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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarterly period ended April 30, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to____________
Commission File Number 0-3319
DEL GLOBAL TECHNOLOGIES CORP.
(Exact name of registrant as specified in its charter)
New York 13-1784308
- -------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Commerce Park, Valhalla, NY 10595
(Address of principal executive offices) (Zip Code)
914-686-3650
------------
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-25 of the Exchange Act) Yes / / No /X/
The number of shares of Registrant's common stock outstanding as of June 10,
2005 was 10,584,425.
1
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Part I. Financial Information: Page No.
--------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Operations for the Three 3
and Nine Months ended April 30, 2005 and May 1, 2004
Consolidated Balance Sheets - April 30, 2005 and July 31, 2004 4-5
Consolidated Statements of Cash Flows for the Nine Months Ended 6
April 30, 2005 and May 1, 2004
Notes to Consolidated Financial Statements 7-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-27
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 28
Item 4. Controls and Procedures 28
Part II. Other Information:
Item 1. Legal Proceedings 29-31
Item 6. Exhibits 32
Signatures 32
Certifications 33-38
2
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
Apr. 30, May 1, Apr. 30, May 1,
2005 2004 2005 2004
------- ------- ------ -------
NET SALES $18,892 $20,610 $64,259 $64,445
COST OF SALES 14,091 15,590 47,937 49,110
------- ------- ------- -------
GROSS MARGIN 4,801 5,020 16,322 15,335
------- ------- ------- -------
Selling, general and administrative 4,874 3,375 12,546 11,639
Research and development 446 413 1,268 1,144
Litigation settlement costs - - 300 3,199
-------- ------ ------- -------
Total operating expenses 5,320 3,788 14,114 15,982
------- ------- ------- -------
OPERATING INCOME (LOSS) (519) 1,232 2,208 (647)
Interest expense (297) (908) (978) (1,545)
Other income/(expense) 46 46 34 101
------- ----- ------- -------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAX
PROVISION AND MINORITY INTEREST (770) 370 1,264 (2,091)
Income tax provision 248 940 1,557 8,479
-------- ------ ------- -------
LOSS FROM CONTINUING
OPERATIONS BEFORE MINORITY INTEREST (1,018) (570) (293) (10,570)
Minority interest 13 139 322 485
------- ------ ------- -------
LOSS FROM CONTINUING
OPERATIONS (1,031) (709) (615) (11,055)
Discontinued operations - 420 199 (2,198)
-------- ------ ------- --------
NET LOSS $(1,031) $ (289) $ (416) $(13,253)
======== ======= ======= ========
INCOME(LOSS)PER COMMON SHARE-BASIC
Continuing operations $(0.10) $ (0.07) $ (0.06) $(1.07)
Discontinued operations - 0.04 0.02 (0.21)
------ ------ ----- -----
Net loss per basic share $(0.10) $ (0.03) $ (0.04) $(1.28)
======= ======= ===== ======
INCOME (LOSS) PER COMMON SHARE-DILUTED
Continuing operations $(0.10) $(0.07) $ (0.06) $(1.07)
Discontinued operations - 0.04 0.02 (0.21)
------- ------ ------ ------
Net loss per diluted share $(0.10) $(0.03) $ (0.04) $(1.28)
======= ====== ====== ======
Weighted average number of common
shares outstanding (in thousands):
Basic 10,517 10,333 10,449 10,333
Diluted 10,517 10,333 10,449 10,333
See notes to consolidated financial statements
3
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
ASSETS
April 30, July 31,
2005 2004
-------- --------
CURRENT ASSETS
Cash and cash equivalents $ 945 $ 4,755
Trade receivables (net of allowance
for doubtful accounts of $1,027 and $888
at April 30, 2005 and July 31, 2004,
respectively) 12,870 12,900
Inventory 14,598 15,122
Assets attributable to discontinued operations,
at net realizable value - 4,369
Prepaid expenses and other current
assets 1,002 1,068
------- --------
Total current assets 29,415 38,214
FIXED ASSETS - Net 6,604 6,907
DEFERRED INCOME TAX ASSET-NON CURRENT 1,302 1,102
GOODWILL 1,911 1,911
INTANGIBLES - Net 54 103
OTHER ASSETS 994 1,024
-------- ---------
TOTAL ASSETS $40,280 $49,261
======== =========
See notes to consolidated financial statements
4
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
April 30, July 31,
2005 2004
-------- --------
CURRENT LIABILITIES
Short-term credit facilities $ 3,600 $ 2,699
Current portion of long-term debt 799 730
Accounts payable - trade 8,620 10,926
Accrued liabilities 7,423 8,920
Liabilities attributable to
discontinued operations - 958
Litigation settlement reserves 66 5,148
Income taxes payable 1,336 1,069
-------- ---------
Total current liabilities 21,844 30,450
NON-CURRENT LIABILITIES
Long-term debt 4,672 5,076
Subordinated note 2,070 1,962
Other long-term liabilities 2,737 2,462
Other liabilities attributable to
discontinued operations - 147
------- ---------
Total liabilities 31,321 40,097
------- ---------
MINORITY INTEREST IN SUBSIDIARY 1,299 1,389
------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.10 par value;
Authorized 20,000,000 shares;
Issued - 11,206,958 and 10,978,581
at April 30, 2005 and July 31, 2004 1,120 1,098
Additional paid-in capital 64,355 64,072
Accumulated other comprehensive income 788 792
Accumulated deficit (53,057) (52,641)
Less common stock in treasury - 643,533
shares at April 30, 2005 and
July 31, 2004 (5,546) (5,546)
------------- --------------
Total shareholders' equity 7,660 7,775
------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 40,280 $ 49,261
======== ========
See notes to consolidated financial statements
5
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
Apr. 30, 2005 May 1, 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations $(615) $(11,055)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 977 1,533
Imputed interest - Subordinated note 107 133
Minority interest 322 485
Stock based compensation expense 29 31
Deferred income tax (123) 7,903
Impairment of intangible assets - 1,453
Loss on disposal of fixed assets 51 72
Litigation settlement provision 300 3,199
Changes in operating assets and liabilities:
Increase in trade receivables 604 137
Decrease in inventory 1,194 1,731
Decrease (increase) in prepaid expenses and
other current assets 95 (123)
Decrease (increase) in other assets 66 (247)
(Decrease) increase in accounts payable - trade (2,829) 3,866
(Decrease) increase in accrued liabilities (2,187) 114
Payment of litigation settlement costs (5,382) -
Increase in income taxes payable 170 525
Increase in other long-term liabilities 111 41
----------- -----------
Net cash(used in)provided by operating activities (7,110) 9,798
----------- -----------
Cash Flows from discontinued operations
and sale proceeds 3,463 (2,198)
CASH FLOWS FROM INVESTING ACTIVITIES: ----------- ----------
Fixed asset purchases (366) (345)
---------- --------
Net cash used in investing activities (366) (345)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing (repayment) of bank borrowings 174 (1,593)
Warrant exercise 44 -
Stock option exercise 231 -
Dividend to Villa minority shareholders (509) (505)
----------- ----------
Net cash used in financing activities (60) (2,098)
----------- ----------
EFFECT OF EXCHANGE RATE CHANGES 263 215
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,810) 5,372
CASH AND CASH EQUIVALENTS AT THE BEGINNING
OF THE PERIOD 4,755 1,381
----------- ---------
CASH AND CASH EQUIVALENTS AT THE END OF
THE PERIOD $ 945 $ 6,753
=========== =========
See notes to consolidated financial statements
6
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
(Unaudited)
1. DESCRIPTION OF THE BUSINESS
Del Global Technologies Corp, (the "Company") is primarily engaged in the
design, manufacture and marketing of cost-effective medical imaging and
diagnostic systems consisting of stationary and portable x-ray systems,
radiographic/fluoroscopic systems, dental imaging systems and proprietary
high-voltage power conversion subsystems for medical and other critical
industrial applications. Through its subsidiary RFI Corporation ("RFI"), the
Company 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year is based on a 52/53 week cycle ending on the Saturday
nearest to July 31. Results of the Company's Milan, Italy based Villa Sistemi
Medicali S.p.A. ("Villa") subsidiary are reported on a one-month lag.
