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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended August 3, 2002

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
 incorporation or organization)
(I.R.S. Employer Identification No.)

One Commerce Park, Valhalla, NY 10595
(Address of Principal Executive Offices with Zip Code)

Registrant’s telephone number, including area code (914) 686-3600

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, $.10 par value
(“Common Stock”)

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 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 the Form 10-K. [ ]

State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such common equity, as of a specified date within 60 days prior to the date of filing. (See definition of affiliate in Rule 405, 17 CFR 230.405).

The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant as of November 11, 2002, was $19,792,873.

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.

As of November 11, 2002, there were 10,347,515 shares of the Registrant’s Common Stock outstanding.

PART I

ITEM 1.    BUSINESS

Del Global Technologies Corp., a New York Corporation, was incorporated in 1954. Unless otherwise specifically indicated, “Del,” 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 imaging equipment and power conversion subsystems and components worldwide. Our products include stationary and portable medical diagnostic imaging equipment; high voltage power systems; and electronic systems and components such as electronic filters, transformers and capacitors.

We historically have grown internally and through acquisitions. Most recently, in December 1999, we acquired an 80% ownership of Villa Sistemi Medicali S.p.A for total consideration of approximately $520,000, including closing costs.

OPERATING SEGMENTS

Operating businesses that we report as segments include our Del Medical Systems Group and Del Power Conversion Group. For the fiscal year ended August 3, 2002, (“fiscal year 2002”), the Medical Systems Group segment accounted for approximately 56% of our revenues and the Power Conversion Group segment represents approximately 44% of our revenues. For further information concerning our operating segments, see Note 6 in the Notes to our Consolidated Financial Statements. Our operating segments and businesses are summarized in the following table:

Division Recognized Brands Subsidiaries Facilities
       
Medical Systems Group:      
       
Medical Imaging Del Medical, Villa,
UNIVERSAL, DynaRad		 Del Medical Imaging Corp. Franklin Park, IL
       
    Villa Sistemi Medicali S.p.A.
(80% owned)		 Milan, Italy
Power Conversion Group:      
       
High Voltage Power Del High Voltage, Bertan
High Voltage, DynaRad		  Bertan High Voltage Corp. Valhalla, NY
Hicksville, NY
      (Until 2003)
       
    DynaRad Corporation*  
       
Electronic Systems
& Components		 RFI, Filtron, Sprague,
Stanley 		RFI Corporation Bayshore, NY

*

 Product lines previously manufactured and sold by DynaRad Corporation have been moved to other divisions within the Power Conversion Group and the Medical Systems Group. Accordingly, we are in the process of liquidating this subsidiary.

1

MEDICAL SYSTEMS GROUP

The Medical Systems Group designs, manufactures, markets and sells medical imaging and diagnostic systems consisting of stationary and portable imaging systems, radiographic/ fluoroscopic systems, dental imaging systems and mammography systems. Approximately 55% of this segment’s revenues are attributed to Villa Sistemi Medicali S.p.A., our Italian subsidiary.

Medical imaging systems of the types we manufacture use x-ray technology to produce images of matter beneath an opaque surface. An imaging system principally consists of a high voltage power supply, an x-ray tube and an image recording system, which is usually film. X-rays are generated as a result of high voltage being applied to the x-ray tube. 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 film. X-rays, which are not reflected by opaque surfaces, pass through the object and expose the film. 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 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 imaging and diagnostic systems worldwide in the following markets:

 

Del Medical Systems Group Markets Served

Medical Imaging Division
  Hospitals Veterinary Clinics
  Teaching Institutions Chiropractic Clinics
  Medical Clinics Dental Offices
  Private Practitioners Military
  National Buying Groups Home Health Care Providers

Our medical imaging systems are sold under the Del, Villa, UNIVERSAL, and DynaRad brand names. The prices of our medical imaging systems range from approximately $9,000 to $150,000 per unit, depending on the complexity and flexibility of the system. The following is a description of our product lines in this segment:

General Radiographic System–For more than 100 years, conventional projection radiography has used film to capture 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 represented approximately 55% of the Medical Systems Group’s revenues in fiscal year 2002. 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 high-end priced RadView system is designed to meet the broad requirements of a hospital or teaching university’s radiographic room, while our mid-range priced Del Medical and Villa Medical systems are suited more to the needs of smaller hospitals, outpatient clinics and private practitioners.

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We also have a broad range of products serving medical practitioners, veterinarians and chiropractors through our well recognized UNIVERSAL brand product line. These units are designed for durability, are space efficient, rugged and are priced more economically. The UNIVERSAL medical products include a variety of configurations that can be constructed to best suit the needs of the desired work environment. The UNIVERSAL VetTek veterinary line of products are designed with many of the same attributes as the medical line. UNIVERSAL’s chiropractic line, ChiroEZ and Raymaster, combine precision alignment and positioning with a versatile chiro imaging system.

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.

