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EX-32 - EXHIBIT 32.1 - DGT Holdings Corp.exh_321.htm
EX-31 - EXHIBIT 31.2 - DGT Holdings Corp.exh_312.htm
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EX-31 - EXHIBIT 31.1 - DGT Holdings Corp.exh_311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended October 30, 2010

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: 0-03319

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.)

100 PINE AIRE DRIVE, BAY SHORE, NY
11706
(Address of principal executive offices)
(Zip Code)

631-231-6400
(Registrant’s telephone number, including area code)
 
 
(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 ý     No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes ¨     No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ¨     No ý

The number of shares of Registrant’s common stock outstanding as of December 1, 2010 was 22,718,306.

 
 

 
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
 
Table of Contents
 
   
Page No.
 
       
PART I -
FINANCIAL INFORMATION
   
   
   
   
   
   
   
   
   
       
PART II -
OTHER INFORMATION
   
   
   
   
   
 
EX-31.1 (EX-31.1):  Certification
   
 
EX-31.2 (EX-31.2):  Certification
   
 
EX-32.1 (EX-32.1):  Certification
   
 
EX-32.2 (EX-32.2):  Certification
   


 
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 AMOUNTS)
(UNAUDITED)
 
   
Three Months Ended
 
   
October 30,
2010
   
October 31,
2009
 
             
             
 NET SALES
  $ 15,558     $ 11,582  
COST OF SALES
    12,063       9,007  
GROSS MARGIN
    3,495       2,575  
                 
Selling, general and administrative
    2,235       2,228  
Research and development
    468       443  
Total operating expenses
    2,703       2,671  
OPERATING INCOME (LOSS)
    792       (96 )
Interest expense, net of interest income of $3 and $25 in 2010 and 2009, respectively
    (81 )     (154 )
Other income (expense)
    61       (23 )
INCOME(LOSS) FROM CONTINUING OPERATIONS BEFORE
               
INCOME TAX PROVISION
    772       (273 )
INCOME TAX PROVISION
    499       115  
INCOME (LOSS) FROM CONTINUING OPERATIONS
    273       (388 )
LOSS FROM DISCONTINUED OPERATIONS
    -       (3,114 )
NET INCOME (LOSS)
  $ 273     $ (3,502 )
NET INCOME (LOSS) PER SHARE – BASIC
               
Income (loss) from continuing operations
  $ 0.01     $ (0.02 )
Loss from discontinued operations
    -       (0.13 )
Net Income (Loss)
  $ 0.01     $ (0.15 )
Weighted average shares outstanding
    22,718,306       22,718,306  
                 
NET INCOME (LOSS) PER SHARE – DILUTED
               
Income (loss) from continuing operations
  $ 0.01     $ (0.02 )
Loss from discontinued operations
    -       (0.13 )
Net Income (Loss)
  $ 0.01     $ (0.15 )
Weighted average shares outstanding
    22,722,405       22,718,306  

See notes to consolidated financial statements.

 
3

 
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PAR VALUE)
(UNAUDITED)
 
   
October 30,
2010
   
July 31,
2010
 
ASSETS
           
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 9,731     $ 3,987  
Trade receivables (net of allowance for doubtful accounts of $1,313 and $1,214 at October 30, 2010 and July 31, 2010, respectively)
    16,103       12,925  
Inventories (net of allowance for excess and obsolete of $2,767 and $2,536 at October 30, 2010 and July 31, 2010, respectively)
    11,007       9,123  
Prepaid expenses and other current assets
    1,752       2,770  
Total current assets
    38,593       28,805  
                 
NON-CURRENT ASSETS:
               
Property plant and equipment, net
    5,521       5,254  
Deferred income taxes
    469       415  
Goodwill
    4,526       4,526  
Other assets
    143       29  
Total non-current assets
    10,659       10,224  
TOTAL ASSETS
  $ 49,252     $ 39,029  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
CURRENT LIABILITIES:
               
Revolving loan
  $ 74     $ 135  
Current portion of long-term debt
    1,878       1,973  
Accounts payable – trade
    9,346       5,643  
Accrued expenses
    5,741       3,643  
Total current liabilities
    17,039       11,394  
                 
