July 29, 2006 and July 30, 2005...................................... F-3
Consolidated Statements of Cash Flows for the Fiscal Years Ended July 28,
2007, July 29, 2006 and July 30, 2005...................................... F-4
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended
July 28, 2007, July 29, 2006 and July 30, 2005............................. F-5
Notes to Consolidated Financial Statements for the Fiscal Years Ended July
28, 2007, July 29, 2006 and July 30, 2005.................................. F-6 - F-22
3. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- --------------------------------------------------------------------
2.1 Stock Purchase Agreement (related to the acquisition of Villa
Sistemi Medicali S.p.A.) dated as of December 28, 1999. Filed as
Exhibit 2.1 to Del Global Technologies Corp. Current Report on Form
8-K dated May 4, 2000 and incorporated herein by reference.
2.2 Asset Purchase Agreement dated as of October 1, 2004 by and between
Spellman High Voltage Electronics Corporation and Del Global
Technologies Corp. Filed as Exhibit 99.01 to Del Global Technologies
Corp. Current Report on Form 8-K filed October 7, 2004 and
incorporated herein by reference.
3.1 Certificate of Incorporation dated October 25, 1954. Filed as
Exhibit to Del Electronics Corp. Registration Statement on Form S-1
(No. 2-16839) and incorporated herein by reference.
3.2 Certificate of Amendment of Certificate of Incorporation dated
January 26, 1957. Filed as Exhibit to Del Electronics Corp.
Registration Statement on Form S-1 (No. 2-16839) and incorporated
herein by reference.
3.3 Certificate of Amendment of Certificate of Incorporation dated July
12, 1960. Filed as Exhibit to Del Electronics Corp. Registration
Statement on Form S-1 (No. 2-16839) and incorporated herein by
reference.
3.4 Certificate of Amendment of Certificate of Incorporation dated March
18, 1985. Filed as Exhibit 3.5 to Del Electronics Corp. Form 10-K
for the year ended August 2, 1989 and incorporated herein by
reference.
3.5 Certificate of Amendment of Certificate of Incorporation dated
January 19, 1989. Filed as Exhibit 4.5 to Del Electronics Corp. Form
S-3 (No. 33-30446) filed August 10, 1989 and incorporated herein by
reference.
3.6 Certificate of Amendment of the Certificate of Incorporation of Del
Electronics Corp., dated February 5, 1991. Filed with Del
Electronics Corp. Proxy Statement dated January 22, 1991 and
incorporated herein by reference.
3.7 Certificate of Amendment of the Certificate of Incorporation of Del
Electronics Corp. dated February 14, 1996. Filed as Exhibit 3.6 to
Del Global Technologies Corp. Annual Report on Form 10-K for the
year ended August 1, 1998 and incorporated herein by reference.
46
3.8 Certificate of Amendment of Certificate of Incorporation of Del
Global Technologies Corp. dated February 13, 1997. Filed as Exhibit
3.1 to Quarterly Report on Form 10-Q for the quarter ended February
1, 1997 and incorporated herein by reference.
3.9 Amended and Restated By-Laws of Del Global Technologies Corp. Filed
as Exhibit 3.1 to Current Report on Form 8-K dated September 5, 2001
and incorporated herein by reference.
3.10 Amendment No. 1 to the Amended and Restated By-Laws of Del Global
Technologies Corp. dated July 17, 2003. Filed as Exhibit 3.01 to
Current Report on Form 8-K dated July 30, 2003 and incorporated
herein by reference.
3.11 Certificate of Amendment at the Certificate of Incorporation of Del
Global Technologies Corp. dated November 17, 2006. Filed as Exhibit
3.01 to Current Report on Form 8-K filed November 22, 2006 and
incorporated herein by reference.
4.1 INTENTIONALLY OMITTED.
4.2 INTENTIONALLY OMITTED.
4.8 Warrant Certificate of Laurence Hirschhorn. Filed as Exhibit 4.1 to
Del Global Technologies Corp. Quarterly Report on Form 10-Q for the
quarter ended January 29, 2000 and incorporated herein by reference.
4.9 Warrant Certificate of Steven Anreder. Filed as Exhibit 4.2 to Del
Global Technologies Corp. Quarterly Report on Form 10-Q for the
quarter ended January 29, 2000 and incorporated herein by reference.
4.10 Warrant Certificate of UBS Capital S.p.A. dated as of December 28,
1999. Filed as Exhibit 4 to Del Global Technologies Corp. Quarterly
Report on Form 10-Q for the quarter ended January 29, 2000 and
incorporated herein by reference.
4.11* Del Global Technologies Corp. Amended and Restated Stock Option Plan
(as adopted effective as of January 1, 1994 and as amended December
14, 2000). Filed as Exhibit 4.11 to Del Global Technologies Corp.
Annual Report on Form 10-K for the year ended August 3, 2002 and
incorporated herein by reference.
4.12* Stock Purchase Plan. Filed as Exhibit 4.9 to Del Electronics Corp.
Annual Report on Form 10-K for the year ended July 29, 1989 and
incorporated herein by reference.
4.13* Option Agreement, substantially in the form used in connection with
options granted under the Plan. Filed as Exhibit 4.8 to Del
Electronics Corp. Annual Report on Form 10-K for the year ended July
29, 1989 and incorporated herein by reference.
4.14* Option Agreement dated as of December 28, 1999. Filed as Exhibit 4.2
to Del Global Technologies Corp. Current Report on Form 8-K dated
May 4, 2000 and incorporated herein by reference.
4.15 Warrant Agreement substantially in the form used for 1,000,000
warrants issued in connection with the settlement of the Class
Action Lawsuit on January 29, 2002. Filed as Exhibit 10.12 to Del
Global Technologies Corp. Annual Report on Form 10-K for the year
ended August 3, 2002 and incorporated herein by reference.
4.16* Amendment No. 1 dated July 17, 2003 to the Del Global Technologies
Corp. Amended and Restated Stock Option Plan (as adopted effective
as of January 1, 1994 and as amended December 14, 2000). Filed as
Exhibit 4.1 to Del Global Technologies Corp. Quarterly Report on
Form 10-Q for the quarterly period ended November 1, 2003 and
incorporated herein by reference.
4.17* Amendment No. 2 dated July 7, 2005 to the Del Global Technologies
Corp. Amended and Restated Stock Option Plan (as adopted effective
as of January 1, 1994 and as amended December 14, 2000 and July 17,
2003). Filed as Exhibit 99.01 to Del Global Technologies Corp.
Current Report on Form 8-K dated July 7, 2005 and incorporated
herein by reference.
47
4.18 Stock Purchase Agreement dated as of December 22, 2005 by and among
Del Global Technologies Corp. and Mr. Giuseppe Carmelo Ammendola,
Mr. Emilio Bruschi, Mr. Roberto Daglio and Mr. Luigi Emmanuele Filed
as Exhibit 10.1 to Del Global Technologies Corp. Current Report on
Form 8-K filed December 28, 2005 and incorporated herein by
reference.
4.19 Rights Agreement, dated as of January 22, 2007, and between Del
Global Technologies Corp. and Mellon investor Services LLC, as
rights agent (including as Exhibit A the Form of Right Certificate
and as Exhibit B the Summary of Rights to Purchase Common Stock).
Filed as Exhibit 4.1 to Del Global Technologies Corp. Current Report
on Form 8-K filed January 23, 2007 and incorporated herein by
reference.
4.20 Joinder Agreement, dated June 27, 2007, between Del Global
Technologies Corp. and Continental Stock Transfer & Trust Company.
Filed as Exhibit 4.1 to Del Global Technologies Corp. Current Report
on Form 8-K filed June 27, 2007 and incorporated herein by
reference.
4.21*/** 2007 Incentive Stock Plan.
10.2 INTENTIONALLY OMITTED.
10.3 INTENTIONALLY OMITTED.
10.4 INTENTIONALLY OMITTED.
10.5 INTENTIONALLY OMITTED.
10.6 INTENTIONALLY OMITTED.
10.7 Lease Agreement dated April 7, 1992 between Messenger Realty and Del
Electronics Corp. Filed as Exhibit 6(a) to Del Electronics Corp.
Quarterly Report on Form 10-Q for the quarter ended May 2, 1992 and
incorporated herein by reference.
10.8 Lease and Guaranty of Lease dated May 25, 1994 between Leshow
Enterprises and Bertan High Voltage Corp. Filed as Exhibit 2.5 to
Del Electronics Corp. Current Report on Form 8-K dated June 10, 1994
and incorporated herein by reference.
10.9 Lease dated January 4, 1993 between Curto Reynolds Oelerich Inc. and
Del Medical Imaging Corp. (formerly knows as Gendex-Del Medical
Imaging Corp.). Filed as Exhibit 10.21 to the Del Global
Technologies Corp. Registration Statement on Form S-2 (No. 333-2991)
dated April 30, 1997 and incorporated herein by reference.
10.10 Loan and Security Agreement dated June 10, 2002, in the principal
amount of $10,000,000, between Del Global Technologies Corp., Bertan
High Voltage Corp., RFI Corporation and Del Medical Imaging Corp.
(Borrowers) and Transamerica Business Capital Corporation. The
Company agrees to furnish supplementally a copy of any omitted
exhibits or schedules to the SEC upon request. Filed as Exhibit
99.01 to Del Global Technologies Corp. Current Report on Form 8-K
filed on November 4, 2002 and incorporated herein by reference.
10.11 Subordinated Promissory Note substantially in the form used for a
total principal amount of $2 million issued in connection with the
settlement of the Class Action Lawsuit on January 29, 2002. Filed as
Exhibit 10.11 to Del Global Technologies Corp. Annual Report on Form
10-K for the year ended August 3, 2002 and incorporated herein by
reference.
10.12 INTENTIONALLY OMITTED.
10.13* Executive Employment Agreement dated May 1, 2001, by and between Del
Global Technologies Corp. and Samuel E. Park. Filed as Exhibit 99.1
to Del Global Technologies Corp. Current Report on Form 8-K filed on
August 1, 2001 and incorporated herein by reference.
10.14* Change of Control Agreement substantially in the form used by the
Company for the current executive officers as named in Item 11,
except for Samuel E. Park (see Exhibit 10.13). Filed as Exhibit
10.14 to Del Global Technologies Corp. Annual Report on Form 10-K
for the year ended August 3, 2002 and incorporated herein by
reference.
48
10.15 Extension and Modification Agreement (lease agreement) dated as of
July 30, 2002 between Praedium II Valhalla LLC and Del Global
Technologies Corp. Filed as Exhibit 10.15 to Del Global Technologies
Corp. Annual Report on Form 10-K for the year ended August 3, 2002
and incorporated herein by reference.
10.16 Grant Decree No. 0213 between the Ministry of Industry, Trade and
Handicrafts and Villa Sistemi Medicali S.p.A. dated September 6,
1995. Filed as Exhibit 10.16 to Del Global Technologies Corp. Annual
Report on Form 10-K for the year ended August 3, 2002 and
incorporated herein by reference.
10.17 Financial Property Lease Contract no. 21136 dated March 30, 2000
between ING Lease (Italia) S.p.A. and Villa Sistemi Medicali S.p.A.
Filed as Exhibit 10.17 to Del Global Technologies Corp. Annual
Report on Form 10-K for the year ended August 3, 2002 and
incorporated herein by reference.
10.18 Declaration of Final Obligation between the Ministry of Productive
Industry and Villa Sistemi Medicali S.p.A. dated May 6, 2002. Filed
as Exhibit 10.18 to Del Global Technologies Corp. Annual Report on
Form 10-K for the year ended August 3, 2002 and incorporated herein
by reference.
10.19 Private Contract between Banca Mediocredito S.p.A and Villa Sistemi
Medicali S.p.A. dated November 4, 1998 in the principal amount of 3
billion Lire. Filed as Exhibit 10.19 to Del Global Technologies
Corp. Annual Report on Form 10-K for the year ended August 3, 2002
and incorporated herein by reference.