Radiographic/Fluoroscopic Systems–We produce a wide range of radiographic/fluoroscopic (“R/F”) systems able to perform complex x-ray analyses with contrast liquids for sequential images. Our Vision, Mercury and Symphony systems include tilting tables for the patient being x-rayed. These tables can easily be interfaced with digital imaging systems. R/F 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.

Portable Medical X-Ray Systems–We also sell portable x-ray equipment with our DynaRad branded HF-110A and PHANTOM systems for the Military and Home Health Care Provider market. 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.

Dental Systems–We produce a broad range of DC and AC powered intra-oral (commonly known as bite wing) x-ray systems. In addition, our Rotograph Plus and Strato-X systems are utilized to perform panoramic images for dental applications.

Mammography Systems–Our mammography unit, Melody, is manufactured for us by a supplier in Italy. Although we have exclusive use of the “Melody” name, this supplier manufactures a similar product and sells it in several competing markets.

Marketing and Distribution: Our medical imaging systems are principally sold in the U.S. and other foreign countries by a network of over 200 distributors. Medical imaging systems distributors are supported by our regional managers, product line managers and technical support groups, who train distributor sales personnel and participate in customer calls. 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 and professionals during regular business hours. Additional product and distributor support is provided through participation in medical equipment exhibitions and trade advertising. We typically exhibit our products at annual conferences, including the Radiological Society of North American Conference in Chicago, the MEDICA Medical Conference in Düsseldorf, Germany and the European College of Radiology Conference in Vienna, Austria.

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Our Medical Systems Group is not dependent on any one customer for more than ten percent of its revenues for fiscal year 2002.

Competition: Based on industry data, we believe our Medical Systems Group is the largest supplier 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 radiographic/fluoroscopic products marketplace.

Our top-tier conventional radiographic and radiographic/fluoroscopic products are sold through partnerships and alliances with multi-hospital buying networks, general purchasing organizations and major independent distributors. The three major competitors in this market segment are GE Medical Systems, a division of General Electric Company, Siemens Medical Solutions, a division of Siemens AG and Philips Medical Systems, a division of Koninklijke Philips Electronics N.V. 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.

Our lower-tier conventional radiographic products compete with a number of smaller companies based primarily in the U.S. and Europe. 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 because we provide the best combination of price, quality and performance, together with the strength and breadth of our independent distribution network.

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 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 become a 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 cover everything from image storage and retrieval to record keeping. However, due to today’s high cost of ownership, many institutions have not yet transitioned to digital technology. In addition, there is uncertainty as to which platform will be accepted as the industry-leading protocol for image digitization and communication.

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Consequently, over the past year our research and development spending was focused primarily on enhancing our existing conventional radiographic products while we studied the developments in the digital marketplace. We believe these studies will help us to assure the investments we make in this area are appropriate. Spending for research and development for our Medical Systems Group was approximately $1.4 million, $1.6 million and $2.3 million during fiscal years 2002, 2001 and 2000, respectively. The decline from 2000 to 2001 was due to the termination of several development projects in our North American medical imaging businesses.

As industry standards become more established, we expect to increase our digital radiographic-related research and development expenditures accordingly.

Government Regulation: Our medical imaging systems are medical devices and, therefore, are subject to regulation by the U.S. Food and Drug Administration and to regulation by foreign governmental authorities. We also are subject to state and local regulation. 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.

Food and Drug Administration’s Premarket Clearance and Approval Requirements

In the United States, medical devices are classified into three different categories over which FDA applies increasing levels of regulation: Class I, Class II, and Class III. The FDA has classified all of our products as Class II devices. Before a new device can be introduced into the United States 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 or the results of clinical studies. Following submission of a 510(k), a company may not market the device until the FDA finds the product is substantially equivalent for a specific or general intended use. FDA clearance generally takes from four to twelve months, may take longer, and 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 has cleared new 510(k) submissions for these modifications.

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All of our products to date have met the appropriate FDA requirement for marketing, either being 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 Food and Drug Administration Regulation.

Numerous FDA regulatory requirements apply to our products as well as to components manufactured by some of our suppliers. These requirements include:

• 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 some types of adverse and other events involving their products.

Class II devices may also be subject to special controls applied to them, 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 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.

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Foreign Government Regulation.

Our products are also regulated outside the United States as medical devices by foreign governmental agencies, similar to the FDA, and are subject to regulatory requirements, similar to the FDA’s, in the foreign 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 United States. In certain foreign markets, it may be necessary or advantageous to obtain ISO 9001 certification, which is analogous to compliance with the FDA’s GMP requirements. We have obtained ISO 9001 certification for all of our medical systems manufacturing facilities. The time and cost required to obtain 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

The Power Conversion Group designs and manufactures high voltage power conversion systems 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 broad range of markets. Our products are sold under the following industry brands: Del High Voltage, Bertan High Voltage, DynaRad, RFI, Filtron, Sprague and Stanley. This segment has two divisions: High Voltage Power and Electronic Systems and Components.