NON-CURRENT LIABILITIES:
               
Long-term debt, less current portion
    2,432       95  
Other long-term liabilities
    1,952       1,763  
Total non-current liabilities
    4,384       1,858  
TOTAL LIABILITIES
    21,423       13,252  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
SHAREHOLDERS' EQUITY:
               
Common stock, $.10 par value;
               
Authorized 100,000,000 and 50,000,000; October 30, 2010 and July 31, 2010, respectively; issued-24,900,629 at October 30, 2010 and  July 31, 2010
    2,490       2,490  
Additional paid-in capital
    81,019       80,979  
Treasury shares – 2,182,323 shares, at cost at October 30, 2010 and  July31, 2010
    (7,176 )     (7,176 )
Accumulated other comprehensive income (loss)
    1,525       (214 )
Accumulated deficit
    (50,029 )     (50,302 )
Total shareholders' equity
    27,829       25,777  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 49,252     $ 39,029  

See notes to consolidated financial statements.

 
4

 
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
 
   
Three Months Ended
 
   
October 30,
2010
   
October 31,
2009
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
  $ 273     $ (3,502 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation and amortization
    208       296  
Deferred income tax provision
    (6 )     20  
Stock based compensation expense
    40       78  
Write-down of assets and additional accruals for discontinued operations
    -       1,820  
Changes in operating assets and liabilities:
               
Trade receivables
    (631 )     2,065  
Inventories
    (1,023 )     2,038  
Prepaid expenses and other current assets
    (71 )     126  
Other assets
    (112 )     11  
Accounts payable – trade
    2,997       (1,033 )
Accrued expenses
    1,669       477  
Other long-term liabilities
    (8 )     (27 )
Net cash provided by operating activities
    3,336       2,369  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Property plant and equipment purchases
    (107 )     (196 )
Net cash used in investing activities
    (107 )     (196 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from borrowing of long-term debt
    2,500       -  
Repayment of revolving loan
    (71 )     (4,982 )
Repayment of long-term debt
    (464 )     (495 )
Net cash provided by (used in) financing activities
    1,965       (5,477 )
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    550       70  
CASH AND CASH EQUIVALENTS INCREASE (DECREASE) FOR THE PERIOD
    5,744       (3,234 )
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD
    3,987       7,983  
CASH AND CASH EQUIVALENTS, END OF THE PERIOD
  $ 9,731     $ 4,749  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid for
               
Interest
  $ 101     $ 158  
Taxes (refunds received) paid
    (31 )     126  

See notes to consolidated financial statements.

 
5

 
DEL GLOBAL TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)
 
NOTE 1 - BASIS OF PRESENTATION
 
The accompanying unaudited consolidated financial statements of Del Global Technologies Corp. and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the results for the interim 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 (the “SEC”) for the fiscal year ended July 31, 2010.  Certain reclassifications have been made to prior years’ amounts to conform to the current year’s presentation.
 
We have evaluated subsequent events through the time of filing this Form 10-Q with the Securities and Exchange Commission (“SEC”).
 
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
 
Accounting standards that have been issued by the Financial Accounting Standards Board or other standard setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements.
 
NOTE 2 – DISCONTINUED OPERATIONS
 
On November 24, 2009, the Company consummated the sale of certain of the assets and product lines of its Del Medical Imaging Corp. wholly-owned subsidiary (“DMI”), to an affiliate of U.M.G. Inc. (“UMG” or the “Acquirer”).
 
Pursuant to the agreement, the Acquirer (i) assumed all of the Company’s and DMI’s post-closing obligations in connection with the Company’s lease of its facilities in Roselle, Illinois, (the Company remains secondarily liable on the lease obligations), (ii) accepted all of DMI’s inventory related to the DMI business on a consignment basis, (iii) hired select DMI employees, (iv) indemnified the Company for potential employee severance obligations and (v) assumed certain other liabilities of the business, including outstanding warranty obligations.  The parties have subsequently completed the sale of the consigned inventory.

