|• FORM 10-K • EXHIBIT 21.1 • EXHIBIT 31.1 • EXHIBIT 31.2 • EXHIBIT 32.1 • EXHIBIT 32.2 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE|
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 28, 2012.
o 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
DGT HOLDINGS CORP.
(Exact Name of Registrant as Specified in Its Charter)
Registrant’s telephone number, including area code (212) 520-2300
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.10 PAR VALUE (“COMMON STOCK”)
Rights to Purchase Common Stock, par value $0.10 per share, distributed pursuant to Rights Agreement dated January 22, 2007
(Common Stock Purchase Rights)
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
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 x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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).
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No x
The aggregate market value of the registrant’s Common Stock held by non-affiliates of the Registrant as of January 28, 2012 was $19,418,586. Solely for the purposes of this calculation, shares held by directors and executive officers and by each person known by the Registrant to beneficially own 10% or more of the common stock of the Registrant have been excluded. Such exclusion should not be deemed a determination or an admission by the Registrant that such individuals are, in fact, affiliates of the Registrant.
As of September 17, 2012 there were 3,839,468 shares of the registrant’s common stock outstanding.
ITEM 1 BUSINESS
DGT Holdings Corp., a New York corporation, was incorporated in 1954. Prior to the sale of our Villa Sistemi Medicali S.p.A. subsidiary (“Villa”) and our power conversion business (the “Power Conversion Business” or “Power Conversion Group”) operated by our RFI Corporation subsidiary (“RFI”), we were a leader in developing, manufacturing and marketing medical and dental imaging systems and power conversion subsystems and components worldwide. Our products included stationary and portable medical and dental diagnostic imaging systems and electronic systems and components such as electronic filters, transformers and capacitors.
DGT Holdings currently has a real estate business. The Company’s business is expected to consist primarily of capital redeployment and identification of new profitable operations where it can utilize its existing working capital and maximize the use of the Company’s net operating losses.
The Company is headquartered in New York, New York. The mailing address of our headquarters is c/o Steel Partners Holdings L.P., 590 Madison Avenue, 32nd Floor, New York, New York 10022 and our telephone number is (212) 520-2300. Our website is www.dgtholdings.com. Through the “SEC Filings” section of our website, we make our filings with the U.S. Securities and Exchange Commission (the “SEC”) available as soon as practicable after they are electronically filed with the SEC. These include our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
On November 12, 2009, we sold our DynaRad product line and on November 24, 2009, we sold the remainder of our Del Medical U.S. business unit including our Del Medical and UNIVERSAL product lines. On November 3, 2011, we sold Villa. These businesses comprised the entire Medical Systems Group and are reported as discontinued operations.
On August 16, 2012, we sold our Power Conversion Business to EMS Development Corporation (“EMS”), a New York corporation and an affiliate of Ultra Electronics Defense, Inc. (“UEDI”), pursuant to the asset purchase agreement (the “Asset Purchase Agreement”), dated as of June 6, 2012, by and among UEDI, the Company and RFI. The sale of the Power Conversion Business was subject to the approval of our shareholders, which approval was obtained at the special meeting of shareholders held on August 15, 2012. The sale of the Power Conversion Business will be reported as a gain from discontinued operations in our quarterly report on Form 10-Q for the first quarter of fiscal year 2013. Consequently, our historical financial statements may not be indicative of future results.
As of July 28, 2012, we had 94 employees, all of whom were employed in our Power Conversion Group. We believe that our employee relations are good and none of our employees are represented by a labor union. Employment by functional area as of July 28, 2012, was as follows:
Following the sale of our Power Conversion Business, we currently do not have any employees . We have a contract with SP Corporate Services, LLC (“SP Corporate Services”), a related party, for the services of our Chief Executive Officer and Chief Financial Officer. See Item 13 “Certain Relationships and Related Transactions, and Director Independence.”
The operating business that we report as a segment consists of the Power Conversion Group which was sold in the first quarter of fiscal year 2013. Our consolidated financial statements include a non-operating segment which covers unallocated corporate costs and a building in Italy. For the fiscal year ended July 28, 2012, two of our customers, DFAS and Raytheon Company, accounted for 10% or more of consolidated revenues. None of our business segments were dependent upon a single customer or a few customers.
POWER CONVERSION GROUP
Our Power Conversion Group designed, manufactured, marketed and sold high voltage precision components and sub-assemblies and electronic noise suppression components for a variety of applications. These products are utilized by original equipment manufacturers (“OEMs”) who build systems that are used in a broad range of markets. Our products were sold under the following industry brands: RFI, Filtron, Sprague and Stanley. This segment is comprised of electronic systems and components.
This segment designed and manufactured key electronic components such as transformers, magnetics, noise suppression filters and high voltage capacitors for use in precision regulated high voltage applications. Noise suppression filters and components are used to help isolate and reduce the electromagnetic interference (commonly referred to as “noise”) among the different components in a system sharing the same power source. Examples of systems that use our noise suppression products include aviation electronics, mobile and land-based telecommunication systems and missile guidance systems.
The Power Conversion Group provided subsystems and components which were used in the manufacture of medical electronics, military and industrial applications as follows:
MILITARY APPLICATIONS – Through our relationships with many of the federal government’s top defense suppliers, such as Raytheon, Boeing, Lockheed Martin and Northrop Grumman, we supplied electronic components for various classified and unclassified programs including radar systems, guidance systems, weapons systems and communication electronics.
INDUSTRIAL APPLICATIONS – Our high voltage power components and EMI filters were used in many leading-edge high technology scientific and industrial applications by OEMs, universities and private research laboratories. Some industrial applications using high voltage subsystems include DNA sequencing, molecular analysis, printed circuit board inspection, structural inspection, food and mail sterilization and semiconductor capital equipment.
MARKETING, SALES AND DISTRIBUTION
We marketed 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 and Australia. Our sales representatives were compensated primarily on a commission basis and the international agents were compensated either on a commission basis or acted as independent distributors. Our marketing efforts emphasized our ability to custom engineer products to optimal performance specifications. We emphasized team selling where our sales representatives, engineers and management personnel all worked together to market our products. We also marketed our products through catalogs and trade journals and participation in industry shows. Sales of the Company’s products were typically on open account with 30 day terms. New accounts were established with cash on delivery or cash in advance terms.
RAW MATERIALS AND PRINCIPAL SUPPLIERS
The Power Conversion Group in most cases used two or more alternative sources of supply for each of its raw materials, which consisted primarily of electronic components and subassemblies, metal enclosures for its products and certain other materials. In certain instances, however, the Power Conversion Group used a single source of supply when directed by a customer or by need. In order to ensure the consistent quality of the Power Conversion Group’s products, the Company performed certain supplier evaluation and qualification procedures, and where possible, entered into strategic partnerships with its suppliers to assure a continuing supply of high quality critical components.
With respect to those items which were purchased from single sources, we believed that comparable items would be available in the event that there was a termination of our existing business relationships with any such supplier.
Actual experience could differ materially from this belief as a result of a number of factors, including the time required to locate an alternate source for the material.
The majority of the Power Conversion Group’s raw materials were purchased on open account from vendors pursuant to various individual or blanket purchase orders. Procurement lead times were such that the Company was not required to hold significant amounts of inventory in order to meet customer demand. The Company believed its sources of supply for the Power Conversion Group were adequate to meet its needs.
Our Power Conversion Group competed with several small, privately owned suppliers of electronic systems and components. From our perspective, competition was primarily based on each company’s design, service and technical capabilities, and secondarily on price. Excluding the OEMs that manufacture their own components, based on market intelligence we gathered, we believed that we were among the top two or three in market share in supplying these products.
The markets for our products were subject to limited technological changes and gradually evolving industry requirements and standards. We believed that these trends would continue into the foreseeable future. Some of our current and potential competitors may have had substantially greater financial, marketing and other resources than we had. As a result, they may have been 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 could. Competition could increase if new companies entered the market or if existing competitors expanded their product lines or intensified efforts within existing product lines. Although we believed that our products were more cost-effective than those of our primary competitors, certain competing products may have had other advantages which may have limited our market.
We had a well developed engineering and technical staff in our Power Conversion Group. Our technical and scientific employees were generally employed in the engineering departments at our RFI business unit, and split their time, depending on business mix and their own technical background, between supporting existing production and development and research efforts for new product variations or new customer specifications. Our products included 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 used our noise suppression products include aviation electronics, mobile and land-based telecommunication systems and missile guidance systems.
TRADEMARKS AND PATENTS
The majority of the Power Conversion Group’s products were based on technology that was not protected by patent or other rights. Within the Power Conversion Group, certain of our products and brand names were protected by trademarks, both in the U.S. and internationally.
We were 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 would 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 were subject to cancellation rights at the government’s election. We experienced no material termination of any government contract and are not aware of any pending terminations of government contracts.
Historically, revenue was typically lower during the first quarter of each fiscal year due to the shutdown of operations in our Bay Shore, New York facilities for part of August as a result of vacation schedules.
Consolidated backlog for the Power Conversion Group at July 28, 2012 was $3.9 million versus backlog at July 30, 2011 of approximately $4.4 million. As of July 28, 2012, we believed that substantially all of the backlog would result in shipments within the next 12 to 15 months.
For further information about Geographic areas the Company operated in, as well as other segment related disclosures, refer to Note 10 of the Notes to Consolidated Financial Statements in Part II, Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
ITEM 1A RISK FACTORS
Prospective investors should carefully consider the following risk factors, together with the other information contained in this Annual Report on Form 10-K, in evaluating the Company and its business before purchasing our securities. In particular, prospective investors should note that this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and that actual results could differ materially from those contemplated by such statements. The factors listed below represent certain important factors which we believe could cause such results to differ. These factors are not intended to represent a complete list of the general or specific risks that may affect us. It should be recognized that other risks may be significant, presently or in the future, and the risks set forth below may affect us to a greater extent than indicated.