BASIS OF PRESENTATION
The accompanying financial data as of April 30, 2005 and for the three months
and nine months ended April 30, 2005 and May 1, 2004 has been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of the results for the interim periods have
been included. Results of operations for the interim periods are not necessarily
indicative of the results that may be expected for the full year. These
consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Company's annual
report on Form 10-K filed with the Securities and Exchange Commission for the
year ended July 31, 2004.
As of July 31, 2004, the Company's Board had committed to a plan to dispose of
its Del High Voltage Division ("DHV") and on October 1, 2004, we sold this
division 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 reclassified to show this division as a discontinued
operation.
7
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's products are covered primarily by one year warranty plans and in some
cases optional extended warranties for up to five years are offered. The Company
establishes allowances for warranties as more fully described in the Product
Warranty footnote herein. The Company recognizes service revenue when repairs or
out of warranty repairs are completed. The Company has an FDA obligation to
continue to provide repair service for certain medical systems for up to seven
years past the warranty period, which are billed to the customers at market
rates.
EMPLOYEE STOCK OPTION PLANS
The Company accounts for stock-based awards to employees using the intrinsic
value method of accounting in accordance with Accounting Principles Board
Opinion No 25, "Accounting for Stock Issued to Employees". The Company's
practice in granting these awards to employees is to set the exercise price of
the stock options equal to the market price of our underlying stock on the date
of grant. Therefore under the intrinsic value method, no compensation expense is
recognized in the Company's Consolidated Statements of Operations.
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant dates for awards under those plans consistent
with the methods recommended by SFAS 123, the Company's net income or loss and
net income or loss per share for the three months and nine months ended April
30, 2005 and May 1, 2004 would have been stated at the pro forma amounts
indicated below:
Three Months Ended Nine Months Ended
------------------ -------------------
Apr. 30, May 1, Apr. 30, May 1,
2005 2004 2005 2004
-------- -------- --------- ---------
Net loss - as reported $(1,031) $ (289) $ (416) $(13,253)
Deduct: Total stock-based
awards determined under
fair value method (69) (114) (208) (342)
-------- -------- ------- ---------
Proforma Net loss $(1,100) $ (403) $ (624) $(13,595)
======== ======== ======== =========
Loss per share -
Basic
As reported $ (0.10) $(0.03) $(0.04) $(1.28)
Proforma $ (0.10) $(0.04) (0.06) (1.32)
Loss per share -
Diluted
As reported $ (0.10) $(0.03) $(0.04) $(1.28)
Proforma $ (0.10) $(0.04) (0.06) (1.32)
8
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 153, "Exchanges of Nonmonetary Assets", which eliminates the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. SFAS No. 153 will be effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The Company
does not believe the adoption of SFAS No. 153 will have a material impact on the
Company's financial statements.
In December 2004, the FASB issued FASB Statement No. 123 (R), "Share-Based
Payment," which establishes standards for transactions in which an entity
exchanges its equity instruments for goods and services. This standard requires
a public entity to 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. This eliminates the exception to account for such awards using the
intrinsic method previously allowed under APB Opinion No. 25. SFAS No. 123 (R)
will be effective for fiscal years beginning after June 15, 2005. The statement
does not require restatement of previously issued statements and can be applied
on a prospective basis. The Company is in the process of evaluating the impact
the adoption of this statement will have on its financial statements.
In November 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 151, "Inventory Costs, an amendment of ARB No.43, Chapter 4". This
Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage), requiring that those items be
recognized as current-period charges. In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. The provisions of this
statement are effective for fiscal years beginning after June 15, 2005, with
early application permitted. The Company is in the process of evaluating the
impact the adoption of this statement will have on its financial statements.
In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes and
Error Corrections a replacement of APB Opinion No. 20 and FASB Statement 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 also provides guidance
for determining whether retrospective application of a change in accounting
principle is impracticable and for reporting a change when retrospective
application is impracticable. The correction of an error in previously issued
financial statements is not an accounting change. However, the reporting of an
error correction involves adjustments to previously issued financial statements
similar to those generally applicable to reporting an accounting change
retrospectively. Therefore, the reporting of a correction of an error by
restating previously issued financial statements is also addressed by this
Statement. This Statement is effective for accounting changes made in fiscal
years beginning after December 15, 2005. The Company does not believe the
adoption of SFAS No. 154 will have a material impact on the Company's financial
statements or results of operations.
9
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 provides guidance
relating to the identification of and financial reporting for legal obligations
to perform an asset retirement activity. The Interpretation requires recognition
of a liability for the fair value of a conditional asset retirement obligation
when incurred if the liability's fair value can be reasonably estimated. FIN 47
also defines when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. The provision is
effective no later than the end of fiscal years ending after December 15, 2005.
The Company does not believe the adoption of FIN 47 will have a material impact
on the Company's financial statements or results of operations.
3. DISCONTINUED OPERATIONS
On October 1, 2004, the Company completed the sale of 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 discontinued operations in the accompanying
financial statements.
Certain information is summarized below:
Quarter Ended Nine Months Ended
Apr. 30, May 1, Apr. 30, May 1,
2005 2004 2005 2004
------ ------ ------ -------
Revenues $ - $3,985 $1,899 $11,922
Net income (loss) before income tax provision - 420 199 (2,198)
Income tax provision - - - -
Income (loss) from discontinued operations - 420 199 (2,198)
Income from discontinued operations, net for fiscal year 2005, includes two
months of operations through the October 1 2004 disposition date and a gain on
sale of the DHV assets of $21. Previously, in fiscal 2004, the Company recorded
an impairment charge of $3,481 to write down the DHV assets to net realizable
value during the fourth quarter and recorded charges to write off goodwill of
$1,328 and intangible assets of $125 related to the DHV business during the
second quarter.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the cost of acquisitions over the fair value
of the identifiable assets acquired and liabilities assumed. Other intangible
assets consist of the Company's distribution network. Intangibles are being
amortized on a straight-line basis over their estimated useful lives, which
range from 5 to 10 years. The components of our amortizable intangible assets
are as follows:
10
April 30, 2005 July 31, 2004
---------------- --------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amounts Amortization Amounts Amortization
Distribution
Network $ 653 S 599 $ 653 $ 550
------- ------- ------- -------
Total $ 653 $ 599 $ 653 $ 550
======= ======= ======= =======
Amortization expense for intangible assets for the three and nine months of
fiscal year 2005 was $17 and $49, respectively, and for fiscal year 2004 was $17
and $49, respectively. Estimated amortization expense for the remainder of 2005
and the five succeeding fiscal years is as follows:
2005 (remainder) $17
2006 37
2007-2009 None
There are no components of intangible assets that have an indefinite life.
There were no changes in goodwill balances during the fiscal year 2005.
5. INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market.
Inventories and their effect on cost of sales are determined by physical count
for annual reporting purposes and are evaluated using perpetual inventory
records for interim reporting periods. For certain subsidiaries during interim
periods we estimate the amount of labor and overhead costs related to finished
goods inventories. The estimation methodologies used for interim reporting
purposes are described in Management's Discussion and Analysis of Financial
Condition and Results of Operations under the subtitle "Critical Accounting
Policies".
April 30, 2005 July 31, 2004
----------------- ------------------
Raw materials and purchased parts $ 12,833 $ 10,839
Work-in-process 2,282 2,974
Finished goods 2,652 3,845
---------- ----------
17,767 17,658
Less allowance for obsolete and excess
inventory (3,169) (2,536)
----------- ----------
Total inventory $ 14,598 $ 15,122
=========== ==========
11
6. PRODUCT WARRANTIES
The Company's products are covered primarily by one-year warranty plans and in
some cases optional extended contracts may be offered covering products for
periods up to five years, depending upon the product and contractual terms of
sale. The Company establishes allowances for warranties on an aggregate basis
for specifically identified, as well as anticipated, warranty claims based on
contractual terms, product conditions and actual warranty experience by product
line.
During the third quarter and first nine months of fiscal 2005, the Company
incurred costs of $161 and $271, respectively, related to warranty claims
submitted, and accrued $90 and $372 related to product warranties issued during
the three and nine months of fiscal 2005, respectively. The liability related to
warranties is included in accrued expenses on the accompanying Consolidated
Balance Sheets and is $1,180 and $1,030 at April 30, 2005 and July 31, 2004,
respectively.
7. COMPREHENSIVE LOSS
Comprehensive loss for the Company includes foreign currency translation
adjustments and net loss reported in the Company's Consolidated Statements of
Operations.
Comprehensive loss for 2005 and 2004 was as follows:
Three Months Ended Nine Months Ended
Apr. 30, May 1, Apr. 30, May 1,
2005 2004 2005 2004
------- ------ ------ -----
Net loss $(1,031) $ (289) $ (416) $(13,253)
Foreign currency translation adjustments (337) (304) (4) 286
------- -------- ------ --------
Comprehensive loss $(1,368) $ (593) $ (420) $(12,967)
======= ======== ====== ========
8. LOSS PER SHARE
Three Months Ended Nine Months Ended
Apr. 30, May 1, Apr. 30, May 1,
2005 2004 2005 2004
------- ------- ------- -------
Numerator:
Net loss $(1,031) $ (289) $ (416) $(13,253)
======= ======== ====== ========
Denominator for basic loss per share -
Weighted average shares
outstanding 10,517,195 10,332,548 10,449,118 10,332,548
Effect of dilutive securities - - - -
---------- ---------- ---------- ----------
Denominator for diluted loss
per share 10,517,195 10,332,548 10,449,118 10,332,548
========== ========== ========== ==========
Loss per common share
Basic $(0.10) $ (0.03) $(0.04) $(1.28)
Diluted (0.10) (0.03) (0.04) (1.28)
Common shares outstanding for the current and prior period ended were reduced by
643,533 shares of treasury stock. The computation of diluted shares outstanding
at April 30, 2005, does not include 2,008,494 employee stock options and 991,994
warrants to purchase Company common stock since the effect of their assumed
conversion would be anti-dilutive. The computation of diluted shares outstanding
at May 1, 2004 does not include 2,129,681 employee stock options and 1,065,000
warrants to purchase Company common stock since the effect of their assumed
conversion would be anti-dilutive.
12
9. SEGMENT INFORMATION
The Company has three reportable segments: Medical Systems Group, Power
Conversion Group and Other. The "Other" segment includes unallocated corporate
costs. The results of the Power Conversion Group's DHV operation have been
reclassified to Discontinued Operations and are excluded from the Segment
Information presented below. Interim segment information is as follows:
Medical Power
For three months ended Systems Conversion
April 30, 2005 Group Group Other Total
- ----------------------- --------- -------- ------- -------
Net Sales to Unaffiliated Customers $15,380 $ 3,512 - $18,892
Cost of sales 11,937 2,154 - 14,091
------- -------- ------- -------
Gross margin 3,443 1,358 - 4,801
Operating expenses 3,058 661 1,601 5,320
------ ------- ------ ------
Operating income (loss) $ 385 $ 697 $(1,601) $ (519)
====== ======= ====== ======
Medical Power
For three months ended Systems Conversion
May 1, 2004 Group Group Other Total
- ----------------------- --------- -------- ------- -------
Net Sales to Unaffiliated Customers $17,417 $ 3,193 - $20,610
Cost of sales 13,346 2,244 - 15,590
------- -------- ------- -------
Gross margin 4,071 949 - 5,020
Operating expenses 2,482 606 $ 700 3,788
------ ------- ------ ------
Operating income (loss) $ 1,589 $ 343 $ (700) $ 1,232
====== ======= ====== ======
Medical Power
For nine months ended Systems Conversion
April 30, 2005 Group Group Other Total
- ----------------------- -------- ------- ------- -------
Net Sales to Unaffiliated Customers $53,661 $ 10,598 - $64,259
Cost of sales 40,852 7,085 - 47,937
------- -------- ------- ------
Gross margin 12,809 3,513 - 16,322
Operating expenses 8,357 1,810 3,647 13,814
Litigation Settlement Costs 300 - 300
------ ------- ------ ------
Operating income (loss) $4,452 $ 1,403 $(3,647) $2,208
====== ======= ====== ======
13
Medical Power
For nine months ended Systems Conversion
May 1, 2004 Group Group Other Total
- ----------------------- --------- --------- ------- --------
Net Sales to Unaffiliated Customers $54,952 $ 9,493 - $64,445
Cost of sales 41,890 7,220 - 49,110
------- -------- ------- -------
Gross margin 13,062 2,273 - 15,335
Operating expenses 8,588 1,669 $2,526 12,783
Litigation Settlement Costs - 3,199 - 3,199
------ ------- ------ -------
Operating income (loss) $ 4,474 $ (2,595) $(2,526) $ (647)
======= ======== ======= =======
10. INCOME TAXES
Our effective tax rate for the three and nine months ended April 30, 2005 was
significantly higher than our U.S. statutory tax rate. This is because we
generated taxable income at our Italian subsidiary Villa, which has an effective
rate of approximately 43%. However, we generated taxable losses in our U.S.
operations. We recorded no benefit on those losses, as management has determined
it is more likely than not the benefit will be unrealized. All domestic deferred
tax assets carry a 100% valuation allowance. The deferred tax asset recorded on
our consolidated balance sheet at April 30, 2005 relates to Villa. We continue
to project that it is more likely than not we will recover this deferred tax
asset through the generation of taxable income.
During fiscal year 2004, management updated each domestic business unit's
forecast and operating results, and concluded that it was prudent to record
additional valuation allowances, increasing the total valuation allowance to
100% of both long and short-term US domestic deferred tax assets. Accordingly,
the Company recorded a provision of $7,171 during the second quarter of fiscal
2004 related to the establishment of this valuation allowance.
11. CONTINGENCIES
US DEPARTMENT OF DEFENSE ("DOD") INVESTIGATION - On March 8, 2002, RFI
Corporation, a subsidiary of the Company and the remaining part of the Power
Conversion Group segment, was served with a subpoena by the US Attorney Eastern
District of New York in connection with an investigation by the DOD. RFI
supplies electro magnetic interference filters for communications and defense
applications. Since March 2002, the DOD has been investigating certain past
practices at RFI which date back more than six years and pertain to RFI's
Military Specification testing, record keeping and general operating procedures.