10.20* Change of Control Agreement as approved by the Board of Directors on
October 24, 2002, substantially in the form used by its current
executive officers (in the case of Walter F. Schneider, as amended
pursuant to Exhibit 10.22 hereof). Filed as Exhibit 10.20 to Del
Global Technologies Corp. Annual Report on Form 10-K for the year
ended August 3, 2002 and incorporated herein by reference.
10.21 Waiver and First Amendment to Loan and Security Agreement dated as
of November 1, 2002 among Del Global Technologies Corp., Bertan High
Voltage Corp., RFI Corporation and Del Medical Imaging Corp.
(Borrowers) and Transamerica Business Capital Corporation. Filed as
Exhibit 99.02 to Del Global Technologies Corp. Current Report on
Form 8-K filed on November 4, 2002 and incorporated herein by
reference.
10.22 Second Amendment to the Loan and Security Agreement dated December
17, 2002 among Del Global Technologies Corp., Bertan High Voltage
Corp., RFI Corporation and Del Medical Imaging Corp. (Borrowers) and
Transamerica Business Capital Corporation. Filed as Exhibit 10.1 to
Del Global Technologies Corp. Quarterly Report on Form 10-Q for the
quarter ended November 2, 2002 and incorporated herein by reference.
10.23 Settlement Agreement and Release dated March 10, 2003 by and between
Del Global Technologies Corp. and its affiliates, subsidiaries,
present and former directors, officers, agents, accountants,
attorneys, stockholders, predecessors and the agents and attorneys
of its present and former directors, and Leonard A. Trugman and each
of his heirs, administrators, liquidators, executors, successors,
and assigns. Filed as Exhibit 10.22 to Del Global Technologies Corp.
Quarterly Report on Form 10-Q for the quarter ended February 1, 2003
and incorporated herein by reference.
10.24 Separation Agreement and General Release of Claims dated April 9,
2003, by and between James M. Tiernan and Del Global Technologies
Corp. Filed as Exhibit 99.01 to Del Global Technologies Corp.
Amendment to Current Report on Form 8-K/A filed on April 23, 2003
and incorporated herein by reference.
10.25 Separation Agreement and General Release of Claims dated April 9,
2003, by and between David Michael, David Michael & Co., P.C. and
Del Global Technologies Corp. Filed as Exhibit 99.02 to Del Global
Technologies Corp. Amendment to Current Report on Form 8-K/A filed
on April 23, 2003 and incorporated herein by reference.
10.26 Form of Indemnification Agreement. Filed as Exhibit 10.22 to Del
Global Technologies Corp. Amendment #1 to Registration Statement on
Form S-1/A, filed on May 1, 2003 and incorporated herein by
reference.
10.27 Amendment to Executive Employment Agreement dated May 28, 2003 by
and between Del Global Technologies Corp. and Samuel E. Park. Filed
as Exhibit 10.23 to Del Global Technologies Corp. Quarterly Report
on Form 10-Q for the quarterly period ended May 3, 2003 and
incorporated herein by reference.
10.28 Amendment dated October 10, 2003 to Change of Control Agreement for
Walter F. Schneider filed as Exhibit 10.28 to Del Global
Technologies Corp. Annual Report on Form 10-K for the year ended
August 2, 2003 and incorporated herein by reference.
49
10.29 Waiver and Third Amendment to the Loan and Security Agreement dated
as of October 30, 2003, among Del Global Technologies Corp., Bertan
High Voltage Corp., RFI Corporation and Del Medical Imaging Corp.
(Borrowers) and Transamerica Business Capital Corporation filed as
Exhibit 10.29 to Del Global Technologies Corp. Annual Report on Form
10-K for the year ended August 2, 2003 and incorporated herein by
reference.
10.30 Waiver, Consent and Fourth Amendment to the Loan and Security
Agreement dated as of March 12, 2004, by and among Del Global
Technologies Corp. and General Electric Capital Corporation, as
successor by assignment to Transamerica Business Corporation. Filed
as Exhibit 10.30 to Del Global Technologies Corp. Quarterly Report
on Form 10-Q for the quarterly period ended January 31, 2004 and
incorporated herein by reference.
10.31* Letter Agreement dated as of February 10, 2003 between Mark Koch and
Del Global Technologies Corp. Filed as Exhibit 99.01 to Del Global
Technologies Corp. Current Report on Form 8-K filed August 27, 2004
and incorporated herein by reference.
10.32 Non-Competition Agreement dated as of September 8, 2004 by and
between Del Global Technologies Corp. and Walter F. Schneider. Filed
as Exhibit 99.01 to Del Global Technologies Corp. Current Report on
Form 8-K filed September 10, 2004 and incorporated herein by
reference.
10.33 Separation Agreement and Release dated as of September 1, 2004
between Del Global Technologies Corp. and Thomas V. Gilboy. Filed as
Exhibit 99.01 to Del Global Technologies Corp. Current Report on
Form 8-K filed September 15, 2004 and incorporated herein by
reference.
10.34 Amendment No. 1 dated as of September 15, 2004 to the Letter
Agreement dated February 10, 2003 between Mark Koch and Del Global
Technologies Corp. Filed as Exhibit 99.01 to Del Global Technologies
Corp. Current Report on Form 8-K filed September 20, 2004 and
incorporated herein by reference.
10.35 Loan Agreement dated as of September 23, 2004 between Del Global
Technologies Corp. ("Del Global") and Villa Sistemi Medicali S.p.A.,
a subsidiary of Del Global. Filed as Exhibit 99.01 to Del Global
Technologies Corp. Current Report on Form 8-K filed September 28,
2004 and incorporated herein by reference.
10.36 Waiver, Consent and Fifth Amendment to the Loan and Security
Agreement dated as of September 23, 2004, by and among Del Global
Technologies Corp., Bertan High Voltage Corp., RFI Corporation and
Del Medical Imaging Corp. (Borrowers) and General Electric Capital
Corporation, as successor by assignment to Transamerica Business
Capital Corporation. Filed as Exhibit 99.02 to Del Global
Technologies Corp. Current Report on Form 8-K filed September 28,
2004 and incorporated herein by reference.
10.37 Settlement Agreement dated as of September 30, 2004, by and among
the United States of America, on behalf of the Department of
Defense, acting through the United States Attorney's Office for the
Eastern District of New York, Del Global Technologies Corp. and RFI
Corporation. Current Report on Form 8-K filed October 5, 2004 and
incorporated herein by reference.
10.38 Assignment, Assumption and Amendment of Lease dated as of October 1,
2004 among DP 16, LLC, Del Global Technologies Corp. and Spellman
High Voltage Electronics Corporation. Filed as Exhibit 99.02 to Del
Global Technologies Corp. Current Report on Form 8-K filed October
7, 2004 and incorporated herein by reference.
10.39 First Amendment to Villa Loan Agreement dated October 22, 2004
between Del Global Technologies Corp and Villa Sistemi Medicali,
S.p.A filed as Exhibit 99.01 to Del Global Technologies Corp.
Current Report on Form 8-K filed October 26, 2004 and incorporated
herein by reference.
10.40 Sixth Amendment to the Loan and Security Agreement dated as of
October 25, 2004 by and among Del Global Technologies Corp, Bertan
High Voltage Corp, RFI Corporation and Del Medical Imaging Corp
(Borrowers) and General Electric Capital Corporation as successor to
Transamerica Business Capital Corporation filed as Exhibit 99.02 to
Del Global Technologies Corp. Current Report on Form 8-K filed
October 26, 2004 and incorporated herein by reference.
10.41 Consent and Seventh Amendment to the Loan and Security Agreement
dated as of February 2, 2005, among Del Global Technologies Corp.,
Bertan High Voltage Corp., RFI Corporation and Del Medical Imaging
Corp. (Borrowers) and GE Business Capital Corporation F/K/A
Transamerica Business Capital Corporation filed as Exhibit 99.1 to
Del Global Technologies Corp. Current Report on Form 8-K filed
February 7, 2005 and incorporated herein by reference.
50
10.42 Administrative Agreement dated as of April 1, 2005 between Del
Global Technologies Corp., RFI Corporation and the Defense Logistics
Agency. Filed as Exhibit 99.01 to Del Global Technologies Corp.
Current Report on Form 8-K filed April 5, 2005 and incorporated
herein by reference.
10.43 Consent and Eighth Amendment to the Loan and Security Agreement
dated as of April 5, 2005, among Del Global Technologies Corp.,
Bertan High Voltage Corp., RFI Corporation and Del Medical Imaging
Corp. (Borrowers) and GE Business Capital Corporation F/K/A
Transamerica Business Capital Corporation filed as Exhibit 99.02 to
Del Global Technologies Corp. Current Report on Form 8-K filed April
5, 2005 and incorporated herein by reference.
10.44* Senior Management Incentive Plan filed as Exhibit 99.01 to Del
Global Technologies Corp. Current Report on Form 8-K filed May 3,
2005 and incorporated herein by reference.
10.45* Severance Benefits Letter Agreement dated as of May 23, 2005 between
Del Global Technologies Corp. and Walter F. Schneider. Filed as
Exhibit 99.01 to Del Global Technologies Corp. Current Report on
Form 8-K filed May 25, 2005 and incorporated herein by reference.
10.46* Severance Benefits Letter Agreement dated as of May 23, 2005 between
Del Global Technologies Corp. and Mark A. Koch. Filed as Exhibit
99.02 to Del Global Technologies Corp. Current Report on Form 8-K
filed May 25, 2005 and incorporated herein by reference.
10.47 Separation Agreement and Release dated as of April 1, 2005 between
Del Global Technologies Corp. and Edward Ferris filed as Exhibit
99.01 to Del Global Technologies Corp. Current Report on Form 8-K
filed June 6, 2005 and incorporated herein by reference.
10.48 Waiver and Ninth Amendment to the Loan and Security Agreement dated
as of June 9, 2005, among Del Global Technologies Corp., Bertan High
Voltage Corp., RFI Corporation and Del Medical Imaging Corp.
(Borrowers) and GE Business Capital Corporation F/K/A Transamerica
Business Capital Corporation filed as Exhibit 99.01 to Del Global
Technologies Corp. Current Report on Form 8-K filed June 9, 2005 and
incorporated herein by reference.
10.49 Loan and Security Agreement dated as of August 1, 2005 among Del
Global Technologies Corp., RFI Corporation, Del Medical Imaging
Corp. and North Fork Business Capital Corporation. Filed as Exhibit
10.01 to Del Global Technologies Corp. Current Report on Form 8-K
filed August 3, 2005 and incorporated herein by reference.
10.50 Second Amendment to Villa Loan Agreement dated August 1, 2005
between Del Global Technologies Corp and Villa Sistemi Medicali,
S.p.A filed as Exhibit 10.02 to Del Global Technologies Corp.
Current Report on Form 8-K filed August 3, 2005 and incorporated
herein by reference.
10.51 Waiver and First Amendment to the Loan and Security Agreement dated
as of December 12, 2005 among Del Global Technologies Corp., RFI
Corporation and Del Medical Imaging Corp. (Borrowers) and North Fork
Business Capital Corporation. Filed as Exhibit 10.51 to Del Global
Technologies Corp. Quarterly Report on Form 10-Q for the quarterly
period ended October 29, 2005 and incorporated herein by reference.
10.52 Waiver to the Loan and Security Agreement dated as of March 14, 2006
among Del Global Technologies Corp., RFI Corporation and Del Medical
Imaging Corp. (Borrowers) and North Fork Business Capital
Corporation. Filed as Exhibit 10.52 to Del Global Technologies Corp.
Quarterly Report on Form 10-Q for the quarterly period ended January
28, 2006 and incorporated herein by reference.
10.53* Separation Agreement and Release dated as of March 21, 2006 by and
between Del Global Technologies Corp. and Christopher N. Japp. Filed
as Exhibit 99.1 to Del Global Technologies Corp. Current Report on
Form 8-K filed March 24, 2006 and incorporated herein by reference.
