SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
-----
Exchange Act of 1934
For the quarterly period ended JULYOCTOBER 31, 1997 or
-----------------------------
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
-----
Exchange Act of 1934
For the transition period from ___________ to ------------------- --------------------____________
Commission File Number 0-14677
----------------------------------------------------------------------
DSP TECHNOLOGY INC.
- ---------------------------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIADELAWARE 94-2832651
- --------------------------------------- -------------------------------------------------- ---------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number
48500 Kato Rd.KATO RD., Fremont,FREMONT, CA 94538
- --------------------------------------- ------------------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(510) 657-7555
- -------------------------------------------------------------------------------------------------
(Registrant's telephone number including area code)
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
------- ------------- ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES NO
-------- ------------- ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate number of shares outstanding of each of the issuer's classes of common
stock, at the latest practical date:
CLASS OUTSTANDING AS OF SEPTEMBER 9,DECEMBER 12, 1997
----- -----------------------------------
COMMON STOCK 2,204,0282,241,161
1
DSP TECHNOLOGY INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
July 31, 1997 and January 31, 1997 3
Consolidated Statements of Income -
Three months and six months ended July 31, 1997 and 1996 4
Consolidated Statements of Cash Flows -
Six months ended July 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K. 8
DSP TECHNOLOGY INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
October 31, 1997 and January 31, 1997 3
Consolidated Statements of Income -
Three months and nine months ended October 31, 1997 and 1996 4
Consolidated Statements of Cash Flows -
Nine months ended October 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K. 9
Signatures 9
2
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
JulyOctober 31, January 31,
1997 1997
----------------------- -----------
ASSETS (Unaudited)
Current assets:
Cash and certificates of deposit $ 1,139 $1,3231,579 $ 1,323
Accounts receivable 7,0978,384 4,784
Inventories 2,7332,734 2,015
Deferred income taxes 154 154
Prepaid expenses 340310 304
------- -------------
Total current assets 11,46313,161 8,580
Property and equipment 1,4281,359 1,540
Cost in excess of net assets of acquired
business 311307 362
Other assets 1,2801,314 1,317
------- ------
$14,482-------
$16,141 $11,799
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,030400 $ 799
Accrued liabilities 3,2944,719 1,849
Income taxes payable 641762 206
------- -------
Total current liabilities 4,9655,881 2,854
Deferred income taxes 258 258
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock. Authorized 2,500,000 shares;
noneone issued -- --
Common stock. 25,000,000 shares authorized;
shares issued and outstanding: 2,187,3612,240,261 at
JulyOctober 31 and 2,179,962 at January 31 3,0123,237 2,988
Retained earnings 6,2476,765 5,699
------- -------
Total shareholders' equity 9,25910,002 8,687
------- -------
$14,482$16,141 $11,799
======= =======
The accompanying notes are an integral part of these financial statements.
3
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three months ended SixNine months ended
JulyOctober 31, JulyOctober 31,
------------------ ----------------------------------- -----------------
1997 1996 1997 1996
-------- -------------- ------ ------- -------
Net sales $5,445 $4,411 $9,912 $8,186$5,892 $4,572 $15,804 $12,758
Cost of sales 2,570 1,900 4,737 3,4382,640 1,868 7,377 5,306
------ ------ ------ ------------- -------
Gross profit 2,875 2,511 5,175 4,7483,252 2,704 8,427 7,452
Operating expenses:
Research and development 530 573 1,108 1,069718 564 1,826 1,633
Marketing, general and administrative 1,605 1,647 3,310 3,1221,719 1,737 5,029 4,859
------ ------ ------- -------
2,437 2,301 6,855 6,492
------ ------ 2,135 2,220 4,418 4,191------- -------
Operating income 815 403 1,572 960
Interest income 47 13 156 95
------ ------ ------ ------
Operating income 740 291 757 557
Other income 69 40 109 82
------ ------ ------ ------------- -------
Income before income taxes 809 331 866 639862 416 1,728 1,055
Income taxes 324 104 346 211345 140 691 351
------ ------ ------ ------------- -------
Net income $ 485517 $ 227276 $ 5201,037 $ 428704
====== ====== ====== ============= =======
Net income per common and common
equivalent share $ .21.22 $ .10.12 $ .23.45 $ .19.31
====== ====== ====== ============= =======
Weighted average common and common
equivalent shares outstanding 2,315 2,309 2,310 2,3122,350 2,290 2,323 2,305
====== ====== ====== ============= =======
The accompanying notes are an integral part of these financial statements.