Our actual operating results can be expected to differ from the results indicated in our historical financial statements.
On November 24, 2009, we sold our Del Medical U.S. business unit. On November 3, 2011, we sold Villa. Both of these businesses comprised the entire Medical Systems Group and are reported as discontinued operations. On August 16, 2012, we sold our Power Conversion Business. The sale of the Power Conversion Business will be reported as a gain from discontinued operations in our quarterly report on Form 10-Q for the first quarter of fiscal year 2013. Consequently, our historical financial statements may not be indicative of future results.
We have limited positive cash flows.
Following the sale of our Power Conversion Business, we no longer have substantial business operations and our incoming cash flows are currently limited to the following: (i) the lease of our facility in Milan, Italy, (ii) the lease of our facility in Bay Shore, New York, (iii) payments on an unsecured promissory note received in connection with sale of Villa, and (iv) any dividends that may be paid with respect to our investments in publicly-traded securities.
We will continue to incur operating expenses for SEC reporting, auditing and similar functions, as well as normal operating expenses associated with any ongoing business, such as management services, rent, annual taxes, filing fees, and the like. Accordingly, in the absence of greater revenues, the Company may incur losses.
Failure to successfully identify and enter into a new line of business or identify possible acquisition candidates could cause our stock price to decline.
We are actively pursuing a new line of business operations and exploring all strategic alternatives to maximize shareholder value going forward, including deploying our assets in seeking business acquisition opportunities and other actions to redeploy our capital, while we manage our remaining operations. In relation to pursuing such strategic alternatives and new business acquisition opportunities, our stock price may decline due to any or all of the following potential occurrences:
There can be no assurance that we will be able to identify suitable acquisition candidates or business and investment opportunities.
We are exploring strategic alternatives and seeking to identify new business acquisition opportunities in which we may utilize our NOLs. There is no guarantee that we will be able to identify such new business acquisition opportunities or strategic alternatives in which we may redeploy our assets. If we are unable to identify new business opportunities or investments or acquire suitable acquisition candidate(s), our results of operations and stock price may suffer.
Our shareholders may be subject to the broad discretion of management.
We have limited operating assets, and our business strategy involves identifying new business and investment opportunities. Our shareholders may not have an opportunity to evaluate the specific merits or risks of any such proposed transactions or investments. As a result, our shareholders may be dependent on the broad discretion and judgment of management in connection with the application of our capital and the selection of acquisition or investment targets. There can be no assurance that determinations ultimately made by us will permit us to achieve profitable operations.
We will incur significant costs in connection with our evaluation of new business opportunities and suitable acquisition candidates.
Our management intends to identify, analyze and evaluate potential new business opportunities, including possible acquisition and merger candidates. We will incur significant costs, such as due diligence and legal and other professional fees and expenses, as part of these efforts. Notwithstanding these efforts and expenditures, we cannot give any assurance that we will identify an appropriate new business opportunity, or any acquisition opportunity, in the near term, or at all.
We will likely have no operating history in our new line of business, which is yet to be determined, and therefore we will be subject to the risks inherent in establishing a new business.
We have not identified what our new line or lines of business will be and, therefore, we cannot fully describe the specific risks presented by such business. It is likely that we will have had no operating history in the new line of business, and it is possible that any company we may acquire will have a limited operating history in its business. Accordingly, there can be no assurance that our future operations will generate operating or net income, and as such our success will be subject to the risks, expenses, problems and delays inherent in establishing a new line of business for us. The ultimate success of such new business cannot be assured.
We may be unable to realize the benefits of our NOLs.
NOLs may be carried forward to offset federal and state taxable income in future years and eliminate income taxes otherwise payable on such taxable income, subject to certain limits and adjustments. Based on current income tax rates, our NOLs and other carry-forwards could provide a benefit to us, if fully utilized, of significant future tax savings. However, our ability to use these tax benefits in future years will depend upon our ability to comply with the rules relating to the use of NOLs and the amount of our otherwise taxable income. If we do not have sufficient taxable income in future years to use the tax benefits before they expire, we will lose the benefit of these NOLs permanently. Consequently, our ability to use the tax benefits associated with our NOLs will depend significantly on our success in identifying suitable new business opportunities and acquisition candidates that maximize our NOLs, and once identified, successfully becoming established in this new business line or consummating such an acquisition.
Additionally, if we underwent an ownership change, the NOLs would be subject to an annual limit on the amount of the taxable income that may be offset by our NOLs generated prior to the ownership change. If an ownership change were to occur, we may be unable to use a significant portion of our NOLs to offset taxable income.
The amount of NOLs that we have claimed has not been audited or otherwise validated by the U.S. Internal Revenue Service (the “IRS”). The IRS could challenge our calculation of the amount of our NOLs, and our determinations as to when a prior change in ownership occurred, and other provisions of the Internal Revenue Code of 1986, as amended (the “Code”), may limit our ability to carry forward our NOLs to offset taxable income in future years. If the IRS was successful with respect to any such challenge, the potential tax benefit of the NOLs to us could be substantially reduced.
Depending on the nature of our business operations and assets, we cannot be certain that we will not be deemed a shell company under the federal securities laws.
Pursuant to Rule 405 of the Securities Act and Exchange Act Rule 12b-2, a shell company is defined as a registrant that has no or nominal operations, and either (a) no or nominal assets, (b) assets consisting solely of cash and cash equivalents, or (c) assets consisting of any amount of cash and cash equivalents and nominal other assets. Depending on the nature of our business operations and assets following the sale of our Power Conversion Business, there is a chance that we may be deemed a “shell company” under the federal securities laws and regulations. Applicable securities rules prohibit shell companies from using a Form S-8 registration statement to register securities pursuant to employee compensation plans and from utilizing Form S-3 for the registration of securities for so long as we would be a shell company and for 12 months thereafter. Additionally, Form 8-K requires shell companies to provide more detailed disclosure upon completion of a transaction that causes it to cease being a shell company. To the extent that we acquire a business in the future, we would be required to file a current report on Form 8-K containing the financial and other information required in a registration statement on Form 10 within four business days following completion of such a transaction. To the extent that we would be required to comply with additional disclosure because we would be a shell company, we might be delayed in executing any mergers or acquiring other assets that would cause us to cease being a shell company. In addition, under Rule 144 of the Securities Act, a holder of restricted securities of a “shell company” is not allowed to resell their securities in reliance upon Rule 144. Preclusion from any prospective purchase using the exemptions from registration afforded by Rule 144 might make it more difficult for us to sell equity securities in the future and the inability to utilize registration statements on Forms S-8 and S-3 would likely increase our cost to register securities in the future. Additionally, the loss of the use of Rule 144 and Forms S-3 and S-8 might make investments in our securities less attractive to investors and might make the offering and sale of our securities to employees, directors and others under compensatory arrangements more expensive and less attractive to recipients.
We may be deemed an investment company, which could impose on us burdensome compliance requirements and restrict our activities, which may make it difficult for us to complete future business combinations or acquisitions.
The Investment Company Act of 1940, as amended (the “Investment Company Act”), requires registration, as an investment company, of companies that are engaged primarily in the business of investing, reinvesting, owning, holding or trading securities. Generally, companies may be deemed investment companies under the Investment Company Act if they are viewed as engaging in the business of investing in securities or they own investment securities having a value exceeding 40% of certain assets. Following the sale of our Power Conversion Business and depending on our future activities and operations, we may become subject to the Investment Company Act. While Rule 3a-2 of the Investment Company Act provides an exemption that allows companies that may be deemed investment companies but that have a bona fide intent to engage primarily in a business other than that of investing in securities up to one year to engage in such other business activity, we may not qualify for this or any other exemption under the Investment Company Act. If we are deemed to be an investment company under the Investment Company Act, we may be subject to certain restrictions that may make it difficult for us to complete a business combination, including:
In addition, we may have imposed upon us burdensome requirements, including:
If we become subject to the Investment Company Act, compliance with these additional regulatory burdens would require additional costs and expenses. There can be no assurance that we will not be deemed to be an investment company, as defined under Sections 3(a)(1)(A) and (C) of the Investment Company Act or that we will qualify for the exemption under Rule 3a-2 of the Investment Company Act.
We do not intend to pay dividends on shares of our Common Stock in the foreseeable future.
We currently expect to retain our future earnings, if any, for use in the operation and expansion of our business. We do not anticipate paying any cash dividends on shares of our Common Stock in the foreseeable future.
Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes Oxley Act of 2002, are creating uncertainty for companies such as ours. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest reasonably necessary resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities, which could harm our business prospects.
Our Common Stock is not listed on a national securities exchange and we cannot predict when or if it ever will be listed on any national securities exchange.
Current pricing information on our Common Stock has been available on the Over the Counter Bulletin Board (the “OTCBB”). The OTCBB is an over-the-counter market which generally provides significantly less liquidity than established stock exchanges and quotes for stocks included in the OTCBB are not listed in the financial sections of newspapers. Therefore, prices for securities traded solely in the OTCBB may be difficult to obtain, and shareholders may find it difficult to resell their shares. In order for our Common Stock to be listed on a national securities exchange, we will need to meet certain listing requirements. There can be no assurance that we will be able to meet such listing requirements. We do not have any current plans to list our Common Stock on a national securities exchange.
We are exposed to fluctuations in currency exchange rates which could impact our financial condition.
The lease of our facility in Milan, Italy exposes us to foreign exchange rate fluctuations as the financial results are translated from Euros into U.S. dollars upon consolidation. If the U.S. dollar weakens against the Euro, the translation of such foreign currency denominated lease payments will result in increased revenue, operating expenses and net income. Similarly, if the U.S. dollar strengthens against the Euro, the translation of such payments will result in decreased revenue, operating expenses and net income. As exchange rates vary, sales and other operating results, when translated, may differ materially from expectations.
We may sustain losses in our investment portfolio.