Our high voltage power division represented approximately 70% of this segment’s revenues during fiscal year 2002. Our high voltage systems are offered in standard or custom designed configurations, primarily for security, medical, scientific, military and industrial OEM applications. Output voltages from 500V to 200kV, and power from 1W to 90kW are available in modular, bench-top and rack-mount configurations. High voltage power conversion systems transform commercially available AC power into very stable, high voltage DC power, tailored for a wide range of sophisticated electronic devices including explosive detection, medical equipment and linear accelerators. In these applications, slight variations in the high voltage source will significantly degrade the performance of the system.

Our electronics systems and components division 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.

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The Power Conversion Group provides subsystems and components which are used in the manufacture of products for security, medical, military and industrial applications as follows:

Del Power Conversion Group Markets Served

High Voltage Power Division
Security Analytical Instrumentation
Airport Explosive Detection Systems
Mass Spectrometry
Explosive Trace Detection
Capillary Electrophoresis
X-Ray Baggage Inspection
Spectroscopy
Medical
X-Ray Diffraction
Radiation Oncology
  Semiconductor
CT Scanning
Ion Implantation
MRI
Mask Repair
Bone Densitometry
E-Beam Lithography
PET Scanning
X-Ray Inspection
Blood Analysis
  High Powered E-Beam
Laser
Machining
Military
Sterilization
CRT Display
  Non Destructive Testing
Radar
Food Inspection
 
PC Board Inspection
 
Structural Inspection
   
Electronics Systems & Components Division
Military  Industrial
Guidance & Weapons Systems
Induction Heating
Communications
Automotive
Commercial
Capital Equipment
Power Systems
  Medical
Telecommunications
Radiation Oncology
Satellite
MRI
Meteorological
  

Security Applications–We currently provide a substantial majority of the high voltage power supplies to the two FAA certified OEMs serving the Explosive Detection Systems market. The Security Market is comprised of three market segments: Explosive Detection Systems, Explosive Trace Detection and X-Ray Baggage Inspection. Explosive Detection Systems (EDS) refers to the FAA-approved, CT-based (commonly known as CAT scan), baggage inspection equipment used in airports for the automatic detection of explosives in checked baggage. The Explosive Trace Detection (ETD) market segment includes machines used in airports to detect vapors and residues of explosives on luggage and parcels. The X-Ray Inspection market consists of various types of technologies used in the inspection of aircraft carry-on and check-in baggage, as well as cargo and freight. Areas of use for X-Ray Inspection Equipment include airports, corporate buildings, cruise ships, currency printers, customs, embassies, entertainment, government buildings, hazardous materials, jails, mail rooms, schools and transportation.

Substantially all purchases of EDS products used in U.S. airports are made by the Transportation Security Administration (TSA), an organization overseen by the Office of Homeland Security. Homeland Security’s current certification standards require that EDS products have the ability to automatically screen baggage for explosives with a high rate of detection and with a low rate of false alarms.

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Following the terrorist attacks on September 11, 2001, President Bush signed into law the Transportation Security Act, which mandates 100% EDS screening of checked baggage at U.S. commercial airports by the end of 2002.

The FAA has estimated that in calendar year 2000, airline passengers checked 900 million to one billion pieces of baggage in the U.S., with significantly less than 10% of this baggage being screened by EDS machines. The task of 100% screening of checked baggage in the U.S. will require a significant increase in the number of EDS machines used in U.S. airports. Before a Senate Appropriations hearing in early May 2002, U.S. Department of Transportation Secretary Norman Mineta announced that meeting the Transportation Security Act’s requirements would necessitate the purchase of 1,100 new EDS machines and 4,700 new explosive trace detection (ETD) machines.

In addition to the newly created demand in the U.S., there has also been an increased focus on aviation security outside the U.S. For example, the European Civil Aviation Conference, or ECAC, has mandated the end of 2002 as the deadline for all European airports to be equipped to screen checked baggage.

Two companies, InVision Technologies and L3 Communications, are currently the only FAA-certified equipment manufacturers for EDS equipment, and we are the preferred supplier of high voltage power supplies to both of them. In addition to serving the EDS market, we have built prototype products for both the ETD and X-Ray Baggage Inspection markets.

Medical Applications–Our high voltage power supplies deliver precisely regulated output power while operating over a very wide range of temperatures, altitudes, humidity, shock and vibration conditions. We have designed power supplies that deliver power over a range from several watts up to 60 kilowatts with output voltage ranging from hundreds of volts up to several hundred thousand volts. Operating frequencies range from 60 hertz up to 100 kilohertz. These subsystems are used in CAT scans, magnetic resonance imaging (MRI), bone densitometry, radiography, blood analysis, laser surgery, nuclear medicine and positron emission tomography (PET) scanning.