 
6

 
The Company’s discontinued operations loss for the first quarter of fiscal 2010 is:
 
   
Three Months
Ended
 
   
October 30,
2010
   
October 31,
2009
 
Net sales
  $ -     $ 3,517  
Loss from operations
  $ -     $ (1,263 )
Asset writedowns to fair value
    -       (1,820 )
Accrued expenses
    -       (20 )
Provision for income taxes
    -       (11 )
Total Loss
  $ -     $ (3,114 )
Loss per share – Basic and Diluted:                
   From operations
  $ -     $ (0.05 )
   Loss on sale of operations
    -       (0.08 )
Loss per share – discontinued operations
  $ -     $ (0.13 )

The Company reported additional losses in fiscal year 2010 subsequent periods of approximately $43 related to activity to complete the business disposition, including severance, legal and corporate relocation expenses, offset by realization of collection of receivables and sales of inventory at a greater amount than originally anticipated.
 
The assets and liabilities (excluding intercompany balances) of the discontinued operations that are included in the Company’s consolidated assets and liabilities are as follows:
 
   
October 30,
2010
   
July 31,
2010
 
Accounts receivable
  $ -     $ 188  
Other current liabilities
    38       63  

NOTE 3 - INVENTORIES
 
Inventories are stated at the lower of cost (first-in, first-out method) 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, the Company estimates the amount of labor and overhead costs related to finished goods inventories.  As of October 30, 2010, finished goods represented approximately 20.6% of the gross carrying value of our total gross inventory.  The Company believes the estimation methodologies used are appropriate and are consistently applied.

   
October 30,
2010
   
July 31,
 2010
 
Raw materials and purchased parts
  $ 8,648     $ 7,952  
Work-in-process
    2,288       1,047  
Finished goods
    2,838       2,660  
      13,774       11,659  
Less allowance for  excess and obsolete inventories
    (2,767 )     (2,536 )
Total inventories
  $ 11,007     $ 9,123  
 
 
7

 
NOTE 4 - PRODUCT WARRANTIES
 
The Company’s products are covered primarily by one-year warranty plans and in some cases optional extended contracts may be offered covering products for periods up to five years, depending upon the product and contractual terms of sale.  The Company establishes allowances for warranties on an aggregate basis for specifically identified, as well as anticipated, warranty claims based on contractual terms, product conditions and actual warranty experience by product line.
 
The activity in the warranty reserve accounts in the first quarters of fiscal 2011 and 2010 is as follows:
 
   
Three Months Ended
 
   
October 30,
2010
   
October 31,
2009
 
Balance at beginning of period
  $ 629     $ 704  
Provision for anticipated warranty claims
    106       18  
Costs incurred related to warranty claims
    (40 )     (39 )
Liability related to discontinued operations
    -       (106 )
Effect of foreign currency fluctuation
    94       20  
Balance at end of period
  $ 789     $ 597  

The liability related to warranties is included in accrued expenses on the accompanying Consolidated Balance Sheets.
 
NOTE 5 - COMPREHENSIVE INCOME (LOSS)
 
Comprehensive income for the Company includes foreign currency translation adjustments and net income reported in the Company’s Consolidated Statements of Operations.
 
Comprehensive income for the fiscal 2011 and 2010 periods presented is as follows:
 
   
Three Months Ended
 
   
October 30,
2010
   
October 31,
2009
 
Net income (loss)
  $ 273     $ (3,502 )
Foreign currency translation adjustments
    1,739       577  
Comprehensive income (loss)
  $ 2,012     $ (2,925 )
 
 
8

 
NOTE 6 - INCOME (LOSS) PER SHARE
 
Common shares outstanding exclude 2,182,323 shares of treasury stock for the periods ended October 30, 2010 and October 31, 2009.  The computation of dilutive securities includes the assumed conversion of warrants and employee stock options to purchase Company stock if such conversion is dilutive.
 