A significant portion of our assets consists of investments in marketable securities that we hold as available-for-sale and we mark them to market. While there has been a decline in the trading values of certain of the securities in which we have invested, we have not recognized a material loss on our securities as the unrealized losses incurred were not deemed to be other-than-temporary. We expect to realize the full value of all our marketable securities upon maturity or sale, as we have the intent and ability to hold the securities until the full value is realized. However, we cannot provide any assurance that our invested cash, cash equivalents and marketable securities will not be impacted by adverse conditions in the financial markets, which may require us to record an impairment charge in the future that could adversely impact our financial results.
If the financial institutions that maintain our cash, cash equivalents and marketable securities experience financial difficulties, which is more likely in the current weakened state of the economy, our cash balances may be adversely impacted.
We maintain our cash, cash equivalents and marketable securities with certain financial institutions in which our balances exceed the limits that are insured by the Federal Deposit Insurance Corporation. If the underlying financial institutions fail or other adverse conditions occur in the financial markets, our cash balances may be impacted.
We are dependent on the release of funds from escrow accounts and are subject to potential indemnification claims.
In connection with the sale of the Power Conversion Business, a portion of the proceeds from the sale is being held in escrow to cover any potential net working capital adjustment and a portion is being held in escrow to serve as security for payments in satisfaction of certain of the Company’s and RFI’s indemnification obligations. If EMS brings a claim pursuant to the Asset Purchase Agreement, such claim may first be against such escrow amounts, but could be brought in excess of such escrow amounts. If such claim is proven successful, we may not receive the anticipated amount from the escrow accounts or may have to pay claims in excess of the escrow amounts directly from the Company, and the receipt of funds in the escrow accounts may be delayed pending the final outcome of any such claims.
We may not be able to obtain additional financing.
The Company does not currently have a U.S. credit facility to finance working capital needs. Management believes that if financing is needed, they would be able to obtain new asset based financing on the Company’s U.S. subsidiary. In addition, the Company may be able to dividend necessary funds from its foreign subsidiary, although this is not planned. Although on September 1, 2010, the Company completed a mortgage financing on our property in Bay Shore, New York, and received approximately $2.5 million payable over 10 years at an annual rate of interest of 4.9%, the Company can make no assurances that it will be able to obtain additional financing in the future on terms favorable to the Company or at all.
There is a risk that our insurance will not be sufficient to protect us from product liability claims.
Our Medical Systems Group and Power Conversion Group businesses involved the risk of product liability claims inherent to the business. We maintain product liability insurance subject to certain deductibles and exclusions. There is a risk that our insurance will not be sufficient to protect us from product liability claims, or that product liability insurance will not be available to us at a reasonable cost, if at all. An uninsured or underinsured claim could materially harm our operating results or financial condition.
We may face risks associated with handling hazardous materials and products.
Some of the research and development activity of our disposed businesses involved the controlled use of hazardous materials, such as toxic and carcinogenic chemicals. Although we believe that our safety procedures for handling and disposing of such materials complied with the standards prescribed by federal, state and local regulations, it may not have been possible to completely eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, we could be held liable for any resulting damages, and such liability could be extensive.
We were also subject to substantial regulation relating to occupational health and safety, environmental protection, hazardous substance control and waste management and disposal. The failure to comply with such regulations could subject us to, among other things, fines and criminal liability.
We may issue a substantial amount of our Common Stock in the future which could cause dilution to our shareholders and otherwise adversely affect our stock price.
A key element of our business strategy is to make acquisitions. While we may make acquisition(s) in whole or in part with cash, as part of such strategy, we may issue additional shares of Common Stock as consideration for such acquisitions. These issuances could be significant. To the extent that we make acquisitions and issue our shares of Common Stock as consideration, our existing shareholders’ equity interest may be diluted. Any such issuance will also increase the number of outstanding shares of Common Stock that will be eligible for sale in the future. Persons receiving shares of our Common Stock in connection with these acquisitions may be more likely to sell off their Common Stock, which may influence the price of our Common Stock. In addition, the potential issuance of additional shares in connection with anticipated acquisitions could lessen demand for our Common Stock and result in a lower price than might otherwise be obtained. We may issue common stock in the future for other purposes as well, including in connection with financings, for compensation purposes, in connection with strategic transactions or for other purposes.
A significant number of our shares will be available for future sale and could depress the market price of our stock.
As of July 28, 2012, an aggregate of 3,839,468 shares of our Common Stock were issued and outstanding. In addition, as of July 28, 2012, there were outstanding options to purchase 184,008 shares of our Common Stock, 124,108 of which were fully vested.
Sales of large amounts of our Common Stock in the market could adversely affect the market price of the Common Stock and could impair our future ability to raise capital through offerings of our equity securities. A large volume of sales by holders exercising options could have a significant adverse impact on the market price of our Common Stock.
We have a limited trading market and our stock price may be volatile.
There is a limited public trading market for our Common Stock in the Over-the-Counter “OTC” Market. We cannot assure you that a regular trading market for our Common Stock will ever develop or that, if developed, it will be sustained.
The experiences of other small companies indicate that the market price for our Common Stock could be highly volatile. Many factors could cause the market price of our Common Stock to fluctuate substantially, including:
Accordingly, substantial fluctuations in the price of our Common Stock could limit the ability of our current shareholders to sell their shares at a favorable price.
The Company may submit, from time to time, proposals to shareholders to amend the company’s certificate of incorporation or to increase the number of common shares authorized and any resulting issuances of additional shares could prove dilutive to shareholders or deter changes in control of the Company.
At a special meeting of shareholders of the Company held on October 13, 2010, the shareholders approved a proposal to increase the aggregate number of shares of Common Stock authorized to be issued by the Company from 50,000,000 to 100,000,000 in order to have a sufficient number of shares of Common Stock to provide a reserve of shares available for issuance to meet business needs as they may arise in the future. Such business needs may include, without limitation, rights offerings, financings, acquisitions, establishing strategic relationships with corporate partners, providing equity incentives to employees, officers or directors, stock splits or similar transactions. On January 6, 2011, the Company effected a one-for-fifty reverse stock split, immediately followed by a four-for-one forward stock split. The number of authorized shares of our Common Stock did not change by virtue of the reverse stock split and forward stock split and the Company has additional shares of Common Stock which may be issued. Issuances of any additional shares for these or other reasons could prove dilutive to current shareholders or deter changes in control of the Company, including transactions where the shareholders could otherwise receive a premium for their shares over then current market prices.
ITEM 1B UNRESOLVED STAFF COMMENTS
ITEM 2 PROPERTIES
The following is a list of our principal properties. The property held by RFI Corporation was previously used in our Power Conversion Group and is currently leased to EMS, subject to a five year lease cancellable with 30 days notice. The property held by Villa Immobiliare Srl was previously used in our Medical Systems Group and is currently leased to Villa, subject to a six year lease, with a six year renewal option.
ITEM 3 LEGAL PROCEEDINGS
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. In the opinion of management, such legal actions are not expected to have a material adverse effect on the financial condition or results of operations of the Company.
ITEM 4 MINE SAFETY DISCLOSURES
ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Effective May 11, 2007, our Common Stock commenced trading on the Over the Counter “OTC” Bulletin Board under the symbol “DGTC.OB”. Prior to that, shares of our Common Stock had been traded on the “pink sheets,” under the symbol “DGTC.PK”. The OTC is an over-the-counter market which provides significantly less liquidity than established stock exchanges, and quotes for stocks included in the OTC are not listed in the financial sections of newspapers as are those for established stock exchanges.
As of September 17, 2012, there were approximately 385 holders of record of our Common Stock. The following table shows the high and low sales prices per share of our Common Stock for the past eight quarters, as reported by the over the counter market.
* Adjusted for 1 for 50 and 4 for 1 stock splits effective January 6, 2011.
We have not paid any cash dividends, except for the payment of cash in lieu of fractional shares, since 1983. We do not intend to pay any cash dividends in the foreseeable future.
Information concerning securities authorized for issuance under our equity compensation plans appears in Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters under the caption “Equity Compensation Plan Information,” which is incorporated herein by reference.
ITEM 6 SELECTED FINANCIAL DATA
The selected income statement data presented for the fiscal years ended July 28, 2012, July 30, 2011 and July 31, 2010 and the balance sheet data as of July 28, 2012 and July 30, 2011 have been derived from our audited financial statements included in Part II, Item 8, of this Annual Report on Form 10-K. The income statement data for the years ended August 1, 2009 and August 2, 2008, and the balance sheet data as of July 31, 2010, August 1, 2009 and August 2, 2008 have been derived from audited financial statements not included herein.
On November 12, 2009, we sold our DynaRad product line and on November 24, 2009, we sold the remainder of our Del Medical U.S. business unit including our Del Medical and UNIVERSAL product lines. On November 3, 2011, we sold Villa. These businesses comprised the entire Medical Systems Group and are reported as discontinued operations. The sale of the Power Conversion Business occurred on August 16, 2012 and will be reported as a gain from discontinued operations in our quarterly report on Form 10-Q for the first quarter of fiscal year 2013.
This selected financial data should be read in conjunction with the Consolidated Financial Statements and related notes included in Part II, Item 8, “Financial Statements and Supplementary Data” thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K.
NOTE: Earnings per share and shares outstanding have been adjusted for 1 for 50 and 4 for 1 stock splits effective January 6, 2011. See Notes to Consolidated Financial Statements in Part II, Item 8 “Financial Statements and Supplementary Data.”