4
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
SixNine months ended
JulyOctober 31,
---------------------------
1997 1996
-------- --------------- -------
(Unaudited)
Cash flows from operating activities:
Net income $ 4851,037 $ 428704
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 537 337804 610
Changes in current assets and liabilities:
Accounts receivable (2,313) (1603)(3,600) (1,058)
Inventories (718) (186)(719) (237)
Prepaid expenses (36) (35)(6) (62)
Accounts payables 231 (67)(399) (38)
Accrued liabilities 1,445 9142,870 (489)
Income taxes payable 435 (98)556 (272)
------- -------
Net cash provided by (used in) operating activities 66 (310)543 136
------- -------
Cash flows from investing activities:
Purchases of property and equipment (195) (515)(268) (806)
Investment in software development (195) (285)(320) (405)
Other 116 (50)52 (109)
------- -------
Net cash (used in) investing activities (274) (850)(536) (1,320)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 24 12249 67
------- -------
Net cash provided by financing activities 24 12249 67
------- -------
Increase (decrease) in cash (184) (1,148)256 (1,117)
------- -------
Cash at beginning of period 13231,323 2,015
------- -------
Cash at end of period $ 1,1391,579 $ 867898
======= =======
Supplemental disclosure of cash flow information:
Cash paid during period for income taxes $ 1077 $ 270559
======= =======
The accompanying notes are an integral part of these financial statements.
5
DSP TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation.
---------------------
The accompanying consolidated financial statements have been prepared,
without audit, in accordance with Securities and Exchange Commission
requirements for interim financial statements. Therefore, they do not
include all the disclosures that would be presented in the Company's Annual
Report on Form 10-K. The financial statements should be read in conjunction
with the Company's January 31, 1997 financial statements and accompanying
notes thereto.
The information furnished reflects all adjustments (consisting only of
normal recurring adjustments) that are, in the opinion of management,
necessary for a fair presentation of financial position, results of
operations and cash flows for the interim period. The results of operations
for the periods presented are not necessarily indicative of results to be
expected for the full year.
For accounting purposes, the Company changed to a 52/53 week convention
with the fiscal year ending on the Sunday nearest the end of January.
However, for financial reporting purposes, each fiscal quarter or year is
presented as if it ended on the last day of such period. The third quarter
fiscal 1998 ended November 2, 1997.
2. Inventories. Inventories are stated at the lower of cost (first-in, first-
-----------
out) or market. Inventories consist of:
JulyOctober 31, January 31,
1997 1997
----------- -----------------------
(thousands)
(thousands)
Raw materials $1,575 $1,316$1,325 $1,221
Work in process 820 6391,092 476
Finished goods 338 426317 318
------ ------
$2,733 $2,381$2,734 $2,015
====== ======
3. Accounts Receivable and Accrued Liabilities. Accounts receivable and
--------------------------------------------
accrued liabilities at October 31, 1997 include $1,833,000 in receivables
for customer advanced payment commitments against contracts. In the future,
the Company will not recognize the receivable; instead, it will recognize
the accrued liability at the time the Company receives the advance payment
from the customer.
4. The Company reincorporated in Delaware on September 12, 1997.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
This section of the report contains forward-looking statements regarding
the Company's expected growth and enhanced future performance. All forward-
looking statements are subject to risk and actual results could differ
materially from those projected in the forward-looking statements as a result of
many factors which are set forth below.
Results of Operations
- ---------------------
Net sales for the secondthird quarter of fiscal 1998 ended August 3,November 2, 1997
increased by $1,034,000$1,320,000 or 23%29% to $5,445,000$5,892,000 from $4,411,000$4,572,000 in the secondthird
quarter of fiscal 19971996 ended JulyOctober 31, 1996. Net sales for the first sixnine
months of fiscal 1998 were $9,912,000$15,804,000 or 21%24% higher than net sales of
$8,186,000$12,758,000 in the first sixnine months of fiscal 1997. The increases were due to
continued strong demand for the company's RedLine data acquisition products and
turnkey services.