10.54 Waiver to the Loan and Security Agreement dated as of June 13, 2006
by and among Del Global Technologies Corp., Del Medical Imaging
Corp., RFI Corporation (Borrowers) and North Fork Business Capital
Corporation. Filed as Exhibit 10.53 to Del Global Technologies Corp.
Quarterly Report on Form 10-Q for the quarterly period ended April
29, 2006 and incorporated herein by reference.
51
10.55 Consulting Agreement dated as of June 14, 2006 by and between Del
Global Technologies Corp. and Lumina Group LLC. Filed as Exhibit
99.1 to Del Global Technologies Corp. Current Report on Form 8-K
filed June 30, 2006 and incorporated herein by reference.
10.56 Second Amendment to the Loan and Security Agreement dated as of June
30, 2006 among Del Global Technologies Corp., RFI Corporation and
Del Medical Imaging Corp. (Borrowers) and North Fork Business
Capital Corporation. Filed as Exhibit 99.01 to Del Global
Technologies Corp. Current Report on Form 8-K filed July 7, 2006 and
incorporated herein by reference.
10.57* Separation Agreement and Release dated as of July 24, 2006 by and
between Del Global Technologies Corp. and Walter F. Schneider. Filed
as Exhibit 99.01 to Del Global Technologies Corp. Current Report on
Form 8-K filed July 24, 2006 and incorporated herein by reference.
10.58* Letter Agreement dated as of August 31, 2006 between Del Global
Technologies Corp. and James A. Risher. Filed as Exhibit 99.01 to
Del Global Technologies Corp. Current Report on Form 8-K filed
August 31, 2006 and incorporated herein by reference.
10.59* Letter Agreement dated as of August 30, 2006 between Del Global
Technologies Corp. and Mark Zorko. Filed as Exhibit 99.02 to Del
Global Technologies Corp. Current Report on Form 8-K filed August
31, 2006 and incorporated herein by reference.
10.60 Full-Time Permanent Engagement Resources Agreement dated as of
August 21, 2006 between Del Global Technologies Corp. and Tatum,
LLC. Filed as Exhibit 99.01 to Del Global Technologies Corp. Current
Report on Form 8-K filed August 31, 2006 and incorporated herein by
reference.
10.61* Separation Agreement and Release dated as of September 7, 2006 by
and between Del Global Technologies Corp. and Mark A. Koch. Filed as
Exhibit 99.01 to Del Global Technologies Corp. Current Report on
Form 8-K filed September 7, 2006 and incorporated herein by
reference.
10.62 Waiver and Third Amendment to the Loan and Security Agreement dated
as of October 25, 2006 by and among Del Global Technologies Corp.,
Del Medical Imaging Corp., RFI Corporation (Borrowers) and North
Fork Business Capital Corporation. Filed as Exhibit 10.62 to Del
Global Technologies Corp. Annual Report on Form 10-K filed October
27, 2006 and incorporated herein by reference.
10.63 Waiver and Fourth Amendment to the Loan and Security Agreement dated
as of December 6, 2006 by and among Del Global Technologies Corp.,
Del Medical Imaging Corp., RFI Corporation (Borrowers) and North
Fork Business Capital Corporation. Filed as Exhibit 10.63 to Del
Global Technologies Corp. Quarterly Report on Form 10-Q for the
quarterly period ended October 28, 2006 and incorporated herein by
reference.
10.64 Amendment No. 5 dated as of January 18, 2007 to the Loan and
Security Agreement by and among the registrant, RFI Corporation, Del
Medical Imaging Corp. and North Fork Business Capital Corporation,
dated as of August 1, 2005. Filed as Exhibit 99.02 to Del Global
Technologies Corp. Current Report on Form 8-K filed January 23, 2007
and incorporated herein by reference.
10.65 Amended and Restated Loan Agreement, dated as of May 25, 2007, among
the Del Global Technologies Corp., RFI Corporations, Del Medical
Imaging Corp. and North Fork Business Capital Corporation. Filed as
Exhibit 10.1 to Del Global Technologies Corp. Current Report on Form
8-K filed June 6, 2007 and incorporated herein by reference.
10.66* Letter Agreement dated as of September 19, 2007 between Del Global
Technologies Corp. and James A. Risher. Filed as Exhibit 10.1 to Del
Global Technologies Corp. Current Report on Form 8-K filed September
20, 2007 and incorporated herein by reference.
21.1** List of Subsidiaries
23.1** Consent of BDO Seidman, LLP.
31.1** Certification of Chief Executive Officer, James Risher, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2** Certification of Principal Financial Officer, Mark Zorko, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1** Certification of the Chief Executive Officer, James Risher, pursuant
to 18 USC. Section 1350 adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
52
32.2** Certification of the Principal Financial Officer, Mark Zorko,
pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002..
- ------------
* Represents a management contract or compensatory plan or arrangement.
** Filed herewith
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
October 11, 2007 By: /s/ James A. Risher
----------------------------------
James A. Risher
President and Chief Executive Officer
October 11, 2007 By: /s/ Mark A. Zorko
----------------------------------
Mark A. Zorko
Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ James R. Henderson Director - Chairman October 11, 2007
-----------------------------------
James Henderson
/s/ Merrill A. McPeak Director October 11, 2007
-----------------------------------
Merrill McPeak
/s/ Gerald M. Czarnecki Director October 11, 2007
-----------------------------------
Gerald M. Czarnecki
/s/ James A. Risher Director October 11, 2007
----------------------------------- Chief Executive Officer
James A. Risher
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Del Global Technologies Corp.
Franklin Park, Illinois
We have audited the accompanying consolidated balance sheets of Del Global
Technologies Corp. and subsidiaries as of July 28, 2007 and July 29, 2006, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended July 28, 2007. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Del Global
Technologies Corp. and subsidiaries as of July 28, 2007 and July 29, 2006, and
the results of their operations and their cash flows for each of the three years
in the period ended July 28, 2007, in conformity with accounting principles
generally accepted in the United States of America.
/s/ BDO SEIDMAN, LLP
Chicago, Illinois
September 27, 2007
F-1
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PAR VALUE)
JULY 28, JULY 29,
2007 2006
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 7,860 $ 333
Trade receivables (net of allowance for doubtful accounts of $1,569
and $1,095 for 2007 and 2006, respectively) ............................... 21,221 17,382
Inventories ................................................................ 21,930 16,436
Prepaid expenses and other current assets .................................. 1,180 808
-------- --------
Total current assets ...................................................... 52,191 34,959
-------- --------
NON-CURRENT ASSETS:
Property plant and equipment, net .......................................... 6,511 6,366
Deferred income taxes ...................................................... 1,011 1,159
Goodwill ................................................................... 6,437 6,437
Other assets ............................................................... 189 232
-------- --------
Total non-current assets .................................................. 14,148 14,194
-------- --------
TOTAL ASSETS ................................................................. $ 66,339 $ 49,153
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term credit facilities ............................................... $ -- $ 5,959
Current portion of long-term debt .......................................... 1,086 3,557
Accounts payable - trade ................................................... 17,125 11,037
Accrued expenses ........................................................... 7,432 7,444
Income taxes payable ....................................................... 1,570 27
-------- --------
Total current liabilities ................................................. 27,213 28,024
-------- --------
NON-CURRENT LIABILITIES:
Long-term debt, less current portion ....................................... 5,398 5,133
Deferred income taxes ...................................................... 292 302
Other long-term liabilities ................................................ 3,240 2,880
-------- --------
Total non-current liabilities ............................................. 8,930 8,315
-------- --------
Total liabilities ..................................................... 36,143 36,339
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock -- $.10 par value; authorized - 50,000,000 and 20,000,000
shares; issued - 24,753,526 and 12,258,294 shares at July 28, 2007 and
July 29, 2006, respectively ............................................... 2,475 1,226
Additional paid-in capital ................................................. 79,726 67,679
Treasury shares - 622,770 shares, at cost .................................. (5,546) (5,546)
Accumulated other comprehensive income ..................................... 1,880 1,610
Accumulated deficit ........................................................ (48,339) (52,155)
-------- --------
Total shareholders' equity ............................................ 30,196 12,814
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................... $ 66,339 $ 49,153
======== ========
See notes to consolidated financial statements.
F-2
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
FISCAL YEARS ENDED
JULY 28, JULY 29, JULY 30,
2007 2006 2005
--------- -------- ---------
NET SALES ..................................................................... $ 104,167 $ 83,014 $ 84,872
COST OF SALES ................................................................. 79,150 63,656 62,591
--------- --------- ---------
GROSS MARGIN .................................................................. 25,017 19,358 22,281
--------- --------- ---------
Selling, general and administrative ........................................ 14,590 13,619 16,452
Research and development ................................................... 2,013 1,562 1,636
Litigation settlement costs ................................................ -- 697 300
--------- --------- ---------
Total operating expenses .................................................. 16,603 15,878 18,388
--------- --------- ---------
OPERATING INCOME .............................................................. 8,414 3,480 3,893
Interest expense (net of interest income of $91,$0 and $0 in 2007, 2006
and 2005, respectively)................................................... (991) (1,311) (1,350)
Other income (loss) ........................................................ (54) (34) 97
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST ....................................................... 7,369 2,135 2,640
INCOME TAX PROVISION .......................................................... 3,553 1,758 2,054
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST .................... 3,816 377 586
MINORITY INTEREST ............................................................. -- 108 393
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS ............................................. 3,816 269 193
DISCONTINUED OPERATION ........................................................ -- (175) 199
--------- --------- ---------
NET INCOME .................................................................... $ 3,816 $ 94 $ 392
========= ========= =========
NET INCOME PER BASIC SHARE
Continuing operations ...................................................... $ 0.24 $ 0.02 $ 0.02
Discontinued operation ..................................................... -- (0.01) 0.02
--------- --------- ---------
Net income per basic share ................................................. $ 0.24 $ 0.01 $ 0.04
========= ========= =========
Weighted average shares outstanding ........................................ 16,155 11,244 10,490
========= ========= =========
NET INCOME PER DILUTED SHARE
Continuing operations ...................................................... $ 0.23 $ 0.02 $ 0.01
Discontinued operation ..................................................... -- (0.01) 0.02
--------- --------- ---------
Net income per diluted share ............................................... $ 0.23 $ 0.01 $ 0.03
========= ========= =========
Weighted average shares outstanding ........................................ 16,455 12,076 11,465
========= ========= =========
See notes to consolidated financial statements.
F-3
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FISCAL YEARS ENDED
JULY 28, JULY 29, JULY 30,
2007 2006 2005
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................................................... $ 3,816 $ 94 $ 392
(Income) loss of discontinued operation ......................................... -- 175 (199)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................................. 899 1,026 1,303
Deferred income tax provision (benefit) ....................................... 229 (277) 276
Loss on sale of property plant and equipment .................................. 65 161 100
Non cash litigation settlement costs .......................................... -- 455 --
Non cash pension costs ........................................................ -- -- 492
Imputed interest - subordinated note .......................................... 185 257 196
Minority interest ............................................................. -- 108 393
Stock based compensation expense .............................................. 219 141 39
Changes in operating assets and liabilities:
Trade receivables ............................................................. (2,814) (2,707) (1,368)
Inventories ................................................................... (4,519) (1,180) 345
Prepaid expenses and other current assets ..................................... (328) (68) 348
Other assets .................................................................. 50 11 710
Accounts payable - trade ...................................................... 5,331 1,486 (1,764)
Accrued expenses .............................................................. (654) 1,038 (3,314)
Payment of accrued litigation settlement costs ................................ (200) (311) (5,092)
Income taxes payable .......................................................... 1,573 (177) (586)
Other long-term liabilities ................................................... 143 97 230
-------- -------- --------
Net cash provided by (used in) operating activities
of continuing operations ...................................................... 3,995 329 (7,499)
Net cash provided by (used in) operating activities of discontinued operation ... -- (175) 377
-------- -------- --------
Net cash provided by (used in) all operating activities ......................... 3,995 154 (7,122)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Property plant and equipment purchases ........................................ (779) (765) (891)
Acquisition of minority interest .............................................. -- (2,612) --
-------- -------- --------
Net cash used in investing activities of continuing operations .................. (779) (3,377) (891)
Net cash provided by investing activities of discontinued operation ............. -- -- 3,086
-------- -------- --------
Net cash provided by investing activities of all operations ..................... (779) (3,377) 2,195
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under short-term credit facilities .................................. 37,193 39,112 39,838
Repayment under short-term credit facilities .................................. (43,247) (38,303) (38,256)
Borrowings of long-term debt .................................................. 3,113 2,000 --
Repayment of long-term debt ................................................... (5,900) (972) --
Proceeds from rights offering, net of related costs ........................... 12,354 -- --
Proceeds from warrant exercises................................................ 551 2 87
Proceeds of stock option exercises ............................................ 170 238 278
Dividend paid to minority shareholders ........................................ (16) -- (502)
-------- -------- --------
Net cash provided by financing activities of continuing operations .............. 4,218 2,077 1,445
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ......................................... 93 13 193
-------- -------- --------
CASH AND CASH EQUIVALENTS INCREASE (DECREASE) FOR THE YEAR ...................... 7,527 (1,133) (3,289)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR ................................ 333 1,466 4,755
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF THE YEAR ...................................... $ 7,860 $ 333 $ 1,466
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest ...................................... $ 744 $ 1,054 $ 654
Cash paid during the period for income taxes .................................. 837 1,443 2,221
NON-CASH TRANSACTIONS
Financing Activities
Acquisition of minority interest ............................................. $ -- $ (2,950) $ --
Investing Activities
Stock issued for purchase of minority interest ............................. -- 2,950 --
See notes to consolidated financial statements.