Management retained special counsel to represent the Company on this matter. The
Company has cooperated fully with this investigation, including voluntarily
providing employees to be interviewed by the Defense Criminal Investigative
Services division of the DOD.
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 financial impact. Accordingly, during
the third quarter of fiscal 2003, the Company recorded a charge of $2,347 which
represented its estimate of the low end of a range of potential fines and legal
and professional fees.
14
Following negotiations, the Company reached a global settlement in February 2004
with the US Government that resolves 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 $4,600 if paid by June 30, 2004 and $5,000 if paid by September
30, 2004.
In connection with this settlement, the Company recognized an additional charge
of approximately $3,199 in the second quarter of fiscal 2004. This charge
represented the difference between the $2,347 charge taken during the third
quarter of fiscal 2003, and the up to $5,000 in fines and restitution, plus
estimated legal and professional fees related to this settlement. The liability
associated with these charges is included in Litigation settlement reserves on
the July 31, 2004 balance sheet.
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 million representing fines and restitution. On October 7, 2004, RFI
entered a criminal 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 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 limitation 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.
STRATEGIC ALTERNATIVES - On March 21, 2005, the Company was notified by the
party with whom it signed a non-binding letter of intent for the sale of its
Medical Systems Group that the buyer was terminating negotiations under the
letter of intent. The letter of intent provided for a $1.0 million payment
payable in the event that no later than March 4, 2005, the buyer was ready,
willing and able to enter into a definitive purchase agreement based on the
terms of the letter of intent and containing reasonable and customary
representations, warranties, terms and conditions relating to the transaction,
and the Company elected not to enter into such purchase agreement. The party
with whom the Company signed the letter of intent filed a lawsuit on April 15,
2005 in the United States District Court, Southern District of New York, seeking
payment of the $1.0 million, plus interest, as well as reasonable attorney's
fees. The Company filed an answer to this lawsuit on June 8, 2005 contesting the
buyer's claim to these damages. Although there can be no assurance that the
Company will not have to pay the $1.0 million, the Company believes that no such
payment is payable under the terms of the letter of intent. The Company intends
to vigorously defend this lawsuit.
ERISA MATTERS - During the year ended July 28, 2001, management of the Company
concluded that violations of the Employee Retirement Income Security Act,
("ERISA") existed relating to a defined benefit plan for which accrual of
benefits had been frozen as of May 3, 1986. The violations related to excess
concentrations of the Common stock of the Company in the plan assets. In July
2001, management of the Company decided to terminate this plan, subject to
having available funds to finance the plan in accordance with rules and
regulations relating to terminating pension plans. The Company started the
process of terminating this plan in September 2004. At the time of settlement,
which is expected in the fourth quarter of fiscal 2005, the Company expects to
recognize a related charge of approximately $500, including a cash disbursement
of approximately $100.
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.
15
On October 10, 2003, the Company announced the appointment of Walter F.
Schneider as President and CEO to replace Mr. Park, effective as of such date.
As a result, the Company recorded a charge of $200 during the first quarter of
fiscal 2004 to accrue the balance remaining under Mr. Park's employment
agreement.
In addition, the Company's Board of Directors, elected at the Company's Annual
Meeting of Shareholders held on May 29, 2003, had previously reviewed the
"change in control" provisions regarding payments totaling up to approximately
$1,800 under the employment agreement between the Company and Mr. Park. As a
result of this review and based upon, among other things, the advice of special
counsel, the Company's Board of Directors determined that no obligation to pay
these amounts has been triggered. Prior to his departure from the Company on
October 10, 2003, Mr. Park orally informed the Company that, after reviewing the
matter with his counsel, he believes that the obligation to pay these amounts
has been triggered. On October 27, 2003, the Company received a letter from Mr.
Park's counsel demanding payment of certain sums and other consideration
pursuant to the Company's employment agreement with Mr. Park, including these
change in control payments. On November 17, 2003, the Company filed a complaint
against Mr. Park seeking a declaratory judgment that no change in control
payment was or is due to Mr. Park and that an amendment to the employment
contract with Mr. Park regarding advancement and reimbursement of legal fees is
invalid and unenforceable. 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. The Company and Mr. Park have 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. 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.
During the fourth quarter of fiscal 2004, the Company recorded $363 related to
potential change of control payments the Company may have been required to make
to a former executive. During fiscal 2005, a different member of the executive
management asserted a diminishment of duties claim under his change in control
agreement. Based on a settlement offer made by the Company to this executive,
the Company recorded a charge of approximately $480 during the second quarter of
Fiscal 2005. Such amounts are included in accrued liabilities in the
accompanying consolidated financial statements. On June 2, 2005, the Company
entered into a Separation and Release Agreement with this executive. Under such
Agreement, the Company paid this executive a $475 severance payment and an
additional $25 representing payment of certain legal fees and expenses such
executive incurred in connection with his separation from the Company.
OTHER LEGAL MATTERS -In addition, the Company is a defendant in several other
legal actions arising from the normal course of business in various US and
foreign jurisdictions. Management believes the Company has meritorious defenses
to such actions and that the outcomes will not be material to the Company's
consolidated financial statements.
17
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements are based on current
expectations and the current economic environment. We caution that these
statements are not guarantees of future performance. They involve a number of
risks and uncertainties that are difficult to predict including, but not limited
to, our ability to implement our business plan, retention of management,
changing industry and competitive conditions, obtaining anticipated operating
efficiencies, securing necessary capital facilities, favorable determinations in
various legal matters, and favorable general economic conditions. Actual results
could differ materially from those expressed or implied in the forward-looking
statements. Important assumptions and other important factors that could cause
actual results to differ materially from those in the forward-looking statements
are specified in the Company's filings with the Securities and Exchange
Commission including our Form 10-K for the fiscal year ended July 31, 2004.
OVERVIEW
The Company is primarily engaged in the design, manufacture and marketing of
cost-effective medical imaging and diagnostic systems consisting of stationary
and portable x-ray systems, radiographic/fluoroscopic systems, dental imaging
systems and proprietary high-voltage power conversion subsystems for medical and
other critical industrial applications. 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 "Segment Information" in Part I, Item 1
of this Quarterly Report on Form 10-Q for the fiscal quarter ended April 30,
2005 (this "Quarterly Report") for discussions of the Company's segments.
As of July 31, 2004, the Company's Board had committed to a plan to dispose of
the Del High Voltage Division ("DHV") and on October 1, 2004, we sold this
division for a purchase price of approximately $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.
The Company's domestic asset based revolving credit lending facility matures on
August 1, 2005. The Company is working with a replacement lender to refinance
this facility pursuant to a financing proposal that was signed on May 10, 2005.
There can be no assurance that the Company will be able to refinance the lending
facility before August 1,2005 on terms acceptable to the Company or at all. The
failure to refinance this lending facility would have a material adverse effect
on the Company.
18
CRITICAL ACCOUNTING POLICIES
Complete descriptions of significant accounting policies are outlined in Note 1
to the Consolidated Financial Statements of our Form 10-K for the fiscal year
ended July 31, 2004. Within these policies, we have identified the accounting
for deferred tax assets and the allowance for obsolete and excess inventory as
being critical accounting policies due to the significant amount of estimates
involved. In addition, for interim periods, we have identified the valuation of
finished goods inventory as being critical due to the amount of estimates
involved.