CostThird quarter cost of sales as a percentage of net sales increased to 47%45%
in this year's
second quarteryear from 43%41% in the same period last year. Cost of sales as a
percentage of net sales also increased to 48%47% in the first half of fiscal 1998nine months this year
compared to 42% in fiscal 1997's first nine months. As anticipated, the
first halfincreases in cost of fiscal 1997. The increases issales were a result of product mix with lower-margin
service-related revenues becoming a bigger part of the Company's business as had been anticipated. Cost of sales for the Company's
core products, the RedLine ADAPT and ACAP systems, remain at historical 40%
levels.business.
Research and development ("R&D") expenses decreasedincreased by $43,000$154,000 to $530,000$718,000
in the secondthird quarter this year compared to $573,000$564,000 in the same period last
year whileyear. R&D expenses in the first halfnine months of this year increased by $39,000slightly to
$1,108,000$1,826,000 from $1,069,000$1,633,000 in the first halfnine months of fiscal 1997. The
decreaseincreases in expenses in both the secondthird quarter this year isand the first nine months were
primarily due to lower prototypinghigher development costs and higher expense
allocation to cost of sales. The increaseassociated with new RedLine products
scheduled for introduction in the first half this year is due to
the continued ramp upSpring of joint new product development with FEV, the Company's
strategic ally in Germany.1998 and beyond.
Marketing, general and administrative expenses in the secondthird quarter of
fiscal 1998 decreased by $42,000 or 3%slightly to $1,605,000 compared to$1,719,000 from $1,737,000 in the same period
a year ago. Expenses inquarter
last year. For the first sixnine months of this year, marketing, general and
administrative expenses increased by $188,000$170,000 or 3% to $3,310,000 from $3,122,000$5,029,000 compared to
$4,859,000 last year. As a percentage of sales, however, expenses decreased to
29% from 37%38% in the secondthird quarter this year and to 33%32% from 38% in the first halfnine months
of this year compared to the respective periods last year. The decrease in the second quarter reflect the Company's abilityhigher expenses
were principally due to use
its resources more efficiently.
Net other income was $69,000 in this year's second quarter compared to
$40,000 last yearadditional sales and $109,000 in the first half compared to $82,000 in the same
period last year. Higher other incomes reflect gains from sale of fixed assetsmarketing staff, and higher
available cash invested in interest-bearing accounts atinternal sales commissions due to higher interest rates this year compared to the same period last year.sales bookings.
The effective tax rate computed were 40% for the secondthird quarter and 40% for
the first halfnine months this year was 40% compared to 31%34% for the third quarter and 33%
infor the first nine months last year's second quarteryear. The tax rates computed depend primarily on
the profit contribution mix between the Company's U.S. operations and first
half, respectively.U.K.
subsidiary. The higher tax rates this year reflect the higher domestic incomeprofit
contribution this year versus last year. Domestic tax rates tend to be higher
than the Company's foreign subsidiary's tax rates.rate. Other factors that may affect the tax
rates include R&D tax credits and software capitalization levels. The company
reviews the tax rate quarterly and could make minor adjustments to reflect
changing estimates.
7
Liquidity and Capital Resources
- -------------------------------
Cash decreasedincreased by $184,000$256,000 during the sixnine month period ended July 31,November 2,
1997. The decrease was due to the increase in accountsAccounts receivable increased by $3,600,000 brought about by high
shipments in the last month of the period.period and the inclusion of approximately
$1,833,000 in customer advanced deposit commitments. The primary use of the
Company's cash in the first halfnine months of fiscal 19971998 has been: a) the purchase of
capital equipment used to equip additional personnel and b)to upgrade our
information systems capabilities, and investment in software development.
Working capital at July 31,November 2, 1997 was $6,498,000improved to $7,911,000 compared to
$5,726,000 at the beginning of the fiscal year, while the current ratiosratio stood at
2.32.6 to 1.0 at July 31,November 2, 1997 and at 3.0 to 1.0 at January 31, 1997. At
July 31,November 2, 1997, the Company has a $1,000,000 secured bank line of credit. The
Company currently anticipates that internally generated funds and bank
borrowings will be sufficient to satisfy its anticipated operating and capital
needs over the foreseeable future.
At July 31,November 2, 1997, the Company had no material outstanding commitments to
purchase capital equipment. Management believes that inflation has not had a
material effect on the Company's operations or financial condition.