   
Three Months Ended
 
   
October 30,
2010
   
October 31,
2009
 
             
Numerator:
           
Net income (loss)
  $ 273     $ (3,502 )
Denominator: (shares in thousands)
               
                 
Weighted average number of common shares outstanding used for basic income per share
    22,718       22,718  
Effect of dilutive securities
    4       -  
                 
Denominator for diluted income per share
    22,722       22,718  
Income (loss) per common share:
               
Basic
  $ 0.01     $ (0.15 )
Diluted
  $ 0.01     $ (0.15 )

Antidilutive securities excluded from above computations:
 
   
Three Months Ended
 
   
October 30,
2010
   
October 31,
2009
 
             
Employee stock options
    2,123       2,336  

NOTE 7 - SHORT-TERM CREDIT FACILITIES AND LONG-TERM DEBT
 
Short-term credit facilities are summarized as follows:
 
Revolving lines of credit:
 
October 30,
2010
   
July 31,
2010
 
Domestic
  $ -     $ -  
Foreign
    74       135  
Total
  $ 74     $ 135  
 
 
9

 
Long term debt at October 30, 2010 and July 31, 2010 is summarized as follows:
 
   
October 30
2010
   
July 31,
2010
 
Mortgage
  $ 2,494     $ -  
Foreign capital lease obligations
    1,298       1,273  
Foreign credit facilities
    518       647  
Foreign Italian government loans
    -       148  
Total long term debt
    4,310       2,068  
Less current portion of long-term bank debt
    (1,878 )     (1,973 )
Long term debt, less current portion
  $ 2,432     $ 95  

On September 1, 2010, the Company completed a mortgage financing on its property in Bay Shore, NY and received approximately $2.5 million payable over 10 years at an initial fixed rate of 4.9% for the first 5 years, adjusted for the last 5 years as defined in the agreement.  Monthly principal repayments began in October 2010.

Management believes funds generated from operations, together with current cash and cash equivalents, are adequate to sustain operations, including anticipated capital expenditures for the foreseeable future.  Additionally, management believes that if additional U.S. financing is needed, the Company will be able to obtain new asset based financing for its U.S. subsidiary.

The Company’s Villa subsidiary maintains short term credit facilities which are renewed annually with Italian banks.  The current balance due on these credit facilities at October 30, 2010 and July 31, 2010 is $74 and $135, respectively.  In addition, Villa has outstanding letters of credit of $0.5 million, which reduce availability under the short term credit facilities.  Available borrowing under the credit facilities is $11,508 and variable interest rates currently range from 3.7% - 14.25%.
 
In October 2006, Villa entered into a 1.0 million Euro loan for financing of R&D projects, which were completed in April 2008.  Interest, is payable at Euribor plus 1.04 points, currently 1.92%.  The note is repayable over a 5 year term.  Principal repayments began in September 2008 and will be completed in September 2011.  The note contains a financial covenant which provides that the net equity of Villa cannot fall below 5.0 million Euros.  Villa’s net equity at October 30, 2010 was 13.2 million Euros.
 
In December 2006, Villa entered into a 1.0 million Euro loan with interest payable at Euribor 3 months plus 0.95 points, currently 1.84%.  The loan is repayable over a 4 year period with a maturity in December 2010.
 
Villa was also a party to an Italian government long-term loan with a fixed interest rate of 3.425% maturity which matured in September 2010.  Villa’s manufacturing facility is subject to a capital lease obligation which matures in March 2011 with an option to purchase. The Company plans to exercise its option to purchase the facility. Villa is in compliance with all related financial covenants under these short and long-term financings.
 
 
10

 
NOTE 8 - SEGMENT INFORMATION
 
The Company has three reportable segments: Medical Systems Group, Power Conversion Group and Other.  The “Other” segment includes unallocated corporate costs.  Interim segment information is as follows:
 
For three months ended
October 30, 2010
 
Medical
Systems
Group
   
Power
Conversion
Group
   
Other
   
Total
 
Net Sales to External Customers
  $ 13,311     $ 2,247     $ -     $ 15,558  
Cost of sales
    10,358       1,705       -       12,063  
Gross margin
    2,953       542               3,495  
                                 
Operating expenses
    1,633       776       294       2,703  
Operating income (loss)
  $ 1,320     $ (234 )   $ (294 )   $ 792  

For three months ended
October 31, 2009
 
Medical
Systems
Group
   
Power
Conversion
Group
   
Other
   
Total
 
Net Sales to External Customers
  $ 9,495     $ 2,087     $ -     $ 11,582  
Cost of sales
    7,568       1,439       -       9,007  
Gross margin
    1,927       648       -       2,575  
                                 
Operating expenses
    1,736       577       358       2,671  
Operating income (loss)
  $ 191     $ 71     $ (358 )   $ (96 )

NOTE 9 – SHAREHOLDERS’ EQUITY
 
On October 13, 2010, following approval by shareholders at a special meeting, the Company filed with the New York Secretary of State an amendment to the Company’s Certificate of Incorporation to increase the number of shares of common stock authorized for issuance by the Company from 50,000,000 to 100,000,000.
 