DEFERRED INCOME TAXES
We account for deferred income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," whereby we
recognize an asset related to our net operating loss carry forwards and other
temporary differences between financial reporting basis and income tax basis.
The valuation of our deferred tax assets and the recognition of tax benefits in
each period assumes future taxable income and profitability. We periodically
evaluate the likelihood of the recoverability of our deferred tax asset
recognized, based upon our actual operating results and expectations of future
operating profits.
During fiscal year 2004, as part of our customary six month planning and review
cycle, management updated each domestic business unit's forecast and operating
results, and concluded that it was prudent to record additional valuation
allowances, increasing the total valuation allowance to 100% of both long and
short-term US domestic deferred tax assets. The valuation allowance recorded is
the estimate of the amount of deferred tax assets that are more likely than not
to be unrealized by the Company.
During the first nine months of fiscal 2005 the Company recorded taxable income
on a consolidated basis and its individual domestic business units were
profitable. However, after factoring in approximately $4.0 million in
unallocated costs of the Other reporting segment which are considered domestic
costs for income tax purposes, the Company experienced a domestic taxable loss
during the period. Accordingly the Company has concluded that it should continue
to carry a 100% valuation allowance against domestic deferred tax assets and has
not recorded any income tax benefit for this domestic taxable loss during fiscal
2005.
We recorded a tax provision with respect to the income of Villa in all periods
presented and anticipate it is more likely than not the remaining deferred tax
asset which relates to our Villa subsidiary will be utilized against future
operating profits or as an offset to dividend income received from our Villa
subsidiary. However, we can make no assurances that our Villa subsidiary will
generate profits in the future.
OBSOLETE AND EXCESS INVENTORY
Another significant estimate is our allowance for obsolete and excess inventory.
We re-evaluate our allowance for obsolete inventory once a quarter, and this
allowance comprises the most significant portion of our inventory reserves. The
re-evaluation of reserves is based on a written policy, which requires at a
minimum that reserves be established based on our analysis of historical actual
usage on a part-by-part basis. In addition, if management learns of specific
obsolescence in addition to this minimum formula, these additional reserves will
be recognized as well. Specific obsolescence might arise due to a technological
or market change, or based on cancellation of an order. As we typically do not
purchase inventory substantially in advance of production requirements, we do
not expect cancellation of an order to be a material risk. However, market or
technology changes can occur.
19
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 April 30, 2005, finished goods represented approximately
14.9% of the gross carrying value of our total gross inventory. We believe the
estimation methodologies used to be appropriate and are consistently applied.
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated net sales of $18.9 million for the third quarter of fiscal 2005
decreased by $1.7 million or 8.3% from fiscal 2004 third quarter net sales of
$20.6 million, with increases at the Power Conversion Group offset by decreases
at the Medical Systems Group. The Medical Systems Group's third quarter fiscal
2005 sales of $15.4 million declined by $2.0 million or 11.7% from the prior
year's third quarter with decreases in shipments in both domestic and
international locations. Decreased shipments at international locations were due
to the strong Euro causing pricing for our international products to be less
attractive in non-Euro denominated markets. The Company is obtaining
international certifications for certain of its domestically manufactured
product in order to have US dollar based offerings in these non-Euro denominated
economies. The Power Conversion Group's third quarter fiscal 2005 sales of $3.5
million increased by $0.3 million or 10.0% from last year's levels reflecting
stronger government sales.
Consolidated net sales of $64.3 million for the first nine months of fiscal 2005
were in line with prior year's sales, with increases at the Power Conversion
Group offsetting a decrease in the Medical Systems Group. The Medical Systems
Group's sales for the first nine months of fiscal 2005 of $53.7 million
decreased $1.3 million or 2.3% from the prior year's first nine months, with
increases in shipments of digital units at domestic locations offsetting a
decrease in shipments at international locations. Decreased shipments at
international locations were due to the strong euro causing pricing for our
international products to be less attractive in non-Euro denominated markets.
The Company is obtaining international certifications for certain of its
domestically manufactured product in order to have US dollar based offerings in
these non-Euro denominated economies. The Power Conversion Group's sales for the
first nine months of fiscal 2005 of $10.6 million increased by $1.1 million or
11.6% from the prior years levels.
Consolidated backlog at April 30, 2005 was $16.6 million versus backlog at July
31, 2004 of approximately $25.9 million. The backlog in the Power Conversion
Group decreased $1.2 million from levels at beginning of the fiscal year while
there was an $8.0 million decrease in the backlog at our Medical Systems
Segment. Backlog in the Medical Systems Segment reflects declines due to
shipments of approximately $6.8 million under a large tender order at our
international location as well as a decrease in incoming order rates due to the
strong euro, partially offset by an increase in backlog at our domestic
operation due to strong bookings during the period. Substantially all of the
backlog should result in shipments within the next 12 months.
20
Gross margins as a percent of sales were 25.4% for the third quarter of fiscal
2005, compared to 24.4% in the third quarter of fiscal 2004. The Power
Conversion Group's gross margins for the third quarter of fiscal 2005 were
38.7%, versus 29.7% in the prior year quarter. Third quarter fiscal 2005 Power
Conversion group margins benefited from improvements in procurement, decreased
material costs as a percent of sales and lower waste levels. For the Medical
Systems Group, third quarter gross margins of 22.4% were slightly lower than the
23.4% level in the prior year third quarter due to unfavorable product mix.
Gross margins as a percent of sales were 25.4% for the first nine months of
fiscal 2005, compared to 23.8% in the first nine months of fiscal 2004. The
Power Conversion group margins benefited from improvements in procurement,
decreased material costs as a percent of sales and lower waste levels, which
contributed to a gross margin of 33.1% for the first nine months of fiscal 2005
as compared to 23.9% for the first nine months of fiscal 2004. For the Medical
Systems Group, gross margins of 23.9% were comparable to gross margins of 23.8%
in the prior year's first nine months.
Selling, General and Administrative expenses ("SG&A") for the third quarter
of fiscal 2005 were $4.9 million (25.8% of sales) compared to $3.4 million
(16.4% of sales) in the prior year's third quarter. The increase in SG&A in
the third quarter of fiscal 2005 reflects headcount reductions, offset by
increased corporate legal and accounting costs related to the strategic
alternatives program.
SG&A expenses for the first nine months of fiscal 2005 were $12.5 million
(19.5% of sales) compared to $11.6 million (18.1% of sales) in the prior year's
first nine months. The increase in SG&A for the first nine months of fiscal
2005 is due to increased corporate legal and professional costs related to the
strategic alternatives program, and a $0.5 million charge for an employment
settlement, partially offset by reduced selling expenses in the Medical Systems
Segment.
During the second quarter of fiscal 2004, we reached an agreement in principal
with the U.S. Government regarding a settlement of the civil and criminal
aspects of the previously disclosed Department of Defense ("DOD") investigation
of our RFI subsidiary (See Part II, Item 1, "Legal Proceedings" of this
Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2005 (this
"Quarterly Report")). The settlement included the Company pleading guilty to one
criminal count and agreeing to pay fines and restitution to the US Government of
$5.0 million.
In connection with this settlement, the Company recognized an additional charge
for litigation settlement costs of approximately $3.2 million in the second
quarter of fiscal 2004. This charge represented the difference between the $2.3
million charge taken during the third quarter of fiscal 2003, and the up to $5.0
million in fines and restitution, plus estimated legal and professional fees,
related to this settlement. The fine was paid during the first quarter of fiscal
2005, subject to Court approval. At the sentencing, which occurred on March 15,
2005 the Court imposed an additional fine of $0.3 million related to this
matter. Accordingly, the Company has recorded an additional charge for
Litigation settlement costs of $0.3 million in the second quarter of fiscal
2005.