Factors That May Affect Future Results
- --------------------------------------
The Company's future operating results may be affected by a number of
factors, including: its ability to introduce new products, services and
enhancements for its customers as demands for increasingly sophisticated
measurement and control systems continue; timing of receipt of major system orders; timing of service
revenues; product mix; the Company's ability to timely introduce new products,
services and enhancements for its customers and achieve market acceptance as
demands for increasingly sophisticated measurement and control systems continue;
uncertainties relative to global economic conditions; ability to competeattract and
retain for qualified personnel in various technical positions; the Company's
ability to withstand competition particularly from several companies that are
much larger in size than the Company; international currency fluctuations;
natural disasters, particularly earthquakes which may strike the California area
where the Company's headquarters and manufacturing facility are located; and
availability and cost of components for its products.
Management expanded the services side of the Company's transportation
market business. These services include systems integration, project
management, commissioning and installation. These services are usually coupled
with the sale of our RedLine products and has allowed us to pursue further
growth in the transportation market by providing "one-stop" or turnkey shopping
to our customers. This services business raises several risk factors.
Specifically, the success depends on the time it takes for services personnel
and future staff to come up to speed on our products, customers and the services
they will provide; market acceptance of the services; and the ability to manage
customer projects profitably.profitably; the ability to integrate our products with other
vendors' products; availability and quality of other vendors' products; and
other scheduling and delivery risks.
Because of the foregoing factors, as well as other factors affecting the
Company's operating results, past financial performance should not be considered
to be a reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods.
8
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Company's Annual Meeting of Shareholders was held on June 20, 1997.
There were 2,180,962 shares outstanding on April 25, 1997, the date of record.
There were 2,116,121 (approximately 97%) shares represented at the meeting in
person or by proxy.
8
All four director candidates were elected with no director candidate
receiving fewer than 1,981,000 votes.
The proposal to increase the number of shares of the Company's Common Stock
reserved for issuance under its 1991 Stock Option Plan by 100,000 from 918,327
to 1,018,327 was approved. Total votes counted were 2,093,442 shares with
1,555,923 shares or 74.3% of total votes for, 448,499 or 21.4% against and
89,020 or 4.3% abstaining.
The proposal for the reincorporation of the Company in the State of
Delaware and other related changes to the rights of shareholders was approved
with 1,091,548 votes for, 435,634 against and 18,687 abstaining.
The appointment of Grant Thornton as the independent accountants of the
Company for the fiscal year ending January 31, 1998 was ratified with 1,924,000
votes for, 199,451 against, and 12,300 abstaining.
The voting with respect to the proposals to approve Proposal Four which
contain certain additional anti-takeover measures under the Company's Delaware
Certificate of Incorporation and Delaware By-Laws was adjourned until July 21,
1997, because votes from a large portion of the outstanding shares had not yet
been cast.
The Annual Meeting was reconvened on July 21, 1997 to take up Proposal Four
whose voting was adjourned at the June 20, 1997 meeting. There were 2,116,121
(approximately 97%) shares represented at the meeting in person or by proxy. It
was announced that based upon shareholder voting by proxy, no portion of
Proposal Four passed. None of the measures of Proposal Four received more than
842,000 votes for the measure.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
A. Exhibits:
The following exhibits are filed or incorporated by reference as part of
this Report:
Ex. No. Description
- ------- -----------
3.1 Agreement and Plan of Merger between DSP Technology Inc., a California
corporation, and DSP Technology Inc., a Delaware corporation, dated
April 28, 1997, including as Exhibit 27-FinancialA, Registrant's Certificate of
Incorporation.
3.2 Amended Restated By-Laws of Registrant.
10.53 1991 Stock Option Plan, as amended
27 Financial Data Schedule.Schedule
B. Reports on Form 8-K: None.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DSP TECHNOLOGY INC.
-----------------------
(Registrant)
By: /s/ Jose M. Millares
------------------------------------------------------
Jose M. Millares
Chief Financial Officer
Date: September 11,December 16, 1997
9
EXHIBIT INDEX
Ex. No. Description
- ------- -----------
3.1 Agreement and Plan of Merger between DSP Technology Inc., a California
corporation, and DSP Technology Inc., a Delaware corporation, dated
April 28, 1997, including as Exhibit A, Registrant's Certificate of
Incorporation.
3.2 Amended Restated By-Laws of Registrant.
10.53 1991 Stock Option Plan, as amended
27 Financial Data Schedule
10