The Company did not grant any stock options during the first quarter of fiscal 2011.
 
In the first quarter of fiscal 2011 and 2010, the Company recorded $40 and $78, respectively, of compensation expense related to stock options.  There were no exercises of stock options during the first quarter of fiscal 2011 or 2010.
 
NOTE 10 - CONTINGENCIES
 
The information set forth under Part II, Item 1 contained in the “Legal Proceedings” is incorporated herein by reference.
 
 
11

 
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 and 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 introduce products as scheduled, our ability to obtain necessary product certification, our ability to implement our business plan, retention of management, changing industry and competitive conditions, obtaining anticipated operating efficiencies, securing necessary capital facilities, favorable determinations in various legal and regulatory matters, market and operating risks from foreign currency exchange exposures, and favorable general economic conditions.  Actual results could differ materially from those expressed or implied in the forward-looking statements.  Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements are specified in the Company’s filings with the Securities and Exchange Commission including our Annual Report on Form 10-K for the fiscal year ended July 31, 2010, our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
 
OVERVIEW
 
The Company is primarily engaged in the design, manufacture and marketing of cost-effective medical and dental diagnostic imaging systems consisting of stationary and portable imaging systems, radiographic/fluoroscopic systems, dental imaging systems and digital radiography systems.  The Company also manufactures proprietary high-voltage power conversion systems including 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.  The Company manages its business in two operating segments: the Medical Systems Group and the Power Conversion Group.  In addition, the Company has a third reporting segment, Other, comprised of certain unallocated corporate General and Administrative expenses.  See Note 8 of the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q for the fiscal quarter ended October 30, 2010 (this “Quarterly Report”) for discussions of the Company’s segments.
 
Effective November 24, 2009, the Company sold the Del Medical Imaging business.  It is reflected as a discontinued operation in the financial statements of the Company and prior periods have been restated.  See Note 2 of the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report.
 
CRITICAL ACCOUNTING POLICIES
 
Complete descriptions of significant accounting policies are outlined in Note 1 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2010.  Within these policies, the Company has identified the accounting for revenue recognition, deferred tax assets and the allowance for excess and obsolete inventory as being critical accounting policies due to the significant amount of estimates involved.  In addition, for interim periods, the Company has identified the valuation of finished goods inventory as being critical due to the amount of estimates involved.
 
Revenue Recognition
 
The Company recognizes revenue upon shipment, provided there is persuasive evidence of an arrangement, there are no uncertainties concerning acceptance, the sale price is fixed, collection of the
 
 
12

 
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 on an aggregate basis for specifically identified, as well as anticipated, warranty claims based on contractual terms, product conditions and actual warranty experience by product line.  The Company recognizes service revenue when repairs or out of warranty repairs are completed.  These repairs are billed to the customers at market rates.  The Company periodically evaluates the collectability of their accounts receivable and provides an allowance for doubtful accounts when collection is not certain.
 
Deferred Income Taxes
 
The Company accounts for deferred income taxes in accordance with ASC 740, “Income Taxes,” whereby we recognize deferred income tax assets and liabilities for temporary differences between financial reporting basis and income tax reporting basis and for tax credit carryforwards.
 
The Company periodically assesses the realization of its net deferred income tax assets.  This evaluation is primarily based upon current operating results and expectations of future operating results.  A valuation allowance is recorded if the Company believes its net deferred income tax assets will not be realized.  The Company’s determination is based on what it believes will be the more likely than not result.
 
For fiscal year 2010 the Company’s foreign tax reporting entity was profitable, and its U.S. tax reporting entities incurred a taxable loss.  Based primarily on these results, the Company concluded that it should maintain a 100% valuation allowance on its net U.S. deferred income tax assets.  For the quarter ended October 30, 2010, the Company continues to carry a 100% valuation allowance on its net U.S. deferred income tax asset.
 