21
As a result of the foregoing, we recognized a third quarter fiscal 2005
operating loss of $0.5 million compared to operating income of $1.2 million in
the third quarter of fiscal 2004. The Medical Systems Group posted a third
quarter fiscal 2005 operating profit of $0.4 million and the Power Conversion
Group had operating profit of $0.7 million, offset by unallocated corporate
costs of $1.6 million.
For the first nine months of fiscal 2005, we recognized operating income of $2.2
million compared to an operating loss of $0.6 million in the first nine months
of fiscal 2004. The Medical Systems Group had an operating profit of $4.5
million for the first nine months of fiscal 2005 and the Power Conversion Group
achieved an operating profit of $1.4 million, partly offset by unallocated
corporate costs of $3.7 million.
During the third quarter of fiscal 2004, we incurred $0.6 million in fees
related to a revolving credit loan amendment. Interest expense for the third
quarter of fiscal 2005 was lower than the prior year's third quarter due to
decreased borrowings and lower interest rates and the absence of these fees.
Interest expense for the first nine months of fiscal 2005 was lower than the
prior year for the same period for the same reasons.
The Company has not provided for a U.S. domestic income tax benefit in the third
quarter or first nine months of fiscal 2005 because it continues to maintain a
full valuation allowance relative to its deferred tax assets as discussed in
Critical Accounting Policies, above. With the exception of tax provisions and
adjustments recorded at Villa Sistemi Medicali, S.p.A., our Italian subsidiary
("Villa"), we recorded no adjustments to our current or net deferred tax
accounts during the third quarter or first nine months of fiscal 2005.
Management periodically evaluates the likelihood of the recoverability of the
deferred tax asset recognized on our balance sheet. Based on management
analysis, we believe it is more likely than not that the remaining deferred tax
assets, which relate to our foreign subsidiary will be realized.
Provision for income taxes for the three and nine month period ended May 1, 2004
reflects the establishment of a $7.2 million deferred tax valuation allowance as
discussed in Critical Accounting Policies, above.
As discussed above, Discontinued Operations are related to our DHV division,
which was sold on October 1, 2004. Discontinued operations in the first quarter
of fiscal 2005 reflect the operations of the DHV division through the date of
sale, which recorded income from operations of $0.2 million during the first
quarter of fiscal 2005. The prior year had income from operations of $0.4
million for the third quarter and loss from operations of $2.2 million for the
first nine months.
Reflecting the above, we recorded net loss of $1.0 million or $0.10 per share
basic and diluted in the third quarter of fiscal 2005, as compared to a net loss
of $0.3 million, or $0.03 per share(basic and diluted), during the third quarter
of fiscal 2004. We recorded a net loss of $0.4 million or $0.04 per share basic
and diluted in the first nine months of fiscal 2005, as compared to a net loss
of $13.3 million, or $1.28 per share (basic and diluted) during the first nine
months of fiscal 2004.
22
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
We fund our investing and working capital needs through a combination of cash
flow from operations and short-term credit facilities.
Working Capital -- At April 30, 2005 and July 31, 2004, our working capital was
approximately $7.6 million and $7.8 million, respectively. At such dates, we had
approximately $0.9 million and $4.8 million, respectively, in cash and cash
equivalents, the majority of which is at our Villa subsidiary in Italy. As of
April 30, 2005, we had approximately $0.9 million of excess borrowing
availability under our domestic revolving credit facility compared to $5.8
million at July 31, 2004, reflecting the payment of a $5.0 million fine to the
DOD in September 2004.
In addition, as of April 30, 2005 and July 31, 2004, our Villa subsidiary had an
aggregate of approximately $8.1 and $7.5 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 nine month period ended April 30,
2005, the Company used approximately $7.1 million of cash for operations,
compared to a generation of $9.8 million in the corresponding prior fiscal year
period. Contributing to cash usage in fiscal 2005 was the payment of a total of
$5.3 million in fines related to the DOD investigation as explained in "Legal
Proceedings" in Part II, Item 1 of this Quarterly Report.
Cash Flows from Investing Activities -- we have made approximately $0.4 million
in facility improvements and capital equipment expenditures for the nine months
ended April 30, 2005 compared to $0.3 million for the comparable prior fiscal
year period.
Cash Flows from Financing Activities -- During the nine month period ended April
30, 2005, we borrowed a total of approximately $0.2 million on our domestic and
Italian credit facilities. In addition, the Villa subsidiary paid a dividend of
approximately $2.5 million, of which $0.5 million was paid to Villa's minority
shareholders. The remaining $1.9 million, net of withholding taxes, was an
intercompany transaction with the Company and therefore eliminated in the
accompanying consolidated financial statements.
The following table summarizes our contractual obligations, including debt and
operating leases at July 31, 2004 (in thousands):
WITHIN 2-3 4-5 AFTER 5
OBLIGATIONS TOTAL (1) 1 YEAR YEARS YEARS YEARS
- ------------------------------------------- -----------------------------------------------
Long-Term Debt Obligations....................$ 2,733 $ 564 $1,155 $ 568 $ 446
Capital Lease Obligations .................... 3,073 368 897 994 814
Subordinated Note ............................ 2,000 -- 2,000 -- --
Operating Lease Obligations .................. 953 514 421 18 --
---------- ------ ------ ------ ------
Total Contractual Cash Obligations............$ 8,759 $1,446 $4,473 $1,580 $1,260
=========== ====== ====== ====== ======
(1) In addition to the long term obligations above, as of July 31, 2004 we had
approximately $2.7 million in revolving credit debt in the US and $0.3
million in Italy. The Italian credit facilities are generally renewed on a
yearly basis and the GECC Facility (as hereinafter defined), as amended,
matures in August 2005. The maturity of the GECC Facility is subject to
acceleration upon certain events of default as defined in the credit
agreement, including uncured covenant defaults. The maturity is also
subject to acceleration in the event of the consummation of the sale of
the Medical Systems Group, or the remainder of the Power Conversion Group.
23
Credit Facility and Borrowing -- The Company has a $5 million senior revolving
credit agreement, as amended, entered into on June 10, 2002 with Transamerica
Corporation (the "GECC Facility"). In January 2004, GE Business Capital
Corporation ("GECC") completed the acquisition of Transamerica Corporation and
assumed the ownership and administration of our US credit facility. This
facility, as amended, expires on the earlier of August 1, 2005 or the sale of
substantially all of the assets or stock of RFI or the Medical Systems Group
Segment. Interest under the GECC Facility is based on thirty day commercial
paper rates plus a margin of 3.5%. The interest rate on the GECC Facility was
4.75% at April 30, 2005 and 5.0% at July 31, 2004. The GECC Facility is subject
to commitment fees of 3/8% on the daily unused portion payable monthly. Under
terms of the GECC Facility, interest is calculated based on the higher of the
actual balance, or a floor revolving credit balance of $5 million. The GECC
Facility is secured by substantially all of the Company's accounts receivable,
inventory, and fixed assets in the US. The terms of the GECC Facility require
the Company to comply with various operational and financial covenants, and to
place limitations on the Company's ability to make capital expenditures and to
pay dividends. The Company was in compliance with these various covenants, with
the exception of the fixed charge coverage ratio during the third quarter of
fiscal 2005. On June 9, 2005 the Company and GECC signed the Ninth Amendment to
the GECC Facility. This Ninth Amendment waived the event of default arising from
the Company's non-compliance with the fixed charge coverage ratio covenant. In
addition the Ninth Amendment lowered the minimum availability covenant under the
line from $500,000 to $250,000. The Company intends to refinance the GECC
Facility and any related debt before the August 1, 2005 expiration. No assurance
can be given that the Company will be able to refinance the GECC Facility on
terms acceptable to the Company or at all. The failure to refinance the GECC
Facility would have a material adverse effect on the Company.