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
FORWARD LOOKING STATEMENTS
In addition to other information in this Annual Report on Form 10-K, this Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and the current economic environment. We caution that these statements are not guarantees of future performance. They involve a number of risks and uncertainties that are difficult to predict including, but not limited to, our ability to implement our business plan, retention of management, changing industry and competitive conditions, obtaining anticipated operating efficiencies, securing necessary capital facilities and favorable determinations in various legal and regulatory matters. Actual results could differ materially from those expressed or implied in the forward-looking statements. Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements are specified in the Company’s filings with the SEC including those discussed in Item 1A, “Risk Factors” included in this Annual Report on Form 10-K, the Company’s Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
Prior the sale of our Villa Sistemi Medicali S.p.A. subsidiary (“Villa”) and our power conversion business (the “Power Conversion Business” or “Power Conversion Group”) operated by our RFI Corporation subsidiary (“RFI”), we were a leader in developing, manufacturing and marketing medical and dental imaging systems and power conversion subsystems and components worldwide. Our products included stationary and portable medical and dental diagnostic imaging systems and electronic systems and components such as electronic filters, transformers and capacitors.
On November 12, 2009, we sold our DynaRad product line and on November 24, 2009, we sold the remainder of our Del Medical U.S. business unit including our Del Medical and UNIVERSAL product lines. On November 3, 2011, we sold Villa. These businesses comprised the entire Medical Systems Group and are reported as discontinued operations in the financial statements of the Company and prior periods have been restated. See Note 2 of Notes to Consolidated Financial Statements in Part II, Item 8 “Financial Statements and Supplementary Data.”
On August 16, 2012, we sold our Power Conversion Business to EMS Development Corporation (“EMS”), a New York corporation and an affiliate of Ultra Electronics Defense, Inc. (“UEDI”), pursuant to the asset purchase agreement (the “Asset Purchase Agreement”), dated as of June 6, 2012, by and among UEDI, the Company and RFI. The sale of the Power Conversion Business was subject to the approval of our shareholders, which approval was obtained at the special meeting of shareholders held on August 15, 2012. In consideration for the sale of the Power Conversion Business, EMS paid an aggregate of $12,500 in cash. $1,250 of such amount is being held in escrow to serve as security for payments in satisfaction of certain of the Company’s and RFI’s indemnification obligations and $237 is being held in escrow to cover any potential net working capital adjustment. The sale of the Power Conversion Business will be reported as a gain from discontinued operations in our quarterly report on Form 10-Q for the first quarter of fiscal year 2013. See Note 16 of Notes to Consolidated Financial Statements in Part II, Item 8 “Financial Statements and Supplementary Data.” Consequently, our historical financial statements may not be indicative of future results.
The Company currently has a real estate business. The Company’s business is expected to consist primarily of capital redeployment and identification of new, profitable operations where it can utilize its existing working capital and maximize the use of the Company’s net operating losses.
CRITICAL ACCOUNTING POLICIES
Complete descriptions of significant accounting policies are outlined in Note 1 of the Notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Within these policies, we have identified the accounting for revenue recognition, deferred income taxes, the allowance for obsolete and excess inventory and goodwill as having been critical accounting policies due to the significant amount of estimates involved. In addition, for interim periods, we have identified the valuation of finished goods inventory as being critical due to the amount of estimates involved.
The Company recognizes revenue upon shipment, provided there is persuasive evidence of an arrangement, there are no uncertainties concerning acceptance, the sales price is fixed, collection of the receivable is probable and only perfunctory obligations related to the arrangement need to be completed.
The Company’s products are covered primarily by one year warranty plans and in some cases optional extended warranties for up to five years are offered. The Company establishes allowances for warranties 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 collectibility 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 Accounting Standards Codification (“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 carry forwards.
The Company periodically assesses the realization of our 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. Our determination is based on what we believe will be the more likely than not result.
During fiscal years 2012, 2011 and 2010, the Company’s discontinued 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 tax assets. As of July 28, 2012, the Company continues to carry a 100% valuation allowance on its net U.S. deferred income tax assets.
The Company follows the provisions of ASC 740-10-25, formerly FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) with respect to uncertain tax positions. The guidance specifies how tax benefits for uncertain tax positions are to be measured, recognized and disclosed in the financial statements. The Company recognizes penalties and interest, if any, related to the unrecognized tax obligations as a tax provision expense.
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 INVENTORIES
In addition, we use certain estimates in determining interim operating results. The most significant estimates in interim reporting relate to the valuation of finished goods inventories. For certain subsidiaries, for interim periods, we estimate the amount of labor and overhead costs related to finished goods inventories. These estimates are revised based on actual results at year end. As of July 28, 2012, finished goods represented 8.3% of the gross carrying value of our total gross inventory. We believe the estimation methodologies used are appropriate and are consistently applied.
The Company’s goodwill was subject to, at a minimum, an annual fourth fiscal quarter impairment assessment of its carrying value. Goodwill impairment was deemed to exist if the net book value of a reporting unit exceeded its estimated fair value. Estimated fair values of the reporting units were estimated using an earnings model and a discounted cash flow valuation model. The discounted cash flow model incorporated the Company’s estimates of future cash flows, future growth rates and management’s judgment regarding the applicable discount rates used to discount those estimated cash flows.
The Company’s fiscal 2011 impairment assessment on its Villa reporting unit did not suggest impairment. The assets of Villa were sold at a gain of $6,837.
CONSOLIDATED RESULTS OF OPERATIONS
FISCAL 2012 COMPARED TO FISCAL 2011
The following table summarizes key indicators of consolidated results of operations:
Consolidated net sales of $11,438 for fiscal 2012 reflect a 6.1% increase from fiscal 2011 net sales of $10,783.
Backlog was $3,890 at July 28, 2012 compared to $4,360 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 31.6% of sales for fiscal 2012 from 27.0% of sales in fiscal 2011. Process improvements affecting material utilization attributed to increased margins and reduced material variances during fiscal 2012. Additionally, the comparable prior year margin was adversely impacted by unfavorable product mix and increased reserves for excess inventory.
Total operating expenses increased $2,173 to $6,570 in fiscal 2012 from $4,397 for the prior year as a result of increased legal expenses related to the sale of the Power Conversion Group, as well as increased compensation costs and restricted stock grants.
The following table summarizes the key changes in operating expenses for fiscal 2012 from the prior year:
Operating loss for fiscal year 2012 was $2,958 compared to an operating loss of $1,484 in the prior year, primarily as a result of the legal and compensation costs discussed above.
The discontinued operations had net income of $1,230 during fiscal year 2012 on sales of $16,714 compared to net income of $2,824 on sales of $57,138 in fiscal 2011. The Villa subsidiary was sold on November 3, 2011 and the fiscal 2012 results only include four months of activity compared to the full year in the prior year. The prior fiscal year first quarter sales included unusually high volume that was not repeated in fiscal 2012.
A net gain on the sale of Villa of $6,837 was recognized in fiscal 2012.
The Company recorded net income of $5,116 or $1.33 per basic share in fiscal 2012, compared to net income of $1,130 or $.37 per basic share (as adjusted to reflect stock splits) in the prior fiscal year.
FISCAL 2011 COMPARED TO FISCAL 2010
The following table summarizes key indicators of consolidated results of operations:
Consolidated net sales of $10,783 for fiscal 2011 reflect a 13.6% decrease from fiscal 2010 net sales of $12,473 as a result of a decline in customer orders.
Consolidated gross margin decreased to 27.0% of sales for fiscal 2011 from 35.0% of sales in fiscal 2010 due to an increase in inventory reserves of approximately $500 and to higher employee costs, consisting primarily of medical insurance expense in fiscal 2011.
Total operating expenses increased $624 to $4,397 in fiscal 2011 from $3,773 for the prior year.
The following table summarizes the key changes in operating expenses for fiscal 2011 from the prior year:
Operating loss for fiscal year 2011 was $1,484 compared to operating income of $590 in the comparable prior year period. The Power Conversion Group generated operating income of $116, compared to operating income of $1,826 in the prior year. The decrease was due to additional inventory reserves and higher employee costs, as explained above. Unallocated corporate expenses for fiscal 2011 totaled $1,600 as compared to $1,236 in the prior year.
On a consolidated basis in fiscal 2011, the Company recorded an income tax provision of $183 related to tax on a dividend from Villa compared to $25 income tax benefit recorded in fiscal 2010. The Company has not provided for any income tax benefits related to the U.S. pretax losses in fiscal 2011 or 2010 due to uncertainty regarding the realizability of its U.S. net operating loss carry forwards, as explained in Critical Accounting Policies above.
The discontinued operations for Del Medical Imaging had a loss of $3,157 in fiscal 2010 which reflects a $1,262 million loss from operations on sales of $5,377, $1,895 loss on the sale from the write-down of assets to net realizable value and severance and related expenses.
The discontinued operations for Villa had net income of $2,824 in fiscal 2011 on sales of $57,138 compared to net income of $1,813 in fiscal 2010 on sales of $43,695.
The Company recorded net income of $1,130 or $0.37 per basic share in fiscal 2011, compared to net loss of $812 or $.45 per basic share (as adjusted to reflect stock splits) in the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s sources of capital include, but are not limited to, cash on hand, 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.
FISCAL 2012 COMPARED TO FISCAL 2011
Working Capital — At July 28, 2012 and July 30, 2011, our working capital was approximately $45,193 and $38,147, respectively. The increase in working capital for fiscal 2012 as compared to fiscal 2011 related primarily to the net proceeds from the sale of Villa of $22,194 during the second quarter of fiscal 2012. At July 28, 2012 and July 30, 2011, the Company had $44,956 and $23,629 in cash and cash equivalents and marketable securities, respectively. This increase is due to the proceeds from the sale of Villa during fiscal 2012.
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 completed its rights offering in December 2010 and raised $14,340, net of expenses of the offering.
The following is a summary of the Company’s cash flows:
Cash Flows from Operating Activities – The significant decrease in fiscal 2012 was primarily due to that year incurring a net loss from continuing operations of $2,951 excluding non-cash items, while 2011 included $1,694 of net income from continuing operations excluding non-cash items.
Cash Flows from Investing Activities – The Company had proceeds of $22,194 from the sale of Villa during fiscal 2012, offset by the purchase of marketable securities of $4,796. The prior year activity included $310 of capital expenditures, primarily for the discontinued operations.