Military Applications–Through our relationships with many of the U.S. Government’s top defense suppliers such as Raytheon, Boeing, Lockheed Martin and Northrop Grumman, we supply high voltage subsystems and electronic components for various classified and unclassified programs including radar systems, guidance systems, weapons systems and communication electronics.

Industrial Applications–Our high voltage power subsystems 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 sequencing DNA, molecular analysis, printed circuit board inspection, structural inspection, food and mail sterilization and ion implantation in semiconductor capital equipment.

Marketing, Sales and Distribution: We market our Power Conversion Group products through in-house sales personnel, independent sales representatives in the U.S. and international agents in Europe, Asia, the Middle East, Canada, Australia and South Africa. Sales representatives are compensated primarily on a commission basis; 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.

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Our Power Conversion Group is not dependent on any one customer for more than ten percent of its revenues for fiscal year 2002.

Competition: Our Power Conversion Group competes primarily with a few (less than 10) small, privately owned suppliers of high voltage power supplies, electronic systems and components. Excluding the original equipment manufacturers that manufacture their own components, based on market intelligence we have gathered, we believe that we are among the top two in market share supplying these products.

The markets for these products are highly competitive and subject to technological change and evolving industry requirements and standards. 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 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 an ongoing research and development program in the Power Conversion Group. Our technical and scientific employees are generally employed in engineering departments at our business units, 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. We develop certain new products as standard products for the industry at large after we have evaluated their potential. These products include standardized high voltage, high frequency rack mounted power supplies and associated modules for use as precision test equipment by industrial laboratories, universities and research facilities. Research and development spending for the Power Conversion Group was $1.5 million, $1.3 million and $2.1 million in fiscal years 2002, 2001 and 2000, respectively.

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Government Regulation: We are subject to various U.S. government guidelines and regulations relating to the qualification of our non-medical products for inclusion in 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. We have experienced no material termination of any government contract and are not aware of any pending terminations of government contracts.

In March 2002, RFI Corporation, our Electronic Systems and Components subsidiary, was served a subpoena in connection with an investigation by the Department of Defense. See Item 3 “Legal Proceedings.”

 

 

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The following descriptions apply to both of our operating segments.

MANUFACTURING

All of the raw materials we use in the manufacture of our products are purchased from various suppliers and are available from numerous sources. No single supplier accounts for a significant percentage of our raw material requirements. We have not encountered any difficulty in obtaining such supplies and believe that if any current source of supply for a particular material or component became unavailable, alternate sources of supply would be available at comparable prices and delivery schedules.

We have not experienced in Fiscal 2002, and do not anticipate, any material expenditures in connection with our compliance with Federal, state or local environmental laws or regulations.

BACKLOG

Our backlog at August 3, 2002 was approximately $32 million. Substantially all of the backlog should result in shipments within the next 12 months. Backlog at July 28, 2001 was approximately $34 million. The decline in backlog was principally in our Power Conversion Group as a result of a change in our method of recording blanket purchase orders. In the past, we had included the entire blanket purchase order in backlog. In order to better plan for unexpected changes in certain blanket purchase orders, we now only record releases against purchase orders of this nature. This change in methodology reduced backlog by approximately $3 million.

TRADEMARKS AND PATENTS

Our trademark properties contribute to our marketing position. To safeguard these properties, we maintain trademark registrations in the U.S. and in significant international markets for its products. We do not consider that our business is materially dependent on patent protection.

EMPLOYEES

As of August 3, 2002, we had approximately 540 employees. We believe that our employee relations are good. None of our approximately 400 U.S. based employees are represented by a labor union.

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ITEM 2.    PROPERTIES

The following is a list of the Company’s principal properties, classified by segment and subsidiary:

  Location   Approx.
Floor
Area in
Sq. Ft.		   Principal Uses   Owned/Leased
(Expiration Date
if Leased)		  
Del Medical Systems Group:                
Del Medical Imaging Corp.
 Franklin Park, IL   68,000   Design and manufacturing   Leased (2005)  
                 
Villa Sistemi Medicali S.p.A.
 Milan, Italy   67,000   Design and manufacturing   Leased (2011)  (1)
                 
Del Power Conversion Group:                
Corporate and Del
High Voltage division
 Valhalla, NY   44,000   Corporate headquarters,
design and manufacturing		   Leased (2006)  
                 
RFI Corporation
 Bayshore, NY   55,000   Design and manufacturing   Owned  
                 
Bertan
 Hicksville, NY   38,000   Design and manufacturing   Leased (2004)  (2)

  (1) We have the option to purchase this property at the conclusion of this lease.
     
  (2) As previously announced, we intend to close this facility and move its production to the Valhalla plant.

We believe that our current facilities are sufficient for our present requirements. Our U.S. credit facility with Transamerica Business Capital Corporation is secured by a mortgage on RFI’s property.