On October 25, 2004, the Company signed a Sixth Amendment to the GECC Facility.
This Sixth Amendment: (i) extended the maturity of the credit facility to the
earlier of (a) August 1, 2005 or (b) the sale of substantially all of the assets
or stock of RFI or the Medical Systems Group segment, (ii) reduced the maximum
formula based borrowing cap from $10 million to $5 million (iii) accelerated the
payment of the $0.5 million Performance Fee immediately upon signing as a charge
against the credit facility, (iv) provided for a $50,000 extension fee payable
immediately as a charge against the facility and (v) provided for an additional
fee of $10,000 per month for each month the credit facility remains outstanding
subsequent to December 2004.
On February 2, 2005, the Company signed a Seventh Amendment to the GECC
Facility. This Seventh Amendment: (i) gave a consent for the use of up to $0.6
million loan proceeds for settlement of certain employment matters, (ii) reduced
the inventory borrowing sub limit under the availability formula to $2.5
million, and (iii) extended the expiry of the Company's fixed charge ratio
covenant through the August 1, 2005 maturity of the GECC Facility.
On April 5, 2005 the Company signed an Eighth Amendment to the GECC Facility.
This Eighth Amendment: (1) permitted the Borrowers to use up to $300,000 of the
proceeds of the GECC Facility to pay additional amounts owing by RFI to the DOD
in connection with the settlement of the investigation conducted by the
Department of Defense with respect to RFI and (ii) provided that in no event
shall the aggregate amount of loans and letters of credit outstanding at any
time under the GECC Facility (x) in respect of Eligible Inventory exceed
$2,000,000 or (y) exceed the Maximum Amount of the GECC Facility.
24
Our Villa subsidiary is a party to various short-term credit facilities with
interest rates ranging from 6% to 14%. These facilities generally renew on a
yearly basis and include overdraft, receivables and import export financing
facilities. In addition, Villa is a party to various medium-term commercial and
Italian Government long-term loans. Medium term facilities have interest rates
ranging from 3% to 6%, with principal payable semi-annually through maturity in
March 2007, and interest payable quarterly. The Government long-term facilities
have an interest rate of 3.4% with principal payable annually through September
2010. Villa's manufacturing facility is subject to a capital lease obligation
which matures in 2011 with an option to purchase. Villa is in compliance with
all related financial covenants under these short and long-term financings.
As of May 1, 2004, the Company has a frozen defined benefit plan that was
under-funded. In accordance with SFAS No. 88, at the time of final settlement of
the pension plan, the Company will recognize an expense to recognize its
under-funded status. 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. At time of settlement, which is expected in the fourth
quarter of fiscal 2005, the Company expects to recognize a related charge of
approximately $0.5 million. In preparation for the plan termination, the Company
transferred $0.1 million to the pension account in April 2005. This transfer,
including cash already on hand in this account, has fully funded the expected
cash disbursement of $0.2 million due at time of final settlement.
As described in Part II, Item I, Legal Proceedings of this Quarterly Report, 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. Since March 2002, the DOD has been investigating certain
past practices at RFI which date back more than six years and pertain to RFI's
Military Specification testing, record keeping and general operating procedures.
Management retained special counsel to represent the Company on this matter. The
Company has cooperated fully with this investigation, including voluntarily
providing employees to be interviewed by the Defense Criminal Investigative
Services division of the DOD.
In June 2003, the Company was advised that the US Government was willing to
enter into negotiations regarding a comprehensive settlement of this
investigation. Prior to the preliminary discussions with the US Government in
June 2003, the Company had no basis to estimate the financial impact of this
investigation. Based on preliminary settlement discussions with the US
Government, discussions with the Company's advisors, consideration of
settlements reached by other parties in investigations of this nature, and
consideration of the Company's capital resources, management then developed an
estimate of the low end of the potential range of the financial impact.
Accordingly, during the third quarter of fiscal 2003, the Company recorded a
charge of $2.3 million, which represented its estimate of the low end of a range
of potential fines and legal and professional fees.
25
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 the up to $5.0 million in fines and restitution,
plus estimated legal and professional fees related to this settlement. The
liability associated with these charges is included in Litigation settlement
reserves on the accompanying balance sheet.
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 million representing fines and restitution. On October 7, 2004, RFI
entered a criminal 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 Defense Logistics Agency, 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.
The Company funded the $5 million paid pursuant to this settlement by a
combination of $2 million in borrowings under its GECC Facility and the receipt
of a combination of dividends, return of intercompany amounts and a $0.6 million
intercompany advance from the Company's Villa subsidiary, totaling $3.0 million.
The Company's Board of Directors, elected at the Company's Annual Meeting of
Shareholders held on May 29, 2003, has reviewed the "change in control"
provisions regarding payments totaling up to approximately $1.8 million under
the employment agreement between the Company and its former Chief Executive
Officer, Samuel Park. As a result of this review and based upon, among other
things, the advice of special counsel, the Company's Board of Directors has
determined that no obligation to pay these amounts has been triggered. Prior to
his departure from the Company on October 10, 2003, Mr. Park orally informed the
Company that, after reviewing the matter with his counsel, he believed that the
obligation to pay these amounts has been triggered. On October 27, 2003, the
Company received a letter from Mr. Park's counsel demanding payment of certain
sums and other consideration pursuant to the Company's employment agreement with
Mr. Park, including these change of control payments. On November 17, 2003, the
Company filed a complaint against Mr. Park seeking a declaratory judgment that
no change in control payment was or is due to Mr. Park, and that an amendment to
the employment contract with Mr. Park regarding advancement and reimbursement of
legal fees is invalid and unenforceable. Mr. Park answered the complaint and
27
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. The Company and Mr. Park have filed motions for summary judgment
on the issues related to the change in control and the amendment to the
employment agreement, which motions have been fully submitted to the court for
consideration. 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.
During the fourth quarter of fiscal 2004, the Company recorded $0.4 million
related to potential change of control payments the Company may have been
required to make to a former executive. During fiscal 2005, a different member
of the executive management asserted a diminishment of duties claim under his
change in control agreement. Based on a settlement offer made by the Company to
this executive, the Company recorded a charge of approximately $0.5 million
during the second quarter of Fiscal 2005. Such amounts are included in accrued
liabilities in the accompanying consolidated financial statements. On June 2,
2005, the Company entered into a Separation and Release Agreement with this
executive. Under such Agreement, the Company paid this executive approximately
$0.5 million, representing a severance payment and certain legal fees and
expenses such executive incurred in connection with his separation from the
Company.
On October 1, 2004, the Company completed the sale of its DHV division for $3.1
million plus the assumption of $0.8 million of liabilities as described more
fully in the Notes to the Consolidated Financial Statements included in Part I,
Item I of this Quarterly Report.