The Company recorded a tax expense with respect to its foreign subsidiary’s income in all periods presented and based on a more likely than not standard, believes that the foreign subsidiary’s net deferred income tax asset at October 30, 2010 will be realized.
 
Excess and Obsolete Inventory
 
We re-evaluate our allowance for obsolete inventory once a quarter, and this allowance comprises the most significant portion of our inventory reserves.  The re-evaluation of reserves is based on a written policy, which requires at a minimum that reserves be established based on our analysis of historical actual usage on a part-by-part basis.  In addition, if management learns of specific obsolescence in addition to this minimum formula, these additional reserves will be recognized as well.  Specific obsolescence might arise due to a technological or market change, or based on cancellation of an order.  As we typically do not purchase inventory substantially in advance of production requirements, we do not expect cancellation of an order to be a material risk.  However, market or technology changes can occur.
 
Valuation of Finished Goods Inventory
 
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 October 30, 2010, finished goods represented approximately 20.6% of the gross carrying value of our total gross inventory.  We believe the estimation methodologies used are appropriate and are consistently applied.
 
 
13

 
CONSOLIDATED RESULTS OF OPERATIONS
 
Three Months Ended October 30, 2010 Compared to Three Months Ended October 31, 2009
 
The following table summarizes key indicators of consolidated results of operations:
 
   
Three Months Ended
 
(Dollars in thousands, except per share data)
 
Oct. 30,
2010
   
Oct. 31,
2009
 
Sales:
               
Medical Systems Group
 
$
13,311
   
$
9,495
 
Power Conversion Group
   
2,247
     
2,087
 
Total
 
$
15,558
   
$
11,582
 
                 
Gross margin as a percentage of sales
   
22.5
%
   
22.2
%
Total operating expenses
   
2,703
     
2,671
 
Operating income (loss) from continuing operations
   
792
     
(96
)
Diluted earnings per share—continuing operations
 
$
0.01
   
$
(0.02
)

Consolidated net sales for the first quarter of fiscal 2011 increased 34.3% to $15.6 million from $11.6 million in the first quarter of fiscal 2010, primarily due to increased volume at the Medical Systems Group.  Net sales at the Medical Systems Group increased 40.2% to $13.3 million from $9.5 million in the prior year period, due to increased international customer orders.  Sales at the Power Conversion Group during the first quarter of fiscal 2011 increased 7.7% to $2.2 million, $0.2 million higher than the level of sales in the comparable prior year period primarily due to the timing of customer shipments.
 
Consolidated backlog at October 30, 2010, adjusted for discontinued operations, was $17.4 million compared to $11.9 million at July 31, 2010.  Backlog at the Medical Systems Group at October 30, 2010 increased $5.3 million to $13.0 million from July 31, 2010.  Backlog at the Power Conversion Group increased $0.2 million to $4.4 million from levels at the beginning of the fiscal year.  Substantially all of the backlog should result in shipments within the next 12 to 15 months.
 
Consolidated gross margin increased to 22.5% of sales during the first quarter of fiscal 2011 from 22.2% of sales in the first quarter of fiscal 2010, due to the impact of higher sales volume.  Gross margin at the Medical Systems Group during the first quarter of fiscal 2011 increased to 22.2% from 20.3% in the prior year’s first quarter attributable to the increased volume. Gross margin at the Power Conversion Group decreased to 24.1% from 31.1% in the first quarter of fiscal 2010 due to higher employee costs, primarily medical insurance expense.
 
 
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Total operating expenses at $2.7 million in the first quarter of 2011 were approximately the same as in the same period one year ago.  The following table summarizes the key changes in operating expenses for fiscal 2011 from the prior year:
 
   
Three Months Ended
October 30, 2010
 
(Dollars in thousands)
 
 
 
Research and development
  $ 25  
Selling, general and administrative
    7  
Change in operating expenses
  $ 32  

The operating income from continuing operations for the first quarter of fiscal 2011 was $0.8 million compared to an operating loss of $0.1 million in the comparable prior year period.  Operating income at the Medical Systems Group was $1.3 million compared to operating income of $0.2 million in the first quarter of fiscal 2010 due to higher volume. The Power Conversion Group incurred an operating loss of $0.2 million, compared to operating income of $0.1 million in the comparable prior year period due to lower gross margins and increased sales & marketing expenses to develop new business.  Unallocated corporate expenses for the first quarter of fiscal 2011 totaled $0.3 million as compared to $0.4 million in the comparable prior year period.
 