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ITEM 3.    LEGAL PROCEEDINGS

Securities and Exchange Commission (“SEC”) Investigation–On December 11, 2000, the Division of Enforcement of the SEC issued a formal Order Directing Private Investigation, designating SEC officers to take testimony and requiring the production of certain documents, in connection with matters giving rise to the need to restate the Company’s previously issued financial statements. The Company has provided numerous documents to and continues to cooperate fully with the SEC Staff.

We have reached an agreement in principle with the Staff of the SEC to settle the SEC’s claims against us for a settlement that will include a penalty of up to $400,000, and an injunction against future violations of the antifraud, periodic reporting, books and records and internal accounting control provisions of the federal securities laws. The proposed settlement may be subject to, among other things, any further restatement of our historical financial statements or other material adjustments. However, we are not aware of any restatements required with respect to the financial statements filed with this Form 10-K. In addition, the proposed settlement will require, approval by the Commission and by the Court. We can give no assurance this settlement will be approved by either the Commission or the Court.

Although the Company has not reached a binding agreement with the SEC on this settlement, management believes that this agreement in principle is a reasonable basis on which it can now estimate the financial impact of this SEC investigation. As a result, the Company has recorded a charge in the fourth quarter of fiscal 2002 related to this agreement in principle with the SEC Staff, plus associated legal costs.

Class Action Litigation–A consolidated class action complaint against the Company, certain of its former officers and certain of our current and former directors and its auditors was filed on February 16, 2001 in the U.S. District Court for the Southern District of New York by certain of our shareholders. The complaint alleged violations of the federal securities laws and sought to recover damages on behalf of all purchasers of the Company’s common stock during the class period November 6, 1997, to November 6, 2000. The complaint sought rescission of the purchase of shares of the Company’s Common Stock or alternatively, unspecified compensatory damages, along with costs and expenses including attorney’s fees.

On July 26, 2001, the Company and certain other defendants reached an agreement in principle to settle the complaint. Under the terms of the settlement, the Company provided the plaintiffs: (i) a $2 million subordinated note due five years from the date of issuance with interest in arrears accrued at 6% per annum; (ii) 2.5 million shares of the Company’s Common Stock; and, (iii) 1 million warrants to purchase the Company’s Common Stock at $2 per share. The Warrants are callable by the Company at $0.25 per share if the Company’s stock trades at a price in excess of $4 for 10 days or more. This settlement was approved by the U.S. District Court for the Southern District of New York on January 29, 2002. It will be necessary for us to register the common stock underlying these warrants before we can allow for the exercise of these warrants.

Management of the Company believes the terms of the agreement in principle provided a reasonable basis to estimate the value of the Company’s portion of the settlement as of July 28, 2001, and, accordingly, recorded a charge of $9,759,000 in fiscal year 2001. This amount was calculated using a discount factor of 12% to present value the subordinated note, the per share price of $1.50 that was the closing price of the Company’s stock in the over the counter market on July 28, 2001, and an option pricing model to value the warrants. Also included in the charge were legal and other specialized fees paid through July 2001 of $3,572,000 and an accrual for legal and related fees incurred in fiscal year 2002 of $821,000.

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When the Court approved the class action settlement on January 29, 2002, and opportunities for appeal expired on March 21, 2002, all uncertainty regarding the final value of the securities issued by the Company in the settlement had been eliminated. Therefore, in the third quarter of fiscal year 2002, the Company recognized an additional charge related to the increase in the value of securities issued. This additional charge was approximately $7,050,000.

Department of Defense Investigation–On March 8, 2002, RFI Corporation, a subsidiary of the Company and part of the Power Conversion Group segment, was served with a subpoena by the U.S. Attorney Eastern District of New York in connection with an investigation by the U.S. Department of Defense (“DOD”). RFI supplies noise suppression filters for communications and defense applications. The Company is fully cooperating with this investigation, and has retained special counsel to represent the Company on this matter. Management of the Company cannot predict the duration of such investigation or its potential outcome.

Litigation Related to Former Chief Executive Officer–In the third quarter of fiscal 2001, the employment of the former CEO of the Company was terminated. In February 2002, the Company filed a lawsuit against the former CEO of the Company in the U.S. District Court, Southern District of New York, seeking damages in excess of $15 million, alleging fraudulent and other wrongful acts, including securities law violations, fraudulent accounting practices, breaches of fiduciary duties, insider trading violations and corporate mismanagement.

The former CEO of the Company has answered the Company’s complaint and has counterclaimed for damages based on the termination of his employment by the Company, pursuant to his then current employment agreement. The former CEO also brought third party claims against certain directors and officers, which were dismissed on October 18, 2002. The former CEO is seeking damages in excess of $500,000. The Company intends to pursue vigorously its claims against the former CEO and believes it has meritorious defenses to his counterclaim. However, due to the former CEO’s financial condition and competing claims and/or fines and penalties that may be imposed, there can be no assurance that we will ever recover any damages from the former CEO.

Other Legal Matters–The Company is a defendant in several other legal actions 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.