F-4
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ACCUMULATED
OTHER
COMMON COMPRE-
STOCK ISSUED ADDITIONAL HENSIVE TREASURY STOCK
----------------------- PAID-IN INCOME ACCUMULATED --------------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
---------- ---------- ----------- ---------- ----------- ------- ---------- ----------
BALANCE, JULY 31,
2004 .................. 10,978,581 $ 1,098 $ 64,072 $ 792 $ (52,641) 643,533 $ (5,546) $ 7,775
Stock option exercises .. 248,421 24 253 -- -- -- -- 277
Stock warrant exercises . 25,956 3 84 -- -- -- -- 87
Non-employee stock
compensation ............ -- -- 39 -- -- -- -- 39
Correction of treasury
shares ................ -- -- -- -- -- (20,763) -- --
Comprehensive income: ... -- -- -- -- -- -- -- --
Net income ............ -- -- -- -- 392 -- -- 392
Pension obligation
adjustments .......... -- -- -- 417 -- -- -- 417
Foreign currency
adjustments .......... -- -- -- 241 -- -- -- 241
----------
Total comprehensive
income ............... -- -- -- -- -- -- -- 1,050
---------- ---------- ---------- ---------- ---------- ------- ---------- ----------
BALANCE, JULY 30,
2005 .................... 11,252,958 1,125 64,448 1,450 (52,249) 622,770 (5,546) 9,228
Stock option exercises .. 99,000 10 228 -- -- -- -- 238
Stock warrant exercises . 1,574 1 1 -- -- -- -- 2
Stock compensation ...... -- -- 142 -- -- -- -- 142
Stock issued in
minority interest
acquisition ........... 904,762 90 2,860 -- -- -- -- 2,950
Comprehensive income: ... -- -- -- -- -- -- -- --
Net income ............ -- -- -- -- 94 -- -- 94
Foreign currency
adjustments .......... -- -- -- 160 -- -- -- 160
----------
Total comprehensive
income ............... -- -- -- -- -- -- -- 254
---------- ---------- ---------- ---------- ---------- ------- ---------- ----------
BALANCE, JULY 29,
2006 .................. 12,258,294 1,226 67,679 1,610 (52,155) 622,770 (5,546) 12,814
Stock option exercises .. 101,000 10 161 -- -- -- -- 171
Stock warrant
exercises ............. 366,854 37 514 -- -- -- -- 551
Stock compensation ...... -- -- 220 -- -- -- -- 220
Issuance of stock for
Rights Offering ....... 12,027,378 1,202 11,152 -- -- -- -- 12,354
Comprehensive income: ... -- -- -- -- -- -- --
Net income ............ -- -- -- -- 3,816 -- -- 3,816
Foreign currency
adjustments .......... -- -- -- 270 -- -- -- 270
----------
Total comprehensive
income ............... -- -- -- -- -- -- -- 4,086
---------- ---------- ---------- ---------- ---------- ------- ---------- ----------
BALANCE, JULY 28,
2007 .................. 24,753,526 $ 2,475 $ 79,726 $ 1,880 $ (48,339) 622,770 $ (5,546) $ 30,196
========== ========== ========== ========== ========== ======= ========== ==========
See notes to consolidated financial statements.
F-5
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS ACTIVITIES - Del Global Technologies Corp. ("Del
Global") together with its subsidiaries (collectively, the "Company"), is
engaged in two major lines of business: Medical Systems Group and Power
Conversion Group. The Medical Systems Group segment designs, manufactures and
markets imaging and diagnostic systems consisting of stationary and portable
x-ray imaging systems, radiographic/fluoroscopic systems, mammography systems
and dental systems. The Power Conversion Group segment designs, manufactures and
markets key electronic components such as transformers, noise suppression
filters and high voltage capacitors for use in precision regulated high voltage
applications.
As of July 31, 2004, the Company's Board committed to a plan to dispose of its
Del High Voltage Division ("DHV") and on October 1, 2004, the Company sold this
division for a purchase price of $3,100, plus the assumption of approximately
$800 of liabilities. Accordingly, the results of operations for the year ended
July 30, 2005 have been reclassified to show this division as a discontinued
operation. See Note 3, Discontinued Operation.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements are prepared
on the accrual basis of accounting, which conforms to accounting principles
generally accepted in the United States of America, ("U.S. GAAP") and include
the accounts of Del Global and its subsidiaries. All material intercompany
accounts and transactions have been eliminated.
USE OF ESTIMATES - The preparation of the consolidated financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated balance
sheets, as well as reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates underlying the accompanying consolidated financial
statements include the allowance for doubtful accounts, allowance for obsolete
and excess inventory, realizability of deferred income tax assets,
recoverability of intangibles and other long-lived assets, and future
obligations associated with the Company's litigation.
Certain reclassifications have been made to prior years' amounts to conform to
the current year's presentation, including the reclassification in the fiscal
2005 cash flows statement of $3,086 of cash flows from discontinued operations
into investing activities from operating activities.
ACCOUNTING PERIOD - The Company's fiscal year-end is based on a 52/53-week cycle
ending on the Saturday nearest to July 31. Results of the Company's subsidiary,
Villa Sistemi Medicali S.p.A. ("Villa") are consolidated into Del Global's
consolidated financial statements based on a fiscal year that ends on June 30
and are reported on a one-month lag.
CASH AND CASH EQUIVALENTS - The Company considers highly liquid instruments
readily convertible to known amounts of cash with original maturities of three
months or less (measured from their acquisition date) to be cash equivalents.
FOREIGN CURRENCY TRANSLATION - The financial statements of our foreign
subsidiary are recorded in "Euro" and translated into U.S. dollars. The foreign
subsidiary's balance sheet accounts are translated at the current exchange rate
and income statement items are translated at the average exchange rate for the
period. Gains and losses resulting from translation are accumulated in a
separate component of shareholders' equity.
INVENTORIES - Inventories are stated at the lower of cost or market value. Cost
is comprised of direct materials and, where applicable, direct labor costs and
overhead that has been incurred in transporting the inventories to their present
location and condition. Engineering costs incurred to set up products to be
manufactured for a customer purchase order are capitalized when the scope of the
purchase order indicates that such costs are recoverable. Such costs are
included in work-in-process inventory and amortized on a units shipped basis
over the life of the customer order from the date of first shipment. Cost is
calculated using the FIFO method. Market value represents the estimated selling
price less all estimated costs to completion and costs to be incurred in
marketing, selling and distribution.
F-6
PROPERTY PLANT AND EQUIPMENT, NET - Property, plant and equipment, net are
stated at cost less accumulated depreciation and amortization. Replacements and
major improvements are capitalized; maintenance and repairs are expensed as
incurred. Gains or losses on asset dispositions are included in the
determination of net income or loss. Depreciation is computed utilizing the
straight-line method. The cost of leasehold improvements is amortized over the
shorter of the useful life or the term of the lease.
Depreciable lives are generally as follows:
DESCRIPTION USEFUL LIVES
Buildings ................................................... 25-33
Machinery and equipment ..................................... 5-15
Furniture and fixtures ...................................... 5-10
Transportation equipment .................................... 3-4
Computer and other equipment ................................ 3-7
RECOVERABILITY OF LONG-LIVED ASSETS - The Company evaluates the carrying amounts
of long-lived assets (including intangibles) to determine if events have
occurred which would require modification to the carrying values. In evaluating
carrying values of long-lived assets, the Company reviews certain indicators of
potential impairment, such as undiscounted projected cash flows and business
plans. In the event that impairment has occurred, the fair value of the related
asset is determined and the Company records a charge to operations calculated by
comparing the asset's carrying value to the estimated fair value. The Company
estimates fair value based on the best information available making whatever
estimates, judgments and projections are considered necessary.
DEFERRED FINANCING COSTS, NET - Financing costs, including fees, commission and
legal expenses are capitalized and amortized on a straight line basis, which
approximates the interest method, over the term or expected term of the relevant
loan. Amortization of deferred financing costs is included in interest expense.
GOODWILL - Goodwill represents the excess of the cost of acquisitions over the
fair value of the identifiable assets acquired and liabilities assumed. The
Company evaluates goodwill for impairment on an annual basis by comparing the
fair value to the carrying value for reporting units within the Medical Systems
Group. Fair value is determined using a discounted cash flow method as well as a
review of valuation parameters for comparable publicly traded companies.
REVENUE RECOGNITION - 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 maintains a sales return allowance, based upon historical
patterns, to cover estimated normal course of business returns, including
defective or out of specification product. 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 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. The Company recognizes service
revenue when repairs or out of warranty repairs are completed. The Company has a
Food and Drug Administration ("FDA") obligation to continue to provide repair
service for certain medical systems for up to seven years past the warranty
period. These repairs are billed to the customers at market rates.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs are recognized
as an expense in the period in which they are incurred.
INCOME TAXES - Deferred income tax assets and liabilities represents the effects
of the differences between the income tax basis and financial reporting basis of
assets, liabilities and tax credit carryforwards at the tax rates expected at
the time the deferred income tax liability or asset is expected to be settled or
realized. Management provides valuation allowances on deferred income tax assets
for which realization does not meet a "more likely than not" standard.
NET INCOME (LOSS) PER SHARE - Net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding during the year. The effect of the assumed exercise of options and
warrants to purchase common stock are excluded from the calculation of earnings
(loss) per share when their inclusion would be anti-dilutive.
F-7
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially subject
the Company to concentrations of credit risk are cash equivalents, investments
in marketable securities, trade receivables and lines of credit. With respect to
accounts receivable, the Company limits its credit risk by performing ongoing
credit evaluations and, when necessary, requiring letters of credit, guarantees
or collateral. Management does not believe significant risk exists in connection
with the Company's concentrations of credit at July 28, 2007.
The activity in allowances for doubtful accounts is as follows:
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSE DEDUCTIONS (1) END OF YEAR
------------ ---------- -------------- ------------
YEAR ENDED JULY 28, 2007 ...........
Allowance for doubtful accounts .... $1,095 $ 646 $ 172 $1,569
YEAR ENDED JULY 29, 2006 ...........
Allowance for doubtful accounts .... $1,028 $ 338 $ 271 $1,095
YEAR ENDED JULY 30, 2005 ...........
Allowance for doubtful accounts .... $888 $ 375 $ 235 $1,028
(1) Write-off of accounts receivable previously charged to costs and expenses.