On March 21, 2005, the Company was notified by the party with whom it signed a
non-binding letter of intent for the sale of its Medical Systems Group that the
buyer was terminating negotiations under the letter of intent. The letter of
intent provided for a $1.0 million payment payable in the event that no later
than March 4, 2005, (i) the buyer was ready, willing and able to enter into a
definitive purchase agreement based on the terms of the letter of intent and
containing reasonable and customary representations, warranties, terms and
conditions relating to the transaction, and (ii) the Company elected not to
enter into such purchase agreement. The party with whom the Company signed the
letter of intent filed a lawsuit on April 15, 2005 in the United States District
Court, Southern District of New York, seeking payment of the $1.0 million, plus
interest, as well as reasonable attorney's fees. The Company filed an answer to
this lawsuit on June 8, 2005 contesting the buyer's claim to these damages.
Although there can be no assurance that the Company will not have to pay the
$1.0 million, the Company believes that no such payment is payable under the
terms of the letter of intent. The Company intends to vigorously defend this
lawsuit.
28
The Company has or had no investments in unconsolidated variable interest
entities or other off balance sheet arrangements during any of the periods
presented in this Quarterly Report.
We anticipate that cash generated from operations and amounts available from
credit facilities will be sufficient to satisfy currently projected operating
cash needs for at least the next twelve months, and for the foreseeable future.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not ordinarily hold market risk sensitive instruments for trading
purposes. We do, however, recognize market risk from interest rate and foreign
currency exchange exposure. There have been no changes in financial market risk
as originally discussed in the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 2004.
ITEM 4 CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of the Company's
management, including Walter F. Schneider, Chief Executive Officer and Mark A.
Koch, Principal Accounting 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 Quarterly Report on Form 10-Q. Based upon that evaluation, the Chief
Executive Officer and Principal Accounting Officer have concluded that the
Company's disclosure controls and procedures were effective as of the end of the
period covered by this Quarterly Report on Form 10-Q to provide reasonable
assurance that information required to be disclosed by the Company in reports
that it files or submits under the Securities Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms.
In the ordinary course of business, the Company routinely enhances its
information systems by either upgrading its current systems or implementing new
systems. There were no changes in the Company's internal controls or in other
factors that could significantly affect these controls, during the Company's
third fiscal quarter ended April 30, 2005, that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute assurance that the objectives of the control system are
met. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within a company have been detected.
29
PART II - OTHER INFORMATION
ITEM 1. 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. Since March 2002, the DOD has been
investigating certain past practices at RFI which date back more than six years
and pertain to RFI's Military Specification testing, record keeping and general
operating procedures. Management retained special counsel to represent the
Company on this matter. The Company has cooperated fully with this
investigation, including voluntarily providing employees to be interviewed by
the Defense Criminal Investigative Services division of the DOD.
In June 2003, the Company was advised that the US Government was willing to
enter into negotiations regarding a comprehensive settlement of this
investigation. Prior to the preliminary discussions with the US Government in
June 2003, the Company had no basis to estimate the financial impact of this
investigation. Based on preliminary settlement discussions with the US
Government, discussions with the Company's advisors, consideration of
settlements reached by other parties in investigations of this nature, and
consideration of the Company's capital resources, management then developed an
estimate of the low end of the potential range of the financial impact.
Accordingly, during the third quarter of fiscal 2003, the Company recorded a
charge of $2.3 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 resolves 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 the up to $5.0 million in fines and restitution,
plus estimated legal and professional fees related to this settlement. The
liability associated with these charges is included in Litigation settlement
reserves on the accompanying balance sheet.
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 million representing fines and restitution. On October 7, 2004, RFI
entered a criminal 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 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.
30
On April 5, 2005, the Company announced that it had reached an administrative
agreement with the DLA, a component of the DOD, 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.
STRATEGIC ALTERNATIVES - On March 21, 2005, the Company was notified by Palladio
Corporate Finance S.p.A. and Palladio Finaziaria S.p.A. (collectively,
"Palladio"), the party with whom it signed a non-binding letter of intent for
the sale of its Medical Systems Group, that Palladio was terminating
negotiations under the letter of intent. The letter of intent provided for a
$1.0 million payment payable in the event that no later than March 4, 2005, (i)
the buyer was ready, willing and able to enter into a definitive purchase
agreement based on the terms of the letter of intent and containing reasonable
and customary representations, warranties, terms and conditions relating to the
transaction, and (ii) the Company elected not to enter into such purchase
agreement. Palladio filed a lawsuit against the Company and its Del Medical
Imaging Corp subsidiary on April 15, 2005 in the United States District Court,
Southern District of New York. The lawsuit seeks payment of the $1.0 million,
plus interest, as well as reasonable attorney's fees. The Company filed an
Answer to this lawsuit on June 8, 2005. Although there can be no assurance that
the Company will not have to pay the $1.0 million, the Company believes that no
such payment is payable under the terms of the letter of intent. The Company
intends to vigorously defend this lawsuit.
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.
In addition, the Company's Board of Directors, elected at the Company's Annual
Meeting of Shareholders held on May 29, 2003, had previously reviewed the
"change 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 determined that no obligation
to pay these amounts has been triggered. Prior to his departure from the Company
on October 10, 2003, Mr. Park orally informed the Company that, after reviewing
the matter with his counsel, he believes that the obligation to pay these
amounts has been triggered. On October 27, 2003, the Company received a letter
from Mr. Park's counsel demanding payment of certain sums and other
consideration pursuant to the Company's employment agreement with Mr. Park,
including these change 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
31
"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. The Company and Mr. Park have filed motions for summary judgment
on the issues related to the change in control and the amendment to the
employment agreement, which motions have been fully submitted to the court for
consideration. 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.
During fiscal 2004, an Italian subsidiary of the Company began employment
termination proceedings against an executive. Subsequently, the executive
instituted legal proceedings in the labor court in Italy against the executive's
former employer asserting certain monetary claims based on change in control
provisions in a letter dated January 10, 2003 to the executive. The court issued
a "pay or justify" order directing the Company's subsidiary to pay damages of
about euro 306,000, plus interest and costs. The subsidiary has challenged this
order in the Italian labor court. Subsequently, the executive served a writ of
summons on the Company as a third party claim against the Company in the
litigation pending with the subsidiary. The next hearing date in the Italian
labor court on this action is scheduled for October 28, 2005. In addition, the
executive has brought an action in the Italian labor court for unlawful
dismissal under the Italian labor laws against the Company's subsidiary. The
subsidiary entered an appearance and filed a counterclaim. In addition, the
executive has brought an action in the Italian corporate courts challenging the
subsidiary's removal of the executive as managing director. The executive has
not specified any damages in this action and it is in the preliminary stage. The
Company believes that the executive's change in control provision has not been
triggered and that the executive's termination was justified. However, based on
the court's "pay or justify" order to pay euro 300,000, the Company recorded a
charge in fiscal year 2004 of approximately $0.4 million in connection with this
matter and which charge is included in Litigation Settlement reserves in the
accompanying financial statements.
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.
32
ITEM 6. EXHIBITS
Exhibits
31.1* Certification of Chief Executive Officer, Walter F. Schneider,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Principal Accounting Officer, Mark Koch,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of the Chief Executive Officer, Walter F.
Schneider, pursuant to 18 U.S.C. Section 1350 adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of the Principal Accounting Officer, Mark Koch,
pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DEL GLOBAL TECHNOLOGIES CORP.
Dated: June 14, 2005 /s/ Walter F. Schneider
-----------------------
Walter F. Schneider
Chief Executive Officer
and President
Dated: June 14, 2005 /s/ Mark Koch
-----------------------
Mark Koch
Principal Accounting Officer
and Treasurer
33