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PART II

ITEM 5.    MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock was 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. Following such suspension, the Nasdaq National Market delisted our common stock. Our common stock has been traded in the “pink sheets,” or over-the-counter market. The “pink sheets” 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 “pink sheets” are not listed in the financial sections of newspapers as are those for established stock exchanges and the Nasdaq National Market.

The following table shows the high and low closing sales prices per share of common stock for the past eight quarters, as reported by Nasdaq National Market through December 19, 2000 and over the counter starting December 20, 2000 (second quarter of fiscal year ended July 31, 2001). 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.

    Year Ended
August 3, 2002 		     Year Ended  
July 28, 2001		  
   
High
 
Low
 
High
    
Low
  
First Quarter   $3.00     $1.12 5   $9.81 2   $8.31 2
Second Quarter   4.35     2.50     8.62 5   0.56 3
Third Quarter   3.45     1.50     3.00     1.00  
Fourth Quarter   4.25     2.00     2.25     1.00  

The number of holders of record of our Common Stock $0.10 par value as of August 3, 2002 was 4,647.

We have not paid any cash dividends, except for the payment of cash in lieu of fractional shares, since 1983. The payment of dividends is prohibited under our U.S. credit facility with Transamerica Business Capital Corporation.

The following table summarizes the securities authorized for issuance under equity compensation plans:

Plan Category   Number of Securities to
be issued upon
exercise of outstanding
options, warrants and rights		   Weighted-average
exercise price of
outstanding options,
warrants and rights		   Number of securities
remaining available for
future issuance under
equity compensation plans(1)
Equity compensation plans approved by security holders:            
Stock Option Plan
   1,990,055   $3.45   253,160
Equity compensation plans not approved by security holders:            
Warrants issued in connection with the acquisition of Villa (2)
        50,000   $7.94   None
Warrants granted for services rendered (3)
        15,000   $7.69   None
Warrants issued in settlement of class action lawsuit (4)
   1,000,000   $2.00   Not applicable

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(1) Excludes securities to be issued upon exercise of outstanding options, warrants and rights.
   
(2) These warrants were granted to the former majority shareholder of Villa Sistemi Medicali S.p.A. (“Villa”) in connection with the acquisition of Villa in December 1999. They expire in December 2005.
   
(3) These warrants were granted to consultants for services rendered in 1999. They expire in October 2004.
   
(4) Pursuant to our class action settlement with our shareholders, 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 the class action lawsuit and therefore was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 3(a) (10) thereof. These warrants expire in March 2008.

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ITEM 6.    SELECTED FINANCIAL DATA

The selected income statement data presented for the fiscal years ended August 3, 2002, July 28, 2001 and July 29, 2000 and the balance sheet data as of August 3, 2002 and July 28, 2001 have been derived from the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The financial statement data for the balance sheet as of July 29, 2000 was derived from audited financial statements not included herein. This selected financial data should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere herein.

DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
(Dollars in thousands, except per share data)

    Fiscal Years Ended  
   
 
       August 3,
2002(1)		   July 28
2001(2)
July 29,
2000(3)		  
   
 
 
 
Income Statement Data:                    
Net sales   $ 98,132   $ 92,955   $ 79,590  
Gross margin     19,579     18,864     14,702  
                     
Selling, general and administrative     21,697     17,253     15,313  
Research and development     2,919     2,876     4,388  
Litigation settlement costs     7,713     9,759     —  
Facilities reorganization costs     1,292     822     —  
Operating loss     (14,042 )   (11,846 )   (4,999 )
                     
Minority interest     197     379     (77 )
                     
Net loss     (12,012 )   (8,521 )   (3,638 )
                     
Net loss per basic and diluted share:   $ (1.38 ) $ (1.09 ) $ (0.47 )
                     
Balance Sheet Data:                    
Working capital   $ 18,938   $ 22,269   $ 27,331  
Total assets     77,697     81,658     82,805  
Long-term debt     6,724     6,222     5,953  
Shareholders’ equity     37,141     41,791     46,062  

(1)

 Fiscal 2002 includes $1,292 in Facilities reorganization costs, which were principally related to the closing of the Hicksville, New York facility. (See Note 11 in Notes to Consolidated Financial Statements). Fiscal 2002 also includes $7,713 in Litigation settlement costs, principally for finalization of the settlement of the class action suit and the agreement in principle to settle the SEC investigation. (See Item 3, “Legal Proceedings”).
   

(2)

 During fiscal 2001, the Company recorded $9,759 in Litigation settlement costs related to a class action lawsuit. (See Item 3, “Legal Proceedings”). During fiscal 2001, the Company also decided to close two facilities and recorded a restructuring charge of $822. (See Note 11 in Notes to Consolidated Financial Statements).
   

(3)

 In December 1999, the Company acquired Villa Sistemi Medicali S.p.A. (see Note 13 in Notes to Consolidated Financial Statements.)