Discontinued operations had no profit or loss during the first quarter of fiscal 2011.  The discontinued operations loss of $3.1 million in the first quarter of fiscal 2010 reflects a $1.3 million loss from operations on sales of $3.5 million and $1.8 million from the write-down of assets to net realizable value.
 
Net income in the first quarter of fiscal 2011 was $0.3 million, or $0.01 per basic and diluted share, compared to net loss of $3.5 million, or $0.15 per basic and diluted share in the comparable prior year period.  For the first quarter of fiscal 2011, there were 22.7 million weighted average diluted common shares outstanding (“shares outstanding”), the same number as in the first quarter of fiscal 2010.
 
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
 
The Company’s sources of capital include, but are not limited to, cash flow from operations and short-term credit facilities.  We believe that available short-term and long-term capital resources are sufficient to fund our working capital requirements, scheduled debt payments, interest payments, capital expenditures and income tax obligations for the next 12 months.  In addition, we may be able to dividend necessary funds from our foreign subsidiary, although this is not currently planned.
 
Working Capital — At October 30, 2010 and July 31, 2010, our working capital was approximately $21.6 million and $17.4 million, respectively.  The increase in working capital for the first three months of fiscal 2011 related primarily to the proceeds from the mortgage on the property in Bay Shore, NY.  At October 30, 2010 and July 31, 2010, the Company had approximately $9.7 million and $4.0 million in cash and cash equivalents, respectively.  This increase is primarily due to the mortgage proceeds and increases in accounts payable and accrued expenses at our foreign subsidiary.
 
On October 13, 2010, following approval by shareholders at a special meeting, the Company filed with the New York Secretary of State an amendment to the Company’s Certificate of Incorporation to increase the number of shares of common stock authorized for issuance by the Company from 50,000,000 to 100,000,000.
 
 
15

 
The Company anticipates its rights offering to raise up to approximately $15.0 million, less expenses of the offering, which will be completed by the end of the 2011  second fiscal quarter.
 
This Quarterly Report does not constitute an offer to sell or the solicitation of an offer to buy the securities offered pursuant to the rights offering, nor shall there be any sale of the securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.  The securities may only be offered by means of a prospectus, additional copies of which may be obtained by contacting the information agent.
 
In addition, as of October 30, 2010 and July 31, 2010, our Villa subsidiary had $11.5 and $9.1 million of excess borrowing availability under its various short-term credit facilities, respectively.  Terms of the Italian credit facilities do not permit the use of borrowing availability to directly finance operating activities at our U.S. subsidiary.
 
The following is a summary of the Company’s cash flows:
 
Three Months Ended
 
(Dollars in thousands,)
 
Oct. 30,
2010
   
Oct. 31,
2009
 
Net cash provided by operating activities
 
$
3,336
   
$
2,369
 
Net cash used in investing activities
   
(107
)
   
(196
)
Net cash provided by financing activities
   
1,965
     
(5,477
)
Effect of exchange rate changes on cash
   
550
     
70
 
Net increase/(decrease) in cash and cash equivalents
   
5,744
     
(3,234
)
Cash and cash equivalents at beginning of year
   
3,987
     
7,983
 
Cash and cash equivalents at end of period
 
$
9,731
   
$
4,749
 
 
Cash Flows from Operating Activities – For the three months ended October 30, 2010, the Company generated approximately $3.3 million of cash from operations, compared to $2.4 million in the comparable prior fiscal year period from an increase in payables and accruals partially offset by increases in receivables and inventory.
 
Cash Flows from Investing Activities — The Company made $0.1 million of facility improvements and capital equipment expenditures for the three months ended October 30, 2010, which was comparable to the facility improvements and capital equipment expenditures for the comparable prior fiscal year period.
 