STOCK-BASED COMPENSATION - In December 2004, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
123 (R), "Share-Based Payments," which established standards for transactions in
which an entity exchanges its equity instruments for goods and services. The
standard requires a public entity to measure the equity instruments award based
on the grant-date fair value. This eliminates the exception to account for such
awards using the intrinsic method previously allowed under Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS
No. 123 (R) has been adopted for fiscal years 2007 and 2006 and the Company
recorded related expense of $235 and $141 in these years, respectively. The
statement does not require restatement of previously issued statements and is
being applied on a prospective basis. See Note 11, Shareholders' Equity.
Prior to the adoption of SFAS 123 (R), the Company accounted for stock-based
awards to employees using the intrinsic value method of accounting in accordance
with APB No. 25. The Company's practice in granting these awards to employees is
to set the excise 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
Statement 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 (R), the Company's net income and net
income per share for fiscal year 2005 would have been stated at the pro forma
amounts indicated below:
FOR FISCAL YEAR ENDED
JULY 30, 2005
---------------------
Net income - as reported: .................................... $ 392
Total stock-based awards under fair value method ............. (292)
------------
Pro forma net income ......................................... $ 100
============
Income per share - Basic
As reported .................................................. $ 0.04
Pro forma .................................................... $ 0.01
Income per share - Diluted
As reported .................................................. $ 0.03
Pro forma .................................................... $ 0.01
Weighted average number of shares outstanding - Basic ........ 10,490,178
Weighted average number of shares outstanding - Diluted. ..... 11,464,718
The fair value of the options used for the above pro forma disclosures were
determined on the date of grant using a Black-Scholes option pricing model.
These options were valued based on the following assumptions: an estimated life
of seven years, volatility of 63%, risk free interest rate of 4.06% and no
dividend yield.
F-8
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS - In May 2005, the FASB issued SFAS No.
154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No.
20 and SFAS No. 3." This Statement provides guidance on the accounting for and
reporting of accounting changes and error corrections. It establishes, unless
impracticable, retrospective application as the required method for reporting a
change in accounting principle, in the absence of explicit transition
requirements specific to the newly adopted accounting principle. This Statement
was effective for accounting changes made in fiscal years beginning after
December 15, 2005. The adoption of SFAS No. 154 had no impact on the Company's
financial statements or results of operations.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140," which
simplifies accounting for certain hybrid instruments by permitting fair value
remeasurement for any hybrid instrument that contains an embedded derivative
that otherwise would require bifurcation. SFAS No. 155 is effective for all
financial instruments acquired, issued or subject to a remeasurement (new basis)
event occurring after the beginning of an entity's first fiscal year that begins
after September 15, 2006. The adoption of SFAS No. 155 is not expected to have
any impact on the Company's results of operations or our financial position.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,
"Accounting for Income Taxes" ("SFAS 109")", to clarify the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with SFAS 109. This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. The
provisions of FIN 48 are effective for fiscal years beginning after December 15,
2006. The Company believes that FIN 48 will not have a material impact on its
financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Current Year Misstatements." SAB 108 requires
analysis of misstatements using both an income statement (rollover) approach and
a balance sheet (iron curtain) approach in assessing materiality and allows for
a one-time cumulative effect transition adjustment. SAB 108 was effective for
the Company's fiscal year 2007 annual financial statements and did not have any
impact on its results of operations or financial position.
In September 2006, the FASB issues SFAS No. 157, "Fair Value Measurements,"
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the information. This
statement is effective for the Company beginning July 1, 2008. The Company has
not evaluated the impact that the adoption of SFAS No. 157 will have on its
financial statements at this time.
In February 2007, the FASB released SFAS No. 159, "Fair Value Option for
Financial Assets and Financial Liabilities." This statement permits entities to
choose to measure many financial instruments and certain other items at fair
value. This Statement is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those years.
The Company has not evaluated the impact that the adoption of SFAS No. 159 will
have on its financial statements at this time.
2. ACQUISITION OF MINORITY INTEREST IN VILLA
On December 23, 2005, the Company acquired the remaining 20% of Villa for $2,612
plus 904,762 restricted shares of Company common stock. These shares were valued
at $3.26 a share, or $2,950, and are subject to SEC Rule 144 limitations as to
holding periods and trading volume limitations. Goodwill in the amount of $4,526
was recorded and $934 of minority interest was reversed after recognition of a
$388 dividend. Due to the previous 80% ownership interest existing at the time
of the original acquisition, the assets and liabilities of the Villa subsidiary
were fully consolidated before the transaction and considered to be at fair
market value with no additional adjustments necessary.
3. DISCONTINUED OPERATION
On October 1, 2004, the Company completed the sale of its Del High Voltage
Division ("DHV") for a purchase price of $3,100, plus the assumption of
approximately $800 of liabilities. This division was formerly part of the Power
Conversion Group and designed, manufactured and marketed proprietary precision
power conversion subsystems for medical as well as critical industrial
applications. The results of operations of this division are shown as a
discontinued operation in the accompanying financial statements.
F-9
Certain information with respect to the discontinued operation is summarized
below:
JULY 29, JULY 30,
YEARS ENDED 2006 2005
------- -------
Revenues .............................................. $ -- $1,899
Net income (loss) before income taxes ................. (175) 199
Income taxes .......................................... -- --
Income (loss) from discontinued operation, net ........ (175) 199
Loss from discontinued operations for fiscal 2006 reflects the accrual of an
estimated liability of $175 related to a New York State Sales tax audit of its
Valhalla location, including the DHV business. Income from discontinued
operation, net for fiscal year 2005, includes two months of operations through
the October 1, 2004 disposition date and a gain on the sale of the DHV assets of
$21.
4. INVENTORIES
Inventories consists of the following:
JULY 28, 2007 JULY 29, 2006
------------- -------------
Raw materials and purchased parts ...................... $ 15,237 $ 13,660
Work-in-process ........................................ 3,910 3,747
Finished goods ......................................... 6,652 2,732
-------- --------
25,799 20,139
Less: allowance for obsolete and excess inventories .... (3,869) (3,703)
-------- --------
Total inventories net .................................. $ 21,930 $ 16,436
======== ========
The activity in the allowance for obsolete and excess inventories accounts is as
follows:
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSE DEDUCTIONS (1) END OF YEAR
------------ ---------- -------------- ------------ YEAR
YEAR ENDED JULY 28, 2007
Allowance for obsolete and excess inventories .... $3,703 $ 651 $ 485 $3,869
YEAR ENDED JULY 29, 2006
Allowance for obsolete and excess inventories .... 3,017 1,050 364 3,703
YEAR ENDED JULY 30, 2005
Allowance for obsolete and excess inventories .... 2,536 620 139 3,017
(1) Write-off of inventories previously charged to costs and expenses.
The Company has pledged all of its inventories in the U.S. having a net carrying
amount of approximately $6,608 and $5,009 at July 28, 2007 and July 29, 2006,
respectively, to secure its credit facility with its lender.
5. PROPERTY PLANT AND EQUIPMENT
Property plant and equipment consist of the following:
JULY 28, 2007 JULY 29, 2006
------------- -------------
Land ............................................... $ 694 $ 694
Buildings .......................................... 6,549 6,253
Machinery and equipment ............................ 6,757 6,384
Furniture and fixtures ............................. 817 721
Leasehold improvements ............................. 1,754 1,585
Transportation equipment ........................... 109 119
Computers and other equipment ...................... 2,552 4,187
-------- --------
19,232 19,943
Less: accumulated depreciation and amortization .... (12,721) (13,577)
-------- --------
Property plant and equipment, net .................. $ 6,511 $ 6,366
======== ========
The Company has pledged all of its property, plant and equipment in the U.S.
having a net carrying amount of approximately $1,985 and $1,854 at July 28, 2007
and July 29, 2006, respectively, to secure its credit facility with its lender.
F-10
Included in the table above are assets held under capital leases, including the
Villa building, in the amount of $3,099 and $3,889 at July 28, 2007 and July 29,
2006, respectively. Accumulated amortization relating to capital leases was $845
and $729 at July 28, 2007 and July 29, 2006, respectfully. Amortization expense
relating to capital leases was $116, $113 and $110 for fiscal 2007, 2006 and
2005, respectively.
Depreciation expense for fiscal years 2007, 2006 and 2005 was $872, $998 and
$1,238, respectively.
6. GOODWILL
Goodwill consists of the following:
Medical Systems
---------------
Balance at July 30, 2005 $ 1,911
Additions 4,526
-----
Balance at July 29, 2006 and July 28, 2007 $ 6,437
========
As described in Note 2, during fiscal year 2006, the Company completed the
acquisition of the remaining 20% minority interest in its Villa subsidiary and
recorded additional goodwill of $4,526.
During fiscal 2007, 2006 and 2005, the Company conducted its annual goodwill
impairment testing, and concluded that the remaining goodwill, which relates to
its Medical Systems Segment, was not impaired as each respective balance sheet
date.
7. 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.
The activity in the warranty reserve accounts is as follows:
JULY 28, 2007 JULY 29, 2006
------------- -------------
Balance at beginning of year .................. $ 971 $ 1,040
Provision for anticipated warranty claims .... 879 440
Costs incurred related to warranty claims .... (785) (509)
------- -------
Balance at end of year ........................ $ 1,065 $ 971
======= =======
8. SHORT-TERM CREDIT FACILITIES, LONG-TERM DEBT AND SUBORDINATED NOTE
Short-term credit facilities are summarized as follows:
JULY 28, 2007 JULY 29, 2006
------------- -------------
Revolving lines of credit:
Domestic ....................... $ -- $2,672
Foreign ........................ -- 3,287
---- ------
$ -- $5,959
==== ======
Long-term debt was comprised of the following:
JULY 28, 2007 JULY 29, 2006 INTEREST RATE
------------- ------------- ----------------
AT JULY 28, 2007
----------------
Domestic term loan ............................. $ -- $ 1,817
Domestic subordinated note ..................... -- 2,415
Foreign capital lease obligation ............... 2,650 2,800 5.0%
Foreign credit facilities ...................... 2,699 324 Euribor + 1.3%
Foreign Italian Government loans ............... 1,135 1,334 3.4%
------- -------
Total long term debt ........................... 6,484 8,690
Less current portion of long-term bank debt .... (1,086) (1,142)
Less current portion of subordinated note ...... -- (2,415)
------- -------
Long-term debt, less current portion ........... $ 5,398 $ 5,133
======= =======
F-11
On August 1, 2005, the Company entered into a three-year revolving credit and
term loan facility with North Fork Business Capital (the "North Fork Facility")
and repaid its prior facility. The North Fork Facility provided for a $6,000
formula based revolving credit facility based on the Company's eligible accounts
receivable and inventories as defined in the credit agreement. In addition, the
Company borrowed $2,000 under a term loan facility secured by the Company's Bay
Shore, New York building. Interest on the revolving credit borrowings is payable
at prime plus 0.5% or alternatively at a LIBOR rate plus 2.5%. The $2,000 term
loan was repayable in 36 monthly installments of $17 with a balloon payment of
the remaining balance due at the maturity in 2008. Interest on the term loan was
payable monthly at prime plus 0.75% or a LIBOR rate plus 2.75%. As of July 28,
2007, the Company had approximately $9,000 of availability under the North Fork
Facility, of which North Fork has reserved $1,000 against possible litigation
settlements. The term loan was extinguished and the revolver was paid down to $0
with a portion of the proceeds received from a March 2007 Rights Offering
described below. The North Fork Facility is subject to commitment fees of 0.5%
per annum on the daily-unused portion of the facility, payable monthly. The
Company granted a security interest to the lender on its US credit facility in
substantially all of its accounts receivable, inventories, property plant and
equipment, other assets and intellectual property in the US as well as 66% of
the outstanding stock of its Italian subsidiary, Villa (until a late fiscal 2007
amendment).