Cash Flows from Financing Activities – In connection with the sale of Villa, the Company amended its mortgage loan agreement and agreed to pledge to People’s United Bank a certificate of deposit in the amount of $2,425. The amendment and pledge arrangement were made in consideration for the waiver of certain loan agreement covenants that the Company would not have been able to satisfy as a result of the sale of Villa. During fiscal year 2012, the Company also paid $253 to repurchase shares of its Common Stock. During the fiscal year ended July 30, 2011, the Company completed a Rights Offering which provided $14,340, net of expenses. The Company also received proceeds of $2,500 for a mortgage on its Bay Shore, NY facility. In addition, for discontinued operations, approximately $2,474 of long-term debt was repaid, including the $1,117 for the purchase price of the manufacturing facility in Milan, Italy at the conclusion of its lease in April 2011.
The following table summarizes our contractual obligations, including debt and operating leases at July 28, 2012:
In addition, the Company is contingently liable for the operating lease for the facility related to the Del Medical discontinued operation. The payments are $11 thousand per month through May 31, 2013.
FISCAL 2011 COMPARED TO FISCAL 2010
Working Capital — At July 30, 2011 and July 31, 2010, our working capital was approximately $38,147 and $17,411, respectively. The increase in working capital for fiscal 2011 as compared to fiscal 2010 related primarily to the proceeds from the rights offering during the second quarter of fiscal 2011, as well as the mortgage on the property in Bay Shore, NY. At July 30, 2011 and July 31, 2010, the Company had $23,629 and $3,987 in cash and cash equivalents, respectively. This increase is due to the rights offering and mortgage proceeds and increases in accounts payable and accrued expenses, offset by increases in our receivables as a result of the increase in sales in discontinued operations.
The following is a summary of the Company’s cash flows:
Cash Flows from Operating Activities — For the year ended July 30, 2011, the Company provided $5,009 of cash from operations, compared to $6,205 in the prior fiscal year. The decrease is largely due to an increase in trade accounts payable and accrued expenses, offset by increases in receivables and inventories in the discontinued operations.
Cash Flows from Investing Activities – The Company made $52 in facility improvements and capital equipment expenditures for the fiscal year ended July 30, 2011, compared to $568 in the prior fiscal year period. Discontinued operations had capital expenditures of $258 in fiscal 2011 compared to $280 in the prior year period.
Cash Flows from Financing Activities – During the year ended July 31, 2011, the Company completed a Rights Offering which provided $14,340, net of expenses. The Company also received proceeds of $2,500 for a mortgage on its Bay Shore, NY facility. In addition, $2,474 of long-term debt related to discontinued operations was repaid, including the $1,117 for the purchase price of the manufacturing facility in Milan, Italy at the conclusion of its lease in April 2011. During the year ended July 31, 2010, the Company repaid $7,400 of indebtedness on its revolving loan agreement and $1,566 of long term debt in discontinued operations.
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 Annual Report on Form 10-K.
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. For a discussion of new accounting pronouncements, see Note 1 of Notes to Financial Statements in Part II, Item 8 “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not ordinarily hold market risk sensitive instruments for trading purposes. We do, however, recognize market risk from interest rate and foreign currency exchange exposure.
INTEREST RATE RISK
Our mortgage is at a fixed rate for the first five years and is not affected by fluctuations in interest rates during those years. See Note 7 of Notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. Based on the balances as of July 28, 2012, an increase of 1/2 of 1% in interest rates would be immaterial. There is no assurance that interest rates will increase or decrease over the next fiscal year. Because we believe this risk is not material, we do not undertake any specific steps to reduce or eliminate this risk.
FOREIGN CURRENCY RISK
The financial statements of Villa Immobiliare are denominated in Euros. Having a portion of our future income denominated in Euros exposes us to market risk with respect to fluctuations in the U.S. dollar value of future Euro earnings. A 5% decline in the value of the Euro in fiscal 2012, for example, would have decreased our consolidated income from continuing operations before income taxes by less than $10,000 (due to the reduction in the U.S. dollar value of Villa Immobiliare’s operating income).
We are exposed to the market risk of changes in the equity prices of our investments in marketable securities. The changes in the fair value of the investments that we accounted for as changes in available for sale securities are recorded in Other Comprehensive Income. See Note 3 of Notes to Consolidated Financial Statements included in Part II, Item 8 “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for the cost, gross gains and losses and fair market values of these investments at July 28, 2012.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, including the notes to all such statements and other supplementary data are included in this report beginning on page F-1.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of the Company’s management, including John J. Quicke, 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 Exchange Act, as of the end of the period covered by this Annual Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of July 28, 2012, the end of the period covered by this Annual Report to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
(b) REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes policies and procedures for maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for the preparation of our financial statements; providing reasonable assurance that receipts and expenditures of the Company are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of July 28, 2012.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to an exemption for smaller reporting companies under Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
(c) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting during the fiscal year ended July 28, 2012 that have materially affected, or reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B OTHER INFORMATION
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The names and ages of each director and executive officer of the Company, each of their principal occupations at present and for the past five (5) years and certain other information about each, are set forth below:
The Company believes that the collective skills, experiences and qualifications of its directors provide the Board of Directors with the expertise and experience necessary to advance the interests of its shareholders. While the Governance and Nominating Committee has not established any specific, minimum standards that must be met by each director, it uses a variety of criteria to evaluate directors’ qualifications. In addition to the individual attributes of each director described below, the Company believes directors must exhibit the highest standards of professional and personal ethics and values. Directors should also possess a broad experience at the policy-making level in business, exhibit commitment to enhancing shareholder value, have no current or potential conflict of interest, devote sufficient time to carry out their duties and have the ability to provide insight and practical wisdom based on past experience.
Jack L. Howard has been a member of the Company’s Board of Directors since September 2011. Mr. Howard has been a registered principal of Mutual Securities, Inc., a FINRA registered broker-dealer, since 1989. Mr. Howard has served as the President of Steel Partners Holdings GP Inc. (“Steel Holdings GP”), the general partner of Steel Partners Holdings L.P. (“Steel Holdings”), a global diversified holding company that engages in multiple businesses through consolidated subsidiaries, associated companies and other interests and has significant interests in leading companies in various industries, including diversified industrial products, energy, defense, banking, insurance, food products and services, oilfield services, sports, training, education, and the entertainment and lifestyle industries, since July 2009 and has served as a director of Steel Holdings GP since October 2011. He also served as the Assistant Secretary of Steel Holdings GP from July 2009 to September 2011 and as Secretary from September 2011 to January 2012. He is the President of Steel Partners LLC (“Steel Partners”), a subsidiary of Steel Holdings, and has been associated with Steel Partners and its affiliates since 1993. Mr. Howard co-founded Steel Partners II, L.P., a private investment partnership that is now a wholly-owned subsidiary of Steel Holdings, in 1993. He has served as a director of Handy & Harman Ltd. (“HNH”), a diversified industrial products manufacturing company, since July 2005. He has been a director of Steel Excel Inc. (“Steel Excel”), a company whose business is expected to consist primarily of capital redeployment and identification of new, profitable operations in the sports, training, education, entertainment and lifestyle businesses, since December 2007. Mr. Howard served as Chairman of the Board of a predecessor entity of Steel Holdings from June 2005 to December 2008, as a director from 1996 to December 2008 and its Vice President from 1997 to December 2008. From 1997 to May 2000, he also served as Secretary, Treasurer and Chief Financial Officer of Steel Holdings’ predecessor entity. Mr. Howard served as a director of SP Acquisition Holdings, Inc. (“SPAH”), a company formed for the purpose of acquiring one or more businesses or assets, from February 2007 until June 2007, and was Vice-Chairman from February 2007 until August 2007. He also served as Chief Operating Officer and Secretary of SPAH from June 2007 and February 2007, respectively, until October 2009. He currently holds the securities licenses of Series 7, Series 24, Series 55 and Series 63. As a result of these and other professional experiences, Mr. Howard is qualified to serve as a member of the Board due to his financial expertise and record of success as a director, chairman and top-level executive officer of numerous public companies.
General Merrill A. McPeak has been a member of our Board of Directors since April 27, 2005. From October 1990 until October 1994, he was Chief of Staff of the U.S. Air Force and a member of the Joint Chiefs of Staff. During this period, he was the senior officer responsible for organization, training and equipage of a combined active duty, National Guard, Reserve and civilian work force of over 850,000 people serving at 1,300 locations in the United States and abroad. As a member of the Joint Chiefs of Staff, he and the other service chiefs were military advisors to the Secretary of Defense, the National Security Council and the President of the United States. Following retirement from active service, General McPeak began a second career in business. Since 1995, General McPeak has been President of McPeak and Associates, a management consulting firm that is active as an investor, advisor and director of early development stage companies. A subsidiary, Lost Wingman Press, recently published Hangar Flying, book one of a planned three-volume memoir. General McPeak has long service as a director of public companies, including Tektronix, Inc. and Trans World Airlines, Inc. He was for several years Chairman of ECC International Corp. His current public company directorships include Genesis Biopharma (since 2011), focused on immunology for treatment of Stage IV metastatic melanoma, Derycz Scientific (since 2010), publishing and distributing scientific journal articles, and Miller Energy Resources (since 2010), engaged in oil and gas exploration and production. He previously served as a director of Mosquito Consolidated Gold (Chairman, 2011-2012), Point Blank Solutions, Inc. (2008-2011), MathStar, Inc. (2005-2010), QPC Lasers (Vice Chairman, 2006-2009), and Gigabeam Corp. (2004-2009). From 2003 to 2012, General McPeak was Chairman of Ethicspoint, Inc., a Portland, Oregon-based startup that became a leading provider of risk management and compliance software-as-a-service. In February 2012, Ethicspoint was bought by a private equity firm, merged with other companies and rebranded as NAVEX Global. General McPeak remains a board member of NAVEX Global. He also currently serves as Chairman of Coast Plating, Inc., a Los Angeles-based, privately held provider of metal processing and finishing services, primarily to the aerospace industry. General McPeak received a Bachelor of Arts degree in economics from San Diego State College and a Master of Science degree in international relations from George Washington University. In 1992, San Diego State University honored General McPeak with its first ever Lifetime Achievement Award. In 1995, George Washington University gave him its Distinguished Alumni Award, the “George.” He was among the initial seven inductees to the Oregon Aviation Hall of Honor. He is a member of the Council on Foreign Relations, New York City. In 2008 and 2009, General McPeak was a national co-chairman of Obama for President. In 2011, he became Chairman of the American Battle Monuments Commission, the federal agency that oversees care and maintenance of 24 cemeteries abroad that constitute the final resting place for almost 125,000 American war dead. General McPeak brings to the Board extensive experience in management consulting and a successful military career, including his position as Chief of Staff of the U.S. Air Force and a member of the Joint Chiefs of Staff.