Cash Flows from Financing Activities — During the three-month period ended October 30, 2010 the Company repaid a total of approximately $0.5 million of indebtedness on our revolving loan agreement, as well as on our Italian borrowings, as compared to $5.5 million in the comparable prior fiscal year period.  The Company also received $2.5 million of proceeds from a mortgage on its Bay Shore, NY facility.
 
The Company’s contractual obligations, including debt and operating leases, as previously disclosed on our Annual Report on Form 10-K for the fiscal year ended July 31, 2010, have not changed materially at October 30, 2010, except for the issuance of a mortgage on the Bay Shore, NY facility, which calls for payments of $17 per month through August 31, 2020.  The annual rate is currently 4.9%, adjustable in September 2015.  The Company has short-term credit facilities and long-term debt, including a capital lease obligation at the Company’s Villa subsidiary located in Italy. Villa’s manufacturing facility is subject to a capital lease obligation which matures in March, 2011 with an option to purchase. The Company plans to exercise its option to purchase the facility.   The terms of these facilities are more fully described in Note 7 of the “Notes to Consolidated Financial Statements” and incorporated herein by reference.
 
 
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As of October 30, 2010 the Company had $74 in borrowings under its foreign short-term credit facilities.  As of October 30, 2010, the Company had $11.5 million of excess borrowing availability under its Italian bank credit facilities.
 
OFF BALANCE SHEET COMMITMENTS AND ARRANGEMENTS
 
The Company has not had any investments in unconsolidated variable interest entities or other off balance sheet arrangements during any of the periods presented in this Quarterly Report on Form 10-Q.
 
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
 
Accounting standards that have been issued by the FASB or other standard setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements.
 
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The Company does not hold market risk sensitive instruments for trading purposes.  The Company, however, recognizes market risk from interest rate and foreign currency exchange exposure.  There have been no changes in financial market risks as described in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2010.
 
Item 4.
CONTROLS AND PROCEDURES
 
The Company, under the supervision and with the participation of the Company’s management, including John J. Quicke, President and Chief Executive Officer, and Mark A. Zorko, Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures”, as such term is defined in Rules 13a-15e and 15d-15e promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report to ensure that all material information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure and that all such information is recorded, processed, summarized and reported as specified in the SEC’s rules and forms.
 
There have not been any changes in the Company’s internal control over financial reporting during the fiscal quarter to which this Quarterly Report relates 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.
 
 
17

 
PART II - OTHER INFORMATION
 
Item 1.
LEGAL PROCEEDINGS
 
RFI – On May 24, 2007, the Company’s Power Conversion subsidiary, RFI Corporation (“RFI”), was served with a subpoena to testify before a grand jury of the United States District Court of New York and to provide items and records from its Bay Shore, NY offices in connection with U.S. Department of Defense contracts.  A search warrant from the United States District Court, Eastern District of New York was issued and executed with respect to such offices.  The Company believes that it is in full compliance with the quality standards that its customers require and is fully cooperating with investigators to assist them with their review.  RFI continues to ship products to the U.S. Government, as well as to its commercial customers.
 
OTHER – From time to time the Company may be a defendant in legal actions in various U.S. and foreign jurisdictions, arising from the normal course of business.
 
Item 1A.
RISK FACTORS
 
The risk factors included in our Annual Report on Form 10-K for fiscal year ended July 31, 2010 have not materially changed.
 
Item 6.
 
   
3.01
Certificate of Amendment to Certificate of Incorporation, as amended, dated October 13, 2010.  Filed as Exhibit 3.01 to Del Global Technologies Corp. Current Report on Form 8-K filed October 13, 2010 and incorporated herein by reference.
 
31.1*
Certification of the Principal Executive Officer, John J. Quicke, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2*
Certification of Principal Financial Officer, Mark A. Zorko, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1*
Certification of the Principal Executive Officer, John J. Quicke, 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 Financial Officer, Mark A. Zorko, pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
 
* Filed herewith
 
 
18

 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
DEL GLOBAL TECHNOLOGIES CORP.
   
 
/s/ John J. Quicke
 
John J. Quicke
 
President and Chief Executive Officer

   
 
/s/ Mark A. Zorko
 
Mark A. Zorko
 
Chief Financial Officer

Dated:  December 7, 2010
 
 
 
 
 
 
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