As of the end of the fourth quarter of fiscal 2006, the Company was
non-compliant with the following covenants: the Adjusted US Earnings, Adjusted
Earnings, Senior US Debt Ratio and Fixed Charge Coverage Ratio covenants under
the North Fork Facility, due to the lower than anticipated performance during
fiscal 2006. On October 25, 2006, the Company and North Fork signed an amendment
to the facility that waived the non-compliance with these covenants for the
fourth quarter of fiscal 2006 and adjusted the covenant levels going forward
through the maturity of the credit facility. In addition, the amendment reversed
$300 of a sinking fund reserved for the March 2007 maturity of the subordinated
shareholder notes and eliminated additional sinking fund reserves provisions
related to the subordinated notes.
As of the end of the first quarter of fiscal 2007, the Company was non-compliant
with the tangible net worth covenant under the North Fork Facility. On December
6, 2006, North Fork waived the non-compliance with this covenant for the first
quarter of fiscal 2007 and adjusted the covenant levels going forward through
the maturity of the credit facility.
As of the end of fiscal 2007, the Company was in compliance with all covenants
under the North Fork Facility.
On June 1, 2007, the North Fork Facility was amended and restated. The amendment
increases the revolving credit facility to a maximum amount of $7,500 and
provides a capital expenditure loan facility up to $1,500. Other changes to the
terms and conditions of the original loan agreement include the modification of
covenants, removal of the Villa stock as loan collateral and the removal of
daily collateral reporting which was part of the previous asset-based facility
requirements.
The Company received a dividend from its Villa subsidiary in October 2006 of
approximately $1,560 which was used to pay down amounts outstanding under the
North Fork facility, in accordance with provisions of the facility.
The Company's Villa subsidiary maintains short term credit facilities which are
renewed annually with Italian banks. Currently, these facilities are not being
utilized and the balance due at July 28, 2007 is $0. Interest rates on these
facilities are variable and currently range from 3.7-13.75%.
In October 2006, Villa entered into a 1.0 million Euro loan for financing of R&D
projects, with an option for an additional 1.0 million Euro upon completion of
50% of the projects. Interest payable is at Euribor 3 months plus 1.3 points,
currently 5.475%. The spread may be reduced to 1.04 points upon completion of
the project if objectives are achieved. The note is repayable over a 7 year
term, with reimbursement starting in September 2008. The note contains a
financial covenant which provides that the net equity of Villa cannot fall below
5.0 million Euros. This covenant could limit Villa's ability to pay dividends to
the US parent company in the event of future losses, future dividends or other
events should cause Villa's equity to fall below the defined level.
In December 2006, Villa entered into a 1.0 million Euro loan with interest
payable at Euribor 3 months plus 0.95 points, currently 5.125%. The loan is
repayable in 4 years.
Villa was party to a 1.6 million Euro loan which was extinguished in March 2007.
Two final instalments for a total of 0.3 million Euro were repaid in fiscal year
2007.
Villa is also party to two Italian government long-term loans with a fixed
interest rate of 3.425% with principal payable annually through maturity in
February and September 2010. At the end of fiscal year 2007, total principal due
is 2.3 million Euro. Villa 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.
F-12
SUBORDINATED NOTE - In connection with the settlement reached on January 29,
2002, with the plaintiffs in the class action litigation, the Company recorded
the present value at 12% of the $2,000 of subordinated notes that were issued in
April 2002 and matured in March 2007. The subordinated notes did not pay
interest currently, but accrued interest at 6% per annum, and were recorded at
issuance at a discounted present value of $1,500. The balance was paid on March
29, 2007 with a portion of the proceeds from a Rights Offering described below.
The Company is obligated to make principal payments under its long-term debt and
capital lease obligations as follows:
CAPITAL
FISCAL YEARS DEBT LEASE TOTAL
- ------------------------------------------ ------- ------- -------
2008 ..................................... $ 698 $ 555 $ 1,253
2009 ..................................... 978 555 1,533
2010 ..................................... 990 555 1,545
2011 ..................................... 629 418 1,047
2012 ..................................... 270 -- 270
2013 and beyond .......................... 269 -- 269
Purchase option .......................... -- 1,046 1,046
------- ------- -------
Total payments ........................... 3,834 3,129 6,963
Less: amount representing interest ....... -- (479) (479)
------- ------- -------
Total .................................... $ 3,834 $ 2,650 $ 6,484
======= ======= =======
9. EMPLOYEE BENEFITS
The Company has a Profit Sharing Plan that provides for contributions as
determined by the Board of Directors. The contributions can be paid to the Plan
in cash or common stock of the Company. No contributions were authorized for
fiscal years 2007, 2006 or 2005.
The Profit Sharing Plan also incorporates a 401(k) Retirement Plan that is
available to substantially all domestic employees, allowing them to defer a
portion of their salary. The Company matches employee contributions at a 50%
rate up to a maximum of 2% of annual salary, and recorded a related expense of
$20, $106 and $118 for fiscal years 2007, 2006 and 2005, respectively.
The Company also had a defined benefit plan, which was frozen effective February
1, 1986. As of July 31, 2004, the Company had a minimum liability and
corresponding debit in accumulated other comprehensive income to account for the
unfunded status of its defined benefit plan, in accordance with SFAS No. 87,
Employers' Accounting for Pensions. During fiscal 2005, the Company applied to
the Pension Benefit Guaranty Corp and to the IRS for a determination letter and
approval to terminate this plan. In the fourth quarter of fiscal 2005, the
Company recognized a related non-cash charge of approximately $500 to write off
the accumulated other comprehensive income on its balance sheet in recognition
of the formal decision to terminate the plan. In preparation for the plan
termination, during fiscal 2005 the Company fully funded the expected cash
disbursement of $200. The Company received the IRS determination letter
approving the final settlement during the second quarter of fiscal 2006 and the
plan fully paid out all of the plan participants in March 2006.
In addition, the Company's Villa subsidiary provides for employee termination
indemnities. Villa has established a reserve, representing the liability for
indemnities payable upon termination of employment, accrued in accordance with
labor laws and labor agreements in force. This liability is subject to annual
revaluation using the officially-established indices. The liability for these
indemnities is included in other long-term liabilities on the accompanying
Consolidated Balance Sheets and was $3,127 and $2,787 at July 28, 2007 and July
29, 2006, respectively. Provisions for employee termination indemnities were
$357, $401 and $412 for fiscal years 2007, 2006 and 2005, respectively.
10. SEGMENT REPORTING
The Company has three reportable segments; the Medical Systems Group, the Power
Conversion Group and Other. The Other segment includes unallocated corporate
costs and litigation settlement costs. For each fiscal year presented, corporate
costs (which include certain shared services) were allocated to domestic
subsidiaries on the basis of a percentage of each unit's annual sales. Corporate
costs were allocated at a fixed dollar amount to the international subsidiary
based upon an intercompany management services agreement. The percentages and
the dollar amounts used to allocate actual corporate costs are based on
management's estimate of the benefits received by each reporting segment from
corporate activities and shared services.
F-13
Operating segments are defined as components of an enterprise, about which
separate financial information is available which is evaluated regularly by the
chief decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. The Company's chief operating decision
making group is comprised of the Chief Executive Officer and the senior
executives of the Company's operating segments. The Company evaluates its
reporting segments based on operating income or loss.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Balance Sheet information
presented below and Income Statement related disclosure below for all periods
presented exclude the results of the DHV division due to this division's
classification as a discontinued operation at July 31, 2004 and the subsequent
disposal on October 31, 2004.
Selected financial data of these segments are as follows:
MEDICAL POWER
FISCAL YEAR ENDED SYSTEMS CONVERSION
JULY 28, 2007 GROUP GROUP OTHER TOTAL
- ---------------------------------------------------- --------- --------- --------- ---------
Net sales to external customers .................... $ 90,979 $ 13,188 $ -- $ 104,167
Cost of sales ...................................... 70,879 8,271 -- 79,150
--------- --------- --------- ---------
Gross margin ....................................... 20,100 4,917 -- 25,017
--------- --------- --------- ---------
Selling, general and administrative ................ 10,635 2,476 1,479 14,590
Research and development ........................... 2,013 -- -- 2,013
Litigation settlement costs ........................ -- -- -- --
--------- --------- --------- ---------
Total operating expenses ......................... 12,648 2,476 1,479 16,603
--------- --------- --------- ---------
Operating income (loss) ............................ $ 7,452 $ 2,441 $ (1,479) 8,414
--------- --------- ---------
Interest expense ................................... (991)
Other income (expense) ............................. (54)
---------
Income from continuing operations, before income
taxes and minority interest ...................... $ 7,369
=========
Depreciation ....................................... $ 704 $ 165 $ 3 $ 872
Amortization ....................................... 27 -- -- 27
Segment assets ..................................... 60,658 5,014 668 66,340
Capital expenditures ............................... 703 76 -- 779
Inter-segment sales were $86 for the fiscal year ended July 28, 2007.
Approximately $43,720 of Medical Systems Group assets are located in Italy,
including $10,110 of long-lived assets.
MEDICAL POWER
FISCAL YEAR ENDED SYSTEMS CONVERSION
JULY 29, 2006 GROUP GROUP OTHER TOTAL
- ---------------------------------------------------- --------- --------- --------- ---------
Net sales to external customers .................... $ 70,287 $12,727 $ -- $ 83,014
Cost of sales ...................................... 55,453 8,203 -- 63,656
-------- -------- -------- --------
Gross margin ....................................... 14,834 4,524 -- 19,358
-------- -------- -------- --------
Selling, general and administrative ................ 9,467 2,148 2,004 13,619
Research and development ........................... 1,562 -- -- 1,562
Litigation settlement costs ........................ 252 (55) 500 697
-------- -------- -------- --------
Total operating expenses .......................... 11,281 2,093 2,504 15,878
-------- -------- -------- --------
Operating income (loss) ............................ $ 3,553 $ 2,431 $ (2,504) 3,480
======== ======== ========
Interest expense ................................... (1,311)
Other expense ...................................... (34)
--------
Income from continuing operations, before income
taxes and minority interest ..................... $ 2,135
========
Depreciation ....................................... $ 793 $ 193 $ 2 $ 988
Amortization ....................................... 38 -- -- 38
Segment assets ..................................... 43,630 5,055 468 49,153
Capital expenditures ............................... 695 66 4 765
Inter-segment sales were $149 for the fiscal year ended July 29, 2006.
Approximately $35,481 of Medical Systems Group assets are located in Italy,
including $10,249 of long-lived assets.
F-14
MEDICAL POWER
FISCAL YEAR ENDED SYSTEMS CONVERSION
JULY 30, 2005 GROUP GROUP OTHER TOTAL
- ---------------------------------------------------- --------- --------- --------- ---------
Net sales to external customers .................... $ 70,792 $ 14,080 $ -- $ 84,872
Cost of sales ...................................... 54,288 8,303 -- 62,591
-------- -------- -------- --------
Gross margin ....................................... 16,504 5,777 -- 22,281
-------- -------- -------- --------
Selling, general and administrative ................ 9,261 2,630 4,561 16,452
Research and development ........................... 1,636 -- -- 1,636
Litigation settlement costs ........................ -- 300 -- 300
-------- -------- -------- --------
Total operating expenses ......................... 10,897 2,930 4,561 18,388
-------- -------- -------- --------
Operating income (loss) ............................ $ 5,607 $ 2,847 $ (4,561) 3,893
======== ======== ========
Interest expense ................................... (1,350)
Other income ....................................... 97
--------
Loss from continuing operations, before income
taxes and minority interest ...................... $ 2,640
========
Depreciation ....................................... $ 850 $ 247 $ 141 $ 1,238
Amortization ....................................... 65 -- -- 65
Segment assets ..................................... 32,731 6,008 2,037 40,776
Capital expenditures ............................... 736 151 4 891
Inter-segment sales were $182 for the fiscal year ended July 30, 2005.
Approximately $24,704 of Medical Systems Group assets are located in Italy,
including $5,455 of long-lived assets.
MAJOR CUSTOMERS AND EXPORT SALES - For the fiscal year ended July 28, 2007, one
of our Medical Systems Group customers accounted for approximately 12% of
consolidated revenues and 11% of gross accounts receivable at July 28, 2007. For
fiscal years ended July 29, 2006 and July 30, 2005, no individual customer
accounted for greater than 10% of total revenue or accounts receivable.