James A. Risher has been a member of the Company’s Board of Directors since April 27, 2005. On August 31, 2006, Mr. Risher became the President and CEO of the Company. On August 28, 2009, Mr. Risher resigned from his position as President and Chief Executive Officer of the Company effective August 31, 2009. Mr. Risher continues to serve as a director of the Company. Mr. Risher has been the Managing Partner of Lumina Group, LLC, a private company engaged in the business of consulting and investing in small and mid-size companies, since 1998. From February 2001 to May 2002, Mr. Risher served as Chairman and Chief Executive Officer of BlueStar Battery Systems International, Inc., a Canadian public company that is an e-commerce distributor of electrical and electronic products to selected automotive aftermarket segments and targeted industrial markets. From 1986 to 1998, Mr. Risher served as a director, Chief Executive Officer and President of Exide Electronics Group, Inc. (“Exide”), a global leader in the uninterruptible power supply industry. He also served as Chairman of Exide from December 1997 to July 1998. Mr. Risher has also been a director of SL Industries, Inc., a designer, manufacturer and marketer of power electronics, motion control, power protection and specialized communication equipment, since May 2003 and was a director of New Century Equity Holdings Corp., a holding company seeking to acquire a new business, from October 2004 to January 2010. As a former President and CEO of the Company and with previous experience in the management of several companies, Mr. Risher provides the Board of Directors with intimate knowledge of the Company and the industries in which it operates.
John J. Quicke was appointed as the Company’s President and Chief Executive Officer on September 1, 2009 and a member of the Company’s Board of Directors on September 17, 2009. Mr. Quicke is a Managing Director and operating partner of Steel Partners. Mr. Quicke has been associated with Steel Partners and its affiliates since September 2005. He has served as a director of Rowan Companies, Inc., an offshore contract drilling company, since January 2009. He has served as a director of Steel Excel since December 2007 and as the Interim President and Chief Executive Officer since January 2010. He has also served as the Chief Executive Officer of Sun Well Service, Inc. (“Sun Well”), a subsidiary of Steel Excel and provider of premium well services to oil and gas exploration and production companies operating in the Williston Basin in North Dakota and Montana, since February 2011. He served as a director of Angelica Corporation, a provider of health care linen management services, from August 2006 to July 2008. Mr. Quicke also served as a director of Layne Christensen Company, a provider of products and services for the water, mineral, construction and energy markets, from October 2006 to June 2007. He served as a director of HNH from July 2005 to December 2010. Mr. Quicke continues to serve as a Vice President of HNH, a position he has held since July 2005. He served as a director, President and Chief Operating Officer of Sequa Corporation, a diversified industrial company, from 1993 to March 2004, and as Vice Chairman and Executive Officer of Sequa Corporation from March 2004 to March 2005. As Vice Chairman and Executive Officer of Sequa Corporation, Mr. Quicke was responsible for the Automotive, Metal Coating, Specialty Chemicals, Industrial Machinery and Other Product operating segments of the company. Mr. Quicke brings to the Board of Directors significant managerial experience and technical expertise, having served in senior management positions and as a director of several public companies, in addition to being a Certified Public Accountant and member of the AICPA.
Mark A. Zorko has served as our Chief Financial Officer since August 30, 2006. Mr. Zorko has been employed by SP Corporate Services, LLC (“SP Corporate Services”), an affiliate of Steel Holdings that provides financial and reporting personnel, as well as other services to companies, since October 2011. Mr. Zorko has been the Chief Financial Officer of Steel Excel since October 2011 and the Interim Chief Financial Officer of Steel Excel since August 2011. Mr. Zorko has served as the President and Chief Executive Officer of Well Services Ltd., a subsidiary of Steel Excel, for an interim period during 2012. From 2000 to 2010, he was a CFO Partner at Tatum, LLC, a professional services firm where he has held CFO positions with public and private client companies. From 1996 to 1999, Mr. Zorko was Chief Financial Officer and Chief Information Officer for Network Services Co., a privately held distribution company. His prior experience includes Vice President, Chief Financial Officer and Secretary of Comptronix Corporation, a publicly held electronic system manufacturing company, corporate controller for Zenith Data Systems Corporation, a computer manufacturing and retail electronics company, and finance manager positions with Honeywell, Inc. Mr. Zorko was a senior staff consultant with Arthur Andersen & Co. Mr. Zorko served in the Marine Corps. from 1970 to 1973. He is on the Board of Directors and chairman of the Audit Committee of MFRI, Inc., a publicly held company engaged in the manufacture and sale of piping systems, filtration products, industrial process cooling equipment and the installation of HVAC systems. Mr. Zorko is on the audit committee for Opportunity Int’l, a microfinance bank, and on the Finance Committee for the Alexian Brothers Health System. Mr. Zorko earned a BS degree in Accounting from The Ohio State University, an MBA from the University of Minnesota, and completed the FEI’s Chief Financial Officer program at Harvard University. He is a Certified Public Accountant and a member of the National Association of Corporate Directors.
Leonard J. McGill was appointed as the Company’s Vice President and General Counsel on August 29, 2012. Mr. McGill joined Steel Partners in November 2011 and has been the Senior Vice President, General Counsel and Secretary of Steel Holdings GP since January 2012. He has been the Senior Vice President, Chief Legal Officer and Assistant Secretary of HNH since January 2012. From May 2010 to October 2011, Mr. McGill was Senior Vice President, Secretary and General Counsel of Ameron International Corporation, a multinational manufacturer of highly-engineered products and materials for the chemical, industrial, energy, transportation and infrastructure markets, and from 2002 to 2010 was with Fleetwood Enterprises, Inc., a producer and distributor of recreational vehicles and manufactured housing, where he was Senior Vice President, General Counsel and Secretary. Fleetwood filed for Chapter 11 bankruptcy protection in March 2009. Prior to joining Fleetwood, Mr. McGill was of counsel to the international law firm of Gibson Dunn & Crutcher LLP. He is a graduate of the Georgetown University Law Center.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS: IDENTIFICATION OF AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Directors has a standing Audit Committee, the current member of which is General Merrill McPeak. Although the Company is currently not listed on any exchange, General McPeak is considered to be an “independent director” as defined in Rule 5605 of the Marketplace Rules of the NASDAQ Stock Market. The Board of Directors has determined that it does not have an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K serving on its Audit Committee. The Board believes that an audit committee financial expert is not necessary as the Audit Committee has the power and authority to engage outside experts as it deems appropriate to provide it with advice on matters related to its responsibilities.
CODE OF BUSINESS CONDUCT AND ETHICS
The Company has adopted a Code of Business Conduct and Ethics that applies to the Company’s Principal Executive Officer and Principal Financial and Accounting Officer. The Company’s Code of Business Conduct and Ethics is posted on the Company’s website, www.dgtholdings.com . Any person may obtain a copy of the Code of Business Conduct and Ethics, without charge, by writing to DGT Holdings Corp., c/o Steel Partners Holdings L.P., 590 Madison Avenue, 32nd Floor, New York, New York 10022, Attn: Secretary.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company’s officers and directors, and persons who own more than ten percent of a registered class of the Company’s equity securities, to file reports of ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the SEC. Such officers, directors and 10% shareholders are also required by SEC rules to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons, the Company believes that during the fiscal year ended July 28, 2012, there was compliance with all Section 16(a) filing requirements applicable to its officers, directors and 10% shareholders.
ITEM 11 EXECUTIVE COMPENSATION
ELEMENTS OF COMPENSATION
1. MANAGEMENT SERVICES AGREEMENT AND BASE SALARY
Effective September 1, 2009 until October 1, 2011, we paid SP Corporate Services $30,000 per month for the services of John J. Quicke, our President and CEO, pursuant to the Management Services Agreement, effective as of September 1, 2009 (the “Services Agreement”) between the Company and SP Corporate Services. On October 1, 2011, the Company and SP Corporate Services entered into Amendment No. 1 to the Services Agreement to, among other things, provide for the services of Mark A. Zorko, the Chief Financial Officer and Secretary of the Company, and increase the monthly payment amount to $48,000. Additionally, the Company reimburses SP Corporate Services, Mr. Quicke, and Mr. Zorko for certain expenses, including but not limited to reasonable and necessary business expenses incurred on behalf of the Company. See Item 13 “Certain Relationships and Related Transactions, and Director Independence.”
Prior the amendment to the Services Agreement, Mr. Zorko was compensated pursuant to the Zorko Employment Agreement, as described below. The Services Agreement and base salaries are reviewed annually by the Compensation Committee (the “Committee”), but are not automatically increased annually. The base salary for our former CEO and the former base salary of our CFO are set forth in their employment agreements, which are described in more detail below.