NOTE: This table only includes three years of financial statement data, not the required five years. See Item 7, Management’s Discussion and Analysis under “Risk Factors” for further discussion.

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Del Global Technologies Corp. is a leader in developing, manufacturing and marketing medical imaging equipment and power conversion subsystems and components worldwide. Our products include stationary and portable medical diagnostic imaging equipment, high voltage power systems and electronic systems and components such as electronic filter, transformers and capacitors. Operating businesses that we report as segments include our Medical Systems Group and our Power Conversion Group.

Our main businesses continue to compete vigorously and we continue to enjoy solid relationships with our customers. We expect that the withdrawal of a major medical systems group competitor to contribute to increased orders and sales for our Medical Imaging Group. Our Power Conversion Group has been selected as a supplier of high voltage power systems by the two FAA qualified manufacturers of Explosive Detection Systems (“EDS”) for checked baggage.

Critical Accounting Policies

Significant accounting policies are outlined in Note 1 of the Notes to Consolidated Financial Statements. We have identified the accounting for deferred tax assets and the allowance for obsolete and excess inventory as being the critical accounting policies due to the significant amount of estimates involved.

The Company accounts for deferred taxes in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” whereby the Company recognizes an asset related to the Company’s net operating losses. The Company anticipates that this asset will be utilized against future operating profits; however, the Company can make no assurances that it will generate profits in the future. This deferred tax asset represents approximately 22% of the total assets of the Company. See “Risk Factors - The valuation of our deferred tax assets and the recognition of tax benefits in each period assumes future taxable income and profitability.”

Another significant estimate is our allowance for obsolete and excess inventory. We re-evaluate our allowance for obsolete inventory generally once a quarter, and this allowance comprises the most significant portion of our inventory reserves. The re-evaluation of reserves is based on a written policy, which requires at a minimum that reserves be established based on our analysis of historical actual usage on a part-by-part basis. In addition, if management learns of specific obsolescence in addition to this minimum formula, these additional reserves will be recognized as well. Specific obsolescence might arise due to a technological or market change, or based on cancellation of an order. As we typically do not purchase inventory substantially in advance of production requirements, we do not expect cancellation of an order to be a material risk. However, market or technology changes can and do happen.

 

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RISK FACTORS

IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS

In addition to other information in this Annual Report on Form 10-K, you should carefully consider the following risk factors in evaluating us and our business because such factors currently have or may have a significant impact on our business, operating results or financial condition. This Form 10-K contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth below and elsewhere in this Form 10-K. When included in this Form 10-K, the words “will,” “should,” “expects,” “intends,” “anticipates,” “estimates” and similar expressions, among others, identify forward-looking statements for purposes of Section 21E of the Securities Exchange Act of 1934, as amended and Section 27A of the Securities Act of 1933, as amended. Although we believe these forward-looking statements are based upon reasonable assumptions, these may not prove to be correct. Such risks and uncertainties include, among others, those described below under “Risk Factors”, many of which are beyond our control. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise. We urge you, however, to consult any further disclosures we make on related subjects in our 10-Q and 8-K reports to the SEC.

RISKS RELATED TO THE COMPANY’S PAST FAILURE TO COMPLY WITH THE UNITED STATES SECURITIES LAWS AND OTHER INVESTIGATIONS AND LITIGATION

A failure to settle our ongoing SEC enforcement action could have a negative impact on our business.

On December 11, 2000, the Division of Enforcement of the SEC issued a Formal Order Directing Private Investigation, designating SEC officers to take testimony and requiring the production of certain documents, in connection with matters giving rise to the need to restate our previously issued financial statements, specifically for the fiscal years 1997 through the third quarter of fiscal year 2000.

We have reached an agreement in principle with the Staff of the SEC to settle the SEC’s claims against us for a settlement that will include a penalty of up to $400,000, and an injunction against future violations of the antifraud, periodic reporting, books and records and internal accounting control provisions of the federal securities laws. The proposed settlement may be subject to, among other things, any future restatement of historical financial statements for the Company, or other material adjustments. However, management is not aware of any restatements or adjustments required with respect to financial statements filed with this Form 10-K. In addition, the proposed settlement will require approval by the Commission and by the Court. We can give no assurance that this proposed settlement will be approved by either the Commission or the Court.

Although the Company has not reached a binding agreement with the SEC on this settlement proposal, management believes that this agreement in principal is a reasonable basis on which it can now estimate the financial impact of this SEC investigation. As a result, the Company has recorded a charge in the fourth quarter of fiscal 2002 related to this agreement in principle with the SEC Staff, plus associated legal costs.

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We have not filed certain financial statements with the SEC which could result in a failure to be listed on a national stock exchange, a failure to be able to register our securities with the SEC and a failure to reach a final settlement in our SEC enforcement action.