Foreign sales were 63%, 64% and 55% of the Company's consolidated net sales in
fiscal years ended July 28, 2007, July 29, 2006, and July 30, 2005,
respectively. Net sales by geographic areas were:
JULY 28, 2007 JULY 29 2006 JULY 30, 2005
--------------------- ---------------------- ---------------------
United States ........................ $ 38,397 37% $ 29,979 36% $ 38,785 45%
Canada ............................... 869 1% 158 -% 497 1%
Europe ............................... 48,129 46% 37,078 45% 32,571 38%
Far East ............................. 7,603 7% 6,298 8% 8,819 11%
Mexico, Central and South America .... 3,117 3% 6,750 8% 1,976 2%
Africa, Middle East and Australia .... 6,052 6% 2,751 3% 2,224 3%
-------- -------- -------- -------- -------- --------
$104,167 100% $ 83,014 100% $ 84,872 100%
======== ======== ======== ======== ======== ========
Revenues are attributable to geographic areas based on the location of the
customers.
11. SHAREHOLDERS' EQUITY
RIGHTS OFFERING AND STOCKHOLDERS' RIGHTS PLAN - On December 12, 2006, the
Company filed a registration statement for a subscription rights offering with
the SEC that became effective January 30, 2007. Under terms of this rights
offering, the Company distributed to shareholders of record as of February 5,
2007, non-transferable subscription rights to purchase one share of the
Company's common stock for each share owned at that date at a subscription price
of $1.05 per share. On March 12, 2007, the Company completed the rights
offering, selling 12,027,378 shares of its common stock at $1.05 per share.
Total proceeds to the Company, net of $275 of expenses related to the rights
offering, were $12,354.
The purpose of this rights offering was to raise equity capital in a
cost-effective manner. Approximately $7,564 of the proceeds were used for debt
repayment and the remainder invested in short-term money market securities for
anticipated working capital needs and general corporate purposes. A portion of
the net proceeds may also ultimately be used to acquire or invest in businesses,
products and technologies that Company management believes are complementary to
the Company's business.
In addition, on January 22, 2007, the Company entered into a stockholders'
rights plan (the "Rights Plan"). The Rights Plan provides for a dividend
F-15
distribution of one common stock purchase right for each outstanding share of
the Company's common stock. The Company's Board of Directors adopted the Rights
Plan to protect stockholder value by protecting the Company's ability to realize
the benefits of its net operating losses ("NOLs") and capital loss
carryforwards. The Company has experienced substantial operating and capital
losses in previous years. Under the Internal Revenue Code and rules promulgated
by the Internal Revenue Service, the Company may "carry forward" these losses in
certain circumstances to offset current and future earnings and thus reduce its
federal income tax liability, subject to certain requirements and restrictions.
Assuming that the Company has future earnings, the Company may be able to
realize the benefits of NOLs and capital loss carryforwards. These NOLs and
capital loss carryforwards constitute a substantial asset to the Company. If the
Company experiences an "Ownership Change," as defined in Section 382 of the
Internal Revenue Code, its ability to use the NOLs and capital loss
carryforwards could be substantially limited or lost altogether. In general
terms, the Rights Plan imposes a significant penalty upon any person or group
that acquires certain percentages of the Company's common stock by allowing
other shareholders to acquire equity securities at half their fair values.
STOCK BUY-BACK PROGRAM - In September 2000, the Board of Directors approved an
additional repurchase of $3,000 of the Company's common stock bringing the total
authorized to $7,500. The Company has not purchased any shares under this
program since fiscal 2001, when 11,500 shares were purchased for $108. As of
July 28, 2007, 489,806 shares had been purchased by the Company for $4,502 under
this Stock Buy-Back Program. These shares are included in Treasury Shares on the
accompanying Balance Sheet.
INCREASE OF AUTHORIZED SHARES - At a special meeting of shareholders of the
Company held on November 17, 2006, the Company's shareholders approved an
Amendment of the Certificate of Incorporations of the Company to increase the
number of authorized shares of the Company's common stock, par value $0.10 per
share, from twenty million (20,000,000) shares to fifty million (50,000,000)
shares in order to have a sufficient number of shares of Common Stock to provide
a reserve of shares available for issuance to meet business needs as they may
arise in the future. Such business needs may include, without limitation, rights
offerings, financings, acquisitions, establishing strategic relationships with
corporate partners, providing equity incentives to employees, officers or
directors, stock splits or similar transactions.
STOCK OPTION PLAN AND WARRANTS - Effective July 31, 2005, the Company adopted
SFAS No. 123 (R). This standard requires that the Company measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant date fair value of the award. That cost will be recognized over the
period in which the employee is required to provide the services - the requisite
service period (usually the vesting period) - in exchange for the award. The
grant date fair value for options and similar instruments will be estimated
using option pricing models. Under SFAS 123 (R), the Company is required to
select a valuation technique or option pricing model that meets the criteria as
stated in the standard, which includes a binomial model and the Black-Scholes
model. At the present time, the Company is continuing to use the Black-Scholes
model. The adoption of SFAS 123 (R), applying the "modified prospective method,"
as elected by the Company, requires the Company to value stock options granted
prior to its adoption of SFAS 123 (R) under the fair value method and expense
the related unvested amounts over the remaining vesting period of the stock
options.
Details regarding the fair value of stock options granted in fiscal 2007 and
2006 are as follows:
2007 2006
---------------------------
Estimated life (in years) .................... 7 7
Volatility rate............................... 63%-74% 62%
Risk free interest rate....................... 4.44%-5.16% 4.74%-4.93%
Dividend rate................................. 0% 0%
Forfeiture rate............................... 2% 0%
Weighted average fair value................... 1.16 1.58
Recorded compensation expense................. $ 219 $ 141
The Black Scholes Option Pricing Model requires the use of various assumptions.
The key assumptions are summarized as follows:
Estimated life: The Company derives its estimated life based on historical
experience.
Volatility rate: The Company estimates the volatility of its common stock at
the date of grant based on historical volatility of its common stock.
Risk free interest rate: The Company derives its risk-free interest rate on
the Barron's zero coupon bond rate for a term equivalent to the expected
life of the option.
F-16
Dividend rate: The Company estimates the dividend yield assumption based on
the Company's historical and projected dividend payouts.
Forfeiture rate: The Company estimates the annual forfeiture rate based
on historical experience.
On March 20, 2007, shareholders approved the 2007 Incentive Stock Plan. A total
of 1,000,000 shares of the Company's common stock may be granted under the Plan.
No additional options will be granted under the former stock option plan.
Substantially all of the options granted under this Plan and the prior plan
provide for graded vesting and vest generally at a rate of 25% per year
beginning with the date of grant, expiring ten to fifteen years from the date
they are granted. The option price per share is approved by the Board of
Directors. All options to date have been granted at the fair market value of the
Company's stock at the date of grant. No options can be granted under this plan
subsequent to February 21, 2017.
In December 2000, the Board of Directors approved an extension of time to
exercise for all stock option holders. The extension covers all options whose
term would have expired during the period from the stock de-listing date up to
the date that the shares become re-listed on a national exchange. This extension
grants those stock option holders a period of six months from the date of
re-listing to exercise vested options which may have otherwise expired without
the extension. Options that otherwise expired due to termination of employment
for cause were not effected by this extension. During fiscal 2005, the plan was
modified to remove this extension provision from options granted after January
2005. The majority of the Company's stock options have a 10 year term, however,
due to uncertainty regarding the duration of this extension, the Company cannot
calculate the weighted average remaining contractual term of outstanding or
vested options. The extension provision does not impact the 2007 Incentive Stock
Plan.
OPTION ACTIVITY
The following stock option information is as of:
JULY 28, 2007 JULY 29, 2006 JULY 30, 2005
----------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
OUTSTANDING PRICE OUTSTANDING PRICE OUTSTANDING PRICE
----------- --------- ----------- ----------- ----------- -----------
Granted and outstanding, beginning of year .... 1,545,996 $ 3.93 1,662,494 $ 3.81 2,133,415 $ 3.15
Granted ....................................... 469,000 1.73 100,000 2.66 150,000 2.70
Exercised ..................................... (101,000) 1.69 (99,000) 2.09 (248,420) 1.12
Cancelled and forfeited ....................... -- -- (117,498) 2.56 (372,501) 1.41
--------- --------- ---------
Outstanding at end of year .................... 1,913,996 3.51 1,545,996 3.93 1,662,494 3.81
========= ========= =========
Exercisable at end of year .................... 1,494,743 4.00 1,477,243 4.00 1,508,742 3.92
As mentioned above, due to an extension of exercise time granted to option
holders that has an uncertain term, the Company is unable to calculate the
weighted average contractual term of the above options.
As of July 28, 2007 the distribution of stock option exercise prices is as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE NUMBER OF EXERCISE SHARES EXERCISE
PRICE RANGE OPTION SHARES PRICE EXERCISABLE PRICE
- --------------------- ------------- ---------- ------------ ------------
$1.00 - $3.34 1.223,288 $ 1.76 804,835 $ 1.75
$4.00 - $6.60 313,256 4.85 313,256 4.85
$7.00 - $7.94 220,775 7.51 220,775 7.51
$8.00 - $10.00 156,677 8.91 156,677 8.91
--------- -------- --------- --------
1,913,996 $ 3.51 1,494,743 $ 4.00
========= ======== ========= ========
At July 28, 2007, the aggregate intrinsic value of options outstanding and
options exercisable was $786 and $538, respectively. The intrinsic value is the
amount by which the market value of the underlying stock exceeds the exercise
price of the option at the measurement date for all-in-the money options.
F-17
Future compensation expense related to the vesting of employee options granted
by July 28, 2007 is expected to be $230 in 2008, $198 in 2009 and $37 in 2010.
Cash proceeds and intrinsic value related to total stock options exercised are
provided in the following table:
YEAR ENDED JULY 28, 2007 JULY 29, 2006 JULY 30, 2005
------------- ------------- -------------
Proceeds from stock options exercised $ 170 $ 238 $ 278
Intrinsic Value 57 137 367
An expense was recognized for the fair value of options granted to non-employees
in the amount of $39 in fiscal year 2005.
WARRANTS
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 sought damages in the amount of $1,250 together with 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. In July 2004, in settlement of
this matter, Del Global modified the exercise, or "strike," price of the
1,000,000 warrants issued in 2002 from $2.00 to $1.50 per share, and extended
the expiration date of such warrants by one year to March 28, 2009. During
fiscal 2007, 2006 and 2005, 366,854, 1,574 and 58,006, respectively, of these
warrants were exercised for cash proceeds to the Company of $551, $2 and $87,
respectively. As of July 28, 2007, 573,516 of these warrants were outstanding.
12. INCOME (LOSS) PER SHARE
FOR FISCAL YEARS ENDED
-----------------------------------------------
JULY 28, 2007 JULY 29, 2006 JULY 30, 2005
------------- ------------- -------------
Numerator:
Net income.......................................................... $ 3,816 $ 94 $ 392
Denominator:
Weighted average shares outstanding for basic income per share..... 16,154,552 11,244,421 10,490,178
Effect of dilutive securities...................................... 300,673 832,075 974,540
----------- ----------- -----------
Weighted average shares outstanding for diluted income per share... 16,455,225 12,076,496 11,464,718
=========== =========== ===========
Income per basic common share......................................... $ 0.24 $ 0.01 $ 0.04
=========== =========== ===========
Income per diluted common share....................................... $ 0.23 $ 0.01 $ 0.03
=========== =========== ===========
Common shares outstanding for the fiscal years ended July 28, 2007, July 29,
2006 and July 30, 2005, were reduced by 622,770 shares of treasury stock.
The computation of diluted shares outstanding does not include the effect of the
assumed exercise of 1,414,978, 1,180,389 and 545,622 for employee stock options
outstanding as of July 28, 2007, July 29, 2006 and July 30, 2005, respectively,
and 0, 474,113 and 428,919 warrants to purchase Company common stock for those
years because the effect of their assumed exercise would be anti-dilutive.