2. ANNUAL CASH BONUSES
The purpose of the annual cash bonus is to provide a competitive annual cash incentive opportunity that rewards both the Company’s performance toward corporate goals and objectives and also individual achievements. The annual bonus is a short-term annual incentive paid in cash pursuant to arrangements that cover all executive officers, including the CEO and CFO, and provide that a bonus will be paid upon achieving the Company’s annual budget goals. For fiscal year 2011, the Committee determined that bonuses would be paid out upon the achievement of improvement of revenue and operating income as compared to fiscal year 2011 business plan with targets set for the CEO and CFO of 70% and 45% of their annual base salary respectively. Incentive targets for fiscal year 2011 were partially achieved and as a result, the CEO and CFO received an annual bonus. For fiscal year 2012, the Committee determined that discretionary cash bonuses be paid in the amount of $500,000 to Mr. Quicke and $100,000 to Mr. Zorko in recognition of their performance.
3. LONG TERM EQUITY INCENTIVES
A. DGT HOLDINGS CORP. STOCK OPTION PLAN
The purpose of the Company’s Amended and Restated Stock Option Plan (the “DGTC Plan”), is to provide for the granting of incentive stock options and non-qualified stock options to the Company’s executive officers, directors, employees and consultants. The Committee administers the DGTC Plan. Among other things, the Committee: (i) determines participants to whom options may be granted and the number of shares to be granted pursuant to each option, based upon the recommendation of our CEO; (ii) determines the terms and conditions of any option under the DGTC Plan, including whether options will be incentive stock options, within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or non-qualified stock options; (iii) may vary the vesting schedule of options; and (iv) may suspend, terminate or modify the DGTC Plan. Any Committee recommendations of awards, options or compensation levels for senior executive officers are approved by the entire Board, excluding any management directors.
Under the DGTC Plan, incentive stock options have an exercise price equal to the fair market value of the underlying stock as of the grant date and, unless earlier terminated, are exercisable for a period of ten (10) years from the grant date. Non-qualified stock options may have an exercise price that is less than, equal to or more than the fair market value on the grant date and, unless earlier terminated, are exercisable for a period of up to ten (10) years from their grant date.
No options have been granted under the DGTC Plan since March 2007.
B. AMENDED AND RESTATED 2007 INCENTIVE STOCK PLAN
The Amended and Restated 2007 Incentive Stock Plan (the “2007 Plan”) is designed to provide an incentive to, and to retain in the employ of the Company and any Subsidiary of the Company, within the meaning of Section 424(f) of the United States Internal Revenue Code of 1986, as amended, directors, officers, consultants, advisors and employees with valuable training, experience and ability; to attract to the Company new directors, officers, consultants, advisors and employees whose services are considered valuable and to encourage the sense of proprietorship and to stimulate the active interest of such persons in the development and financial success of the Company and its Subsidiaries.
The 2007 Plan is administered by the Committee, which has full power and authority to designate recipients of options (as defined in the 2007 Plan) and restricted stock under the 2007 Plan and to determine the terms and conditions of the respective option and restricted stock agreements and to interpret the provisions and supervise the administration of the 2007 Plan. The Committee also has the authority to designate which options granted under the 2007 Plan will be incentive options and which shall be nonqualified options.
For the fiscal year ended July 28, 2012, under the terms of the 2007 Plan, the Company did not make any stock option or restricted stock grants to (a) John J. Quicke or (b) Mark A. Zorko.
The Company’s compensation program also includes other benefits and perquisites. These benefits include annual matching contributions to certain executive officers’ 401(k) plan accounts, car allowances, living allowances and tax gross-ups to cover taxes on certain benefits. We are selective in our use of perquisites, attempting to utilize perquisites that are within range of modest to competitive within our industry. The Committee has delegated authority to the CEO to approve such perquisites for other executive officers, but the Committee must separately approve any perquisites that exceed $10,000 per year.
Mr. Quicke received no perquisites during fiscal year 2012 and Mr. Zorko received a car allowance equal to $1,150 in value during fiscal year 2012.
The Role of Shareholder Say-on-Pay Votes. Although the advisory shareholder vote on executive compensation is non-binding, the Committee has considered and will continue to consider, the outcome of the vote when making future compensation decisions for named executive officers. At our annual meeting of shareholders held on December 15, 2011, approximately 90.8% of the shareholders who voted on the “say-on-pay” proposal approved the compensation of our named executive officers, while only approximately 2.6% voted against (with approximately 6.5% voting to abstain). The Committee believes that the shareholder vote strongly endorses the compensation philosophy of the Company.
The following table sets forth all compensation awarded to, paid or earned by the following type of executive officers for each of the Company’s last three completed fiscal years: (i) individuals who served as, or acted in the capacity of, the Company’s principal executive officer for the fiscal year ended July 28, 2012; (ii) individuals who served as, or acted in the capacity of, the Company’s principal financial officer for the fiscal year ended July 28, 2012; (iii) the Company’s three most highly compensated executive officers, other than the principal executive officer and principal financial officer, who were serving as executive officers at the end of the fiscal year ended July 28, 2012; and (iv) up to two additional individuals for whom disclosure would have been provided but for the fact that the individual was not serving as an executive officer of the Company at the end of the fiscal year ended July 28, 2012 (of which there were none). We refer to these individuals collectively as our named executive officers.
SUMMARY COMPENSATION TABLE
A. James A. Risher Employment Agreements
Mr. Risher had an employment agreement, which expired on August 31, 2009. On August 28, 2009, Mr. Risher resigned from his position as President and Chief Executive Officer of the Company effective August 31, 2009. Mr. Risher continues to serve as a director of the Company. In connection with the termination of his employment, Mr. Risher received as severance his base salary and living allowance through December 31, 2009, and the Company paid for Mr. Risher’s medical plan through December 31, 2009.
B. Mark A. Zorko Employment Agreement
The Company and Mr. Zorko entered into a Letter Agreement, dated August 30, 2006 (the “Zorko Employment Agreement”), that provided for Mr. Zorko’s employment with the Company as its Chief Financial Officer. Pursuant to the Zorko Employment Agreement, Mr. Zorko was entitled to an annual salary of $245,000 and received an option grant to purchase 4,800 shares (as adjusted for stock splits) of the Company’s Common Stock pursuant to and in accordance with the Company’s DGTC Plan. Mr. Zorko was also entitled to receive an automobile allowance of $575 per month. The Zorko Employment Agreement was terminated on October 1, 2011 in connection with entry into Amendment No. 1 to the Services Agreement. Further information regarding Amendment No. 1 to the Services Agreement is located in the section above entitled, “Elements of Compensation-- Management Services Agreement and Base Salary.”
Mr. Zorko remains eligible to receive an annual incentive bonus with a target of 45% of his annual base salary based upon achieving the Company’s annual budget and attaining specific objectives assigned by the CEO of the Company. For fiscal years 2012 and 2011, specific objectives were partially achieved and a bonus of $100,000 and $75,000 (in addition to the March 2011 award of restricted stock), respectively, were paid. As a result of the Company not achieving these specific objectives in fiscal year 2010, Mr. Zorko did not receive an incentive bonus for that fiscal year.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END:
POTENTIAL PAYMENTS UPON TERMINATION OR A CHANGE IN CONTROL
Separation Agreements with Current and Certain Former Named Executive Officers:
James A. Risher
Mr. Risher’s employment agreement terminated on August 31, 2009. In connection with the termination of his employment, Mr. Risher received as severance his base salary and living allowance through December 31, 2009, and the Company paid for Mr. Risher’s medical plan through December 31, 2009.
Mark A. Zorko
The Zorko Employment Agreement terminated on October 1, 2011. Pursuant to the Zorko Employment Agreement, Mr. Zorko was entitled to a severance payment in the event his employment was terminated by the Company without cause. The severance payment was equal to one-year base salary.
The Company seeks highly qualified individuals to serve as outside directors and compensates them with a combination of cash fees and stock option grants. The Company also reimburses Directors for, or pays, travel costs associated with meeting attendance. There is no retirement plan for outside directors, and no program of perquisites. The Compensation Committee periodically assesses whether its compensation structure is competitive in terms of attracting and retaining the type and quality of outside directors needed.
FISCAL YEAR ENDED JULY 28, 2012 DIRECTOR COMPENSATION:
Restricted Stock and Option Awards
Upon election to the Board, each non-employee member of the Board receives a one-time grant of 2,000 options to purchase the Company’s Common Stock. The exercise price for such options is equal to the fair market price per share on the date of the grant, which is approved by the Committee. These options vest and become exercisable as to 25% of such shares on the date of the option grant, 25% on the first anniversary of the date of the grant and as to an additional 25% of such shares on the second and third anniversaries of the date of the grant, respectively, based on continued service through the applicable vesting date. Effective March 2011, the Board compensation policy was revised to provide that (i) directors receive annual grants of 3,600 shares of restricted stock, the Chairman of the Audit Committee and the Chairman of the Compensation Committee each received an additional annual grant of 400 shares of restricted stock, and the Chairman of the Board received an additional annual grant of 900 shares shares of restricted stock. On December 15, 2011, the Board revised its director compensation policy to provide that in lieu of annual restricted stock grants, directors receive (i) annual grants of 10,000 options to purchase the Company’s Common Stock, (ii) the Chairman of the Audit Committee and the Chairman of the Compensation Committee each receive an additional annual grant of 2,500 stock options, and (iii) the Chairman of the Board receives an additional annual grant of 5,000 stock options. Such options expire after a ten year period and vest on the first anniversary of the date of grant, based on continued service through the vesting date. Directors are also eligible to receive restricted stock and option awards under the terms of the Company’s 2007 Plan. The annual grants of stock options to directors in fiscal year 2010 and 2012 and the grant of restricted shares in fiscal year 2011 were made pursuant to the 2007 Plan.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes the securities authorized for issuance under equity compensation plans as of the end of Fiscal 2012:
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information concerning beneficial ownership of Common Stock of the Company outstanding at September 17, 2012 by each person or entity (including any “Group” as such term is used in Section 13(d) (3) of the Exchange Act), known by the Company to be the beneficial owner of more than five percent of its outstanding Common Stock. The percentage ownership of each beneficial owner is based upon 3,839,468 shares of Common Stock issued and outstanding as of September 17, 2012 plus shares issuable upon exercise of options, warrants or convertible securities (exercisable within 60 days after said date) that are held by such person or entity, but not those held by any other person or entity. The information presented in this table is based upon the most recent filings with the SEC by such persons or upon information otherwise provided by such persons to the Company.
SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT
The following table sets forth information concerning beneficial ownership of Common Stock of the Company outstanding at September 17, 2012 by (i) each director; (ii) each Named Executive Officer of the Company and (iii) by all directors and executive officers of the Company as a group. The percentage ownership of each beneficial owner is based upon 3,839,468 shares of Common Stock issued and outstanding as of September 17, 2012, plus shares issuable upon exercise of options, warrants or convertible securities (exercisable within 60 days after said date) that are held by such person or entity, but not those held by any other person or entity. The information presented in this table is based upon the most recent filings with the SEC by such persons or upon information otherwise provided by such persons to the Company.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
TRANSACTIONS WITH RELATED PERSONS
On October 15, 2009, the Company and SP Corporate Services entered into the Services Agreement. On October 1, 2011, the Company and SP Corporate Services entered into Amendment No. 1 to the Services Agreement. Pursuant to the Services Agreement, SP Corporate Services provides the Company with the services of John J. Quicke as the Company’s Chief Executive Officer and Mark A. Zorko as the Company’s Chief Financial Officer. Mr. Quicke has been serving as the Company’s President and Chief Executive Officer since his appointment to such position on August 28, 2009, and is a member of the Company’s Board of Directors. Mr. Zorko has been serving as the Company’s Chief Financial Officer since August 31, 2006.
Pursuant to the Services Agreement, the Company pays SP Corporate Services $48,000 per month as consideration for Mr. Quicke’s and Mr. Zorko’s services. Additionally, the Company agreed to reimburse SP Corporate Services, Mr. Quicke and Mr. Zorko for certain expenses, including but not limited to reasonable and necessary business expenses incurred on behalf of the Company. The Services Agreement will terminate immediately upon written notice given to the other party.
SP Corporate Services is an affiliate of Steel Partners, a subsidiary of Steel Holdings. Mr. Quicke is a Managing Director and operating partner of Steel Partners. James Henderson, Chairman of the Company’s Board of Directors until December 2011, was a Managing Director and operating partner of Steel Partners until April 2011. Mr. Howard, a member of the Board of Directors since September 21, 2011, is an officer and director of Steel Holdings GP, the general partner of Steel Holdings. Steel Holdings reported in a Form 4 filed with the SEC on September 14, 2012 that it beneficially owns approximately 53.8% of the Company’s outstanding Common Stock.
The Services Agreement and Amendment No. 1 to the Services Agreement were unanimously approved by the Company’s disinterested directors and the Audit Committee of the Board of Directors, and SP Corporate Services will be subject to the supervision and control of the Company’s disinterested directors while performing its obligations under the Services Agreement.
Investment in Handy & Harman Ltd.
As of August 31, 2012, the Company owned 97,550 shares of the common stock of HNH, representing approximately 0.7% of the outstanding shares. Steel Holdings, which owns approximately 53.8% of the Company’s outstanding shares, also directly owns 7,131,185 shares of the common stock of HNH, representing approximately 54.2% of the outstanding shares. Jack L. Howard, a director of the Company and a director and officer of the general partner of Steel Holdings, is also a director of HNH. John J. Quicke, the Chief Executive Officer, President and a director of the Company, serves as a Vice President of HNH. Leonard J. McGill, our Vice President and General Counsel, serves as the Senior Vice President, Chief Legal Officer and Assistant Secretary of HNH. Mr. McGill is also the Senior Vice President, General Counsel & Secretary of the general partner of Steel Holdings. Mr. Quicke and Mark Zorko, the Chief Financial Officer and Secretary of the Company, are also employees of a subsidiary of Steel Holdings. Other officers and directors of affiliates of Steel Holdings also serve as executive officers and directors of HNH. The Company’s aggregate purchase cost of its shares of common stock of HNH is approximately $1,285,323. The Company’s investment in HNH was unanimously pre-approved by the Company’s disinterested directors.
Investment in Steel Partners Holdings L.P.
As of August 31, 2012, the Company owned 925,170 common units of Steel Holdings, representing approximately 2.9% of the outstanding common units. Steel Holdings owns approximately 53.8% of the Company’s outstanding shares. Jack L. Howard, a director of the Company, is also a director and officer of the general partner of Steel Holdings. John J. Quicke, the Chief Executive Officer, President and a director of the Company, and Mark Zorko, the Chief Financial Officer of the Company, are also employees of a subsidiary of Steel Holdings. Leonard J. McGill, our Vice President and General Counsel, is the Senior Vice President, General Counsel & Secretary of Steel Holdings GP. The Company’s aggregate purchase cost of its Steel Holdings common units is approximately $10,433,576. The Company’s investment in Steel Holdings was unanimously pre-approved by the Company’s disinterested directors.
Investment with WebBank
In May, 2012, the Company’s disinterested directors unanimously approved the deposit of $10.0 million of its cash assets in money market funds at a market interest rate with WebBank (“WebBank”), an FDIC insured, State Chartered Industrial Bank. WebBank is a wholly-owned subsidiary of WebFinancial Holding Corporation (“WebFinancial”). WebFinancial is a wholly-owned subsidiary of Steel Holdings. Mr. Howard serves as a director of WebBank and John McNamara, one of Steel Holdings’ representatives, serves as the Chairman of the Board of WebBank
Brokerage Account with Mutual Securities Inc.
In May, 2012, the Company’s disinterested directors unanimously approved the establishment of one or more brokerage accounts with Mutual Securities, Inc. (“Mutual Securities”), a FINRA registered broker-dealer. Mr. Howard, a director of the Company, is a registered principal of Mutual Securities.
REVIEW, APPROVAL OR RATIFICATION OF TRANSACTIONS WITH RELATED PERSONS
During fiscal 2012, the Company had a policy for the review of transactions in which the Company was a participant, the amount involved exceeded the lesser of $120,000 or one percent of the average of the Company’s total assets at year end for the last two completed fiscal years and in which any of the Company’s directors or executive officers, or their immediate family members, had a direct or indirect material interest. Any such related person transaction was to be for the benefit of the Company and upon terms no less favorable to the Company than if the related person transaction was with an unrelated party. The Company’s Board of Directors was responsible for approving any such transactions and the CEO was responsible for maintaining a list of all existing related person transactions. Other than the transactions described above, the Company had no transactions, nor are there any currently proposed transactions, in which the Company was or is to be a participant, where the amount involved exceeded the lesser of $120,000 or one percent of the average of the Company’s total assets at year end for the last two completed fiscal years, and any director, executive officer or any of their immediate family members had a material direct or indirect interest reportable under applicable SEC rules or that required approval of the Board of Directors under the Company’s Related Person Transaction Policy.
Committee membership of the Company’s directors is as follows:
* Independent. In assessing the independence of our directors, our Board has reviewed and analyzed the standards for independence under the Listing Rules of the NASDAQ Stock Market, including Rule 5605, and applicable SEC regulations. Under the Listing Rules of the NASDAQ Stock Market, we would be considered a “controlled company” as of July 2011, as more than 50% of our voting power is held by Steel Holdings. As a controlled company, among other things, we would be exempt from the requirement under the Listing Rules of the NASDAQ Stock Market that we have a majority of independent directors.
+ Mr. Avila resigned from the Board of Directors effective July 24, 2012.
# Mr. Henderson resigned from the Board of Directors effective December 15, 2011.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees – The aggregate fees billed by BDO USA, LLP for professional services rendered for the audit of our annual financial statements set forth in our Annual Report on Form 10-K for the fiscal years ended July 28, 2012 and July 30, 2011, for the reviews of the interim financial statements included in our Quarterly Reports on Form 10-Q for those fiscal years and for assistance with other registration statement filings made by the Company during those fiscal years were $168,411 and $248,261, respectively.
Audit-Related Fees –For the fiscal year ended July 28, 2012, fees billed by BDO USA, LLP for services related to the sale of the assets of our subsidiary, RFI Corporation, were $15,000. There were no fees for other professional services rendered during the fiscal year ended July 30, 2011.
Tax Fees – There were no fees billed by BDO USA, LLP for tax services for the fiscal years ended July 28, 2012 and July 30, 2011.
All Other Fees – There were no fees billed by BDO USA, LLP for services other than those described above under “Audit Fees” for fiscal years ended July 28, 2012 and July 30, 2011.
The Audit Committee’s policy is to pre-approve services to be performed by the Company’s independent public accountants in the categories of audit services, audit-related services, tax services and other services. Additionally, the Audit Committee will consider on a case-by-case basis and, if appropriate, approve specific engagements that are not otherwise pre-approved. The Audit Committee has approved all fees and advised us that it has determined that the non-audit services rendered by BDO USA, LLP during our most recent fiscal year are compatible with maintaining the independence of such auditors.
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)1. FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF DGT HOLDINGS CORP.
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
DGT Holdings Corp.
New York, New York
We have audited the accompanying consolidated balance sheets of DGT Holdings Corp. and subsidiaries as of July 28, 2012 and July 30, 2011, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended July 28, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DGT Holdings Corp. and subsidiaries as of July 28, 2012 and July 30, 2011, and the results of their operations and their cash flows for each of the three years in the period ended July 28, 2012, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
September 20, 2012
DGT HOLDINGS CORP.
(DOLLARS IN THOUSANDS EXCEPT PAR VALUE)
See notes to consolidated financial statements.
DGT HOLDINGS CORP.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)