We have determined that the financial statements that we filed for fiscal years 1997, 1998 and 1999, as well as the financial statements filed in the first three quarters of fiscal year 2000, are incorrect and should no longer be relied upon. The fiscal year 2000 financial statements included herein are the first time we have issued a Statement of Operations and a Statement of Cash Flows for the fiscal year 2000. We have not filed, and do not plan to file, a Form 10-K for fiscal year 2001 and fiscal year 2000, respectively. We filed audited financial statements for fiscal year 2001 on a Form 8-K dated April 9, 2002.

Although we have prepared draft Statements of Operations for fiscal years 1999 and 1998, we have not published them. These statements are not in accordance with Generally Accepted Accounting Principles in the U.S. (“GAAP”), because they still have substantial one time charges recorded in fiscal 1999. We have concluded that a portion of these one-time charges most likely belong in fiscal 1998 or 1997. For certain of these one-time items, we were not able to determine the appropriate allocation of these charges in the Statements of Operations for fiscal years 1997, 1998 or 1999. Due to the quality of our records during fiscal 1997 through 1999, and due to the fact that new management has terminated essentially all of the financial and general management personnel employed by us at that time, it is not possible to prepare Statements of Operations for fiscal years 1999 and 1998 on a basis consistent with GAAP. These Statements of Operations for fiscal years 1999 and 1998 would be necessary for us to file a Form 10-K for fiscal years 2001 and 2000.

As a result, in the Selected Financial Data (Item 6), only three years of financial data, encompassing fiscal years 2002, 2001 and 2000, is included. As such, Item 6 is not fully compliant with Regulation S-K Item 301, which requires 5 years of financial data. We plan to discuss these issues with the SEC and attempt to seek a waiver of certain financial reporting obligations, but are not able to tell at this time whether our waiver request will be granted. If the waiver we request is not granted, our securities may be prohibited from being listed on a national securities exchange and we may not be able to register any securities with the SEC until such time as we are able to prepare a five year Selected Financial Data table that complies with applicable SEC requirements. In addition, we may not be able to settle the SEC enforcement action pending against us.

Our common stock is suspended from trading on the NASDAQ National Market and we cannot predict when or if ever it will be listed on any national securities exchange.

Our common stock was suspended from trading on the Nasdaq National Market in December 2000. Following such suspension and a hearing before a Nasdaq Listing Qualifications Panel, the NASDAQ de-listed our common stock. Current pricing information on our common stock has been available in the “pink sheets” published by National Quotation Bureau, LLC. The “pink sheets” 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 “pink sheets” are not listed in the financial sections of newspapers. Therefore, prices for securities traded solely in the “pink sheets” may be difficult to obtain, and stockholders may find it difficult to resell their shares. Until we are current with our SEC filings, or get appropriate relief pertaining to Selected Financial Data (see Risk Factor described above), we are effectively unable to apply for a new listing for our common stock or other securities with a national securities exchange or NASDAQ. In addition, in order to be re-listed, we will need to meet certain requirements regarding independent directors. There can be no assurance that we will be able to attract the number of independent directors necessary to meet such listing requirements, which we currently do not satisfy.

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The Department of Defense is investigating part of our Power Conversion Group business, which could result in loss of business.

On March 8, 2002, our subsidiary, RFI Corporation, part of our Power Conversion Group segment, was served with a subpoena by the U.S. Attorney Eastern District of New York in connection with an investigation by the U.S. Department of Defense (“DOD”). RFI supplies noise suppression filters for communications and defense applications. This business accounted for approximately $12 million of our revenues in fiscal 2002.

The DOD investigation led us to undertake our own internal investigation. Among other outcomes, our investigation resulted in a complete reengineering of RFI’s quality control practices and replacement of several personnel. This reengineering effort resulted in lower Gross margins for this business in the fourth quarter of fiscal 2002. We expect that Gross margins for this business will continue to be weak through the first half of fiscal 2003 as these new quality control procedures are implemented, and new personnel take on their new responsibilities.

As an additional outcome from this internal investigation, we recognized a non cash charge of approximately $297,000 in the fourth quarter of fiscal 2002 to write off certain inventory that did not meet all relevant DOD specifications, and is not likely to be able to be reworked. Other than this inventory charge, and ongoing legal costs, no other costs have been recorded in relation to the DOD investigation, because we cannot predict the duration of such investigation or its potential outcome.

In addition to these cost considerations, if the DOD were to find that RFI’s new procedures were inadequate, we might be taken off certain government approved lists which would have a material adverse affect on our business.

We may never recover any amounts from our former CEO.

In the third quarter of fiscal 2001, we terminated the employment of our former CEO. In February 2002, we filed a lawsuit against him in the U.S. District Court for the Southern District of New York seeking damages in excess of $15 million, alleging fraudulent and other wrongful acts, including securities law violations, fraudulent accounting practices, breaches of fiduciary duties, insider trading violations and corporate mismanagement.

The former CEO answered our complaint and counterclaimed for damages based on the termination of his employment by us, pursuant to his then current e