13. INCOME TAXES
The Company's consolidated income from continuing operations before income tax
benefit and minority interest for fiscal years 2007, 2006 and 2005 of $7,369,
$2,135 and $2,640 reflects foreign pre-tax net income of $8,180, $3,620, and
$3,842 for fiscal years 2007, 2006, and 2005, respectively and a U.S. pre-tax
loss of $811, $1,485 and $1,202, respectively.
F-18
Provision for income taxes consists of the following:
FOR FISCAL YEARS ENDED
---------------------------------------------
JULY 28, 2007 JULY 29, 2006 JULY 30, 2005
------------- ------------- -------------
CURRENT TAX EXPENSE:
Foreign ........................ $ 3,410 $ 1,739 $ 1,640
State and local ................ 5 35 42
DEFERRED PROVISION (BENEFIT):
Federal ........................ -- -- 101
State and local ................ -- -- --
Foreign ........................ 138 (16) 271
------- ------- -------
NET PROVISION ................... $ 3,553 $ 1,758 $ 2,054
======= ======= =======
The following is a reconciliation of the statutory Federal and effective income
tax rates:
FOR FISCAL YEARS ENDED
-----------------------------------------------
JULY 28, 2007 JULY 29, 2006 JULY 30, 2005
------------- ------------- -------------
Statutory Federal income tax rate ............................. 34.0% 34.0% 34.0%
State Tax, less Federal tax effect ............................ 0.1% 1.6% 6.2%
Foreign taxes ................................................. 9.2% 8.2% 72.4%
Valuation allowance adjustment ................................ (1.9)% (98.5)% (34.8)%
Provision for undistributed earnings of foreign subsidiary .... 7.2% 138.8% --
Other ......................................................... (0.4)% (1.7)% --
==== ==== -----
Effective tax rate ............................................ 48.2% 82.4% 77.8%
==== ==== ====
Deferred income tax assets (liabilities) are comprised of the following:
JULY 28, 2007 JULY 29, 2006
------------- -------------
Deferred income tax assets:
Federal net operating loss carry forward ............... $ 15,420 $ 15,603
State tax credits and operating loss carry forwards .... 2,223 639
Reserve for inventory obsolescence ..................... 1,417 1,203
Allowances and reserves not currently deductible ....... 933 1,043
Amortization ........................................... 197 439
Stock based compensation ............................... 430 315
Other .................................................. 55 --
-------- --------
Gross deferred income tax assets ..................... 20,675 19,242
Deferred income tax liabilities:
Undistributed earnings of foreign subsidiary ......... (2,278) (2,359)
Fixed assets ......................................... (383) (239)
Other ................................................. -- (85)
-------- --------
Gross deferred income tax liabilities ................. (2,661) (2,683)
Less: valuation allowance ................................ (17,295) (15,702)
-------- --------
Net deferred income tax assets ........................... $ 719 $ 857
======== ========
Deferred income tax assets and liabilities are recorded in the consolidated
balance sheets as follows:
JULY 28, 2007 JULY 29, 2006
------------- -------------
Deferred income tax assets - non-current ......... 1,011 $ 1,159
Deferred income tax liabilities -- non-current ... (292) (302)
------- -------
$ 719 $ 857
======= =======
DEFERRED INCOME TAX ASSET
The Company accounts for deferred income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," whereby it recognizes deferred income tax assets
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and liabilities for temporary differences between its financial reporting basis
and income tax reporting basis and for income tax net operating loss carry
forwards.
The Company periodically assesses the realization of its net deferred income tax
assets. This evaluation is primarily based upon current operating results in the
taxing jurisdiction and expectations of future operating results in the taxing
jurisdiction. A valuation allowance is recorded if the Company believes its net
deferred income tax assets will not be realized. The Company's assessment is
based on its expectation of the more likely than not result. Because the
Company's U.S. legal entities reported a loss in each of the fiscal years 2005,
2006 and 2007 and based on expectations of future results from the U.S. legal
entities, the Company continues to carry a 100% valuation allowance on its net
U.S. deferred tax asset.
At July 28, 2007, the Company has federal net operating loss carry forwards of
$45,350 that expire at various times between July, 2020 and July, 2025.
The Company recorded a tax provision with respect to its foreign subsidiary's
income in all periods presented and based on a more likely than not standard,
believes that the foreign subsidiary's net deferred tax asset will be realized.
The Company has also concluded that, given its history of receiving dividends
from its foreign subsidiary, Villa, it cannot assume that the income of Villa
will be permanently reinvested. As required by SFAS 109, the Company recorded a
deferred tax liability related to the undistributed earnings of Villa. However,
it can make no assurances that Villa will generate profits in the future or that
future dividends will be received.
In 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes. FIN 48 requires reporting of taxes based on tax positions which
meet a more likely than not standard and which are measured at their more likely
than not settlement. Currently, reporting of taxes is based on tax return
reporting positions, which do not require a more likely than not standard.
Differences between financial and tax reporting which do not meet this new
threshold are required to be recorded as unrecognized tax benefits. FIN 48 also
provides guidance on the presentation of tax obligations in the financial
statements and the recognition of potential IRS interest and penalties. FIN 48
is effective for the Company's 2008 fiscal year. The Company believes that FIN
48 will not have a material impact on its financial statements.
14. COMMITMENTS AND CONTINGENCIES
a. EMPLOYMENT MATTERS - The Company had an employment agreement with Samuel
Park, the previous Chief Executive Officer ("CEO"), for the period May 1, 2001
to April 30, 2004. The employment agreement provided for certain payments in the
event of a 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 $0.2 million during the first quarter of fiscal 2004 to accrue the
balance remaining under Mr. Park's employment agreement.
The Company's employment agreement with Mr. Park provided for payments upon
certain changes of control. The Company's Board of Directors elected at the
Company's Annual Meeting of Shareholders held on May 29, 2003, had reviewed the
"change of 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 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 of control payments. On November 17, 2003, the Company
filed a complaint in the United States District Court, Southern District of New
York, 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. Discovery in this matter was conducted and completed. Following
discovery, the Company and Mr. Park filed motions for summary judgment on the
issues related to change in control and the amendment to the employment
agreement, which motions have been fully submitted to the Court for
consideration. To date, no decision has been issued by the Court on these
motions. If Mr. Park prevails on his claims and the payments he seeks are
required to be 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
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such a claim is reasonably likely to result in a material decrease in the
Company's liquidity in the foreseeable future. The Company has not recorded an
accrual for any potential settlement of this claim as it has no basis upon which
to estimate either the outcome or amount of loss, if any.
On June 28, 2002, Jeffrey N. Moeller, the former Director of Quality
Assurance and Regulatory Affairs of Del Medical, commenced an action in the
Circuit Court of Cook County, Illinois, against the Company, Del Medical and
Walter Schneider, the former President of Del Medical. In the most current
iteration of this pleading, the third amended complaint, Mr. Moeller alleges
four claims against the defendants in the action: (1) retaliatory discharge from
employment with Del Medical, allegedly in response to Mr. Moeller's complaints
to officers of Del Medical about purported prebilling and his stopping shipment
of a product that allegedly did not meet regulatory standards, (2) defamation,
(3) intentional interference with his employment relationship with Del Medical
and prospective employers, and (4) to hold the Company liable for any misconduct
of Del Medical under a theory of piercing the corporate veil. By order dated
September 15, 2006, the Court denied in part and granted in part defendants'
motion requesting summary judgment dismissing the third amended complaint. The
Court granted the motion only to the extent of dismissing that part of Mr.
Moeller's claim of interference with his employment relationship with Del
Medical and his relationship with prospective employers, addressed to alleged
interference with his relationship with prospective employers. The parties
appeared for mediation in January 2007 but the mediation did not result in a
disposition of the action. Accordingly, it appears that the action will proceed
to trial. A status conference before the Court was held March 8, 2007, and
subsequently, a trial date had been scheduled for October 1, 2007. The trial
date has been postponed due to the unabailability of a witness for the
plaintiff. A trial date has been scheduled for January 28, 2008. The Company and
Del Medical intend to defend vigorously against Mr. Moeller's claims. Mr.
Moeller is seeking $2.37 million in damages consisting of alleged income loss,
including salary and benefits, and the present value of his alleged lost income
and benefits in the future after lump sum tax adjustments. The Company has
recorded an accrual of $0.1 million relating to potential liability in the
settlement of these claims.
b. OTHER LITIGATION MATTERS - On May 24, 2007, the Company's RFI subsidiary was
served with a subpoena to testify before a grand jury of the United States
District Court, Eastern District of New York and to provide items and records
from its Bay Shore, NY offices in connection with U.S. Department of Defense
contracts. A search warrant from the United States District Court, Eastern
District of New York was issued and executed with respect to such offices. The
Company believes that it is in full compliance with the quality standards that
its customers require and is fully cooperating with investigators to assist them
with their review. The Company's RFI subsidiary is continuing to ship products
to the U.S. Government as well as to its commercial customers.
In addition, the Company is a defendant in several other legal actions in
various US and foreign jurisdictions arising from normal course of business.
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
c. LEASE COMMITMENTS - The Company leases facilities for its manufacturing
operations with expiration dates ranging from 2007 through 2012. In addition,
the Company has various office equipment and auto leases accounted for as
operating leases. The future minimum annual lease commitments as of July 28,
2007 are as follows:
FISCAL YEARS AMOUNT
2008 .................................................... $329
2009 .................................................... 260
2010 .................................................... 95
2011-2012 ............................................... 75
----
Total ................................................. $759
====
Rent expense for fiscal years 2007, 2006 and 2005 was $396, $300 and $336,
respectively.
15. SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
YEAR ENDED JULY 28, 2007:
QUARTER
FIRST SECOND THIRD FOURTH
------------ ----------- ----------- ------------
Net sales ................................... $ 19,286 $ 26,771 $ 27,122 $ 30,988
Gross margin ................................ $ 4,011 $ 6,749 $ 6,025 $ 8,232
Income (loss) from continuing operations .... $ (487) $ 1,082 $ 1,056 $ 2,165
Discontinued operation ...................... $ -- $ -- $ -- $ --
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Net income (loss) ........................... $ (487) $ 1,082 $ 1,056 $ 2,165
Basic earnings per share:
Income (loss) from continuing operations .... $ (0.04) $ 0.09 $ 0.06 $ 0.09
Discontinued operation ...................... $ -- $ -- $ -- $ --
Net income (loss) per share ................. $ (0.04) $ 0.09 $ 0.06 $ 0.09
Diluted earnings per share:
Income (loss) from continuing operations .... $ (0.04) $ 0.09 $ 0.06 $ 0.09
Discontinued operation ...................... $ -- $ -- $ -- $ --
Net income (loss) per share ................. $ (0.04) $ 0.09 $ 0.06 $ 0.09
YEAR ENDED JULY 29, 2006
QUARTER
FIRST SECOND THIRD FOURTH
------------ ----------- ----------- ------------
Net sales ................................... $ 16,239 $ 21,994 $ 20,804 $ 23,977
Gross margin ................................ $ 3,735 $ 5,214 $ 4,502 $ 5,907
Income (loss) from continuing operations .... $ (483) $ (60) $ (73) $ 885
Discontinued operation ...................... $ -- $ -- $ -- $ (175)
Net income (loss) ........................... $ (483) $ (60) $ (73) $ 710
Basic earnings per share:
Income (loss) from continuing operations .... $ (0.05) $ (0.01) $ (0.01) $ 0.08
Discontinued operation ...................... $ -- $ -- $ -- $ (0.01)
Net income (loss) per share ................. $ (0.05) $ (0.01) $ (0.01) $ 0.07
Diluted earnings per share:
Income (loss) from continuing operations .... $ (0.05) $ (0.01) $ (0.01) $ 0.07
Discontinued operation ...................... $ -- $ -- $ -- $ (0.01)
Net income (loss) per share ................. $ (0.05) $ (0.01) $ (0.01) $ 0.06
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