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 OCTOBER 31, 1997APR 30, 1998 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)

         DELAWARE                                    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 DECEMBER 12, 1997MAY 3, 1998
          -----          ----------------------------------------------------------------
          COMMON STOCK              2,241,1612,279,360

                                       1

 
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, 1997April 30, 1998 and January 31, 19971998 3 Consolidated Statements of Income - Three months ended April 30, 1998 and nine months ended October 31,April 30, 1997 and 1996 4 Consolidated Statements of Cash Flows - NineThree months ended October 31,April 30, 1998 and April 30, 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 10 Item 6. Exhibits and Reports on Form 8-K. 910 Signatures 910
2
DSP TECHNOLOGY INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) OctoberApr 30, Jan 31, January 31, 1997 1997 ------------1998 1998 ----------- ------- ASSETS (Unaudited) Current assets: Cash and certificates of deposit $ 1,579 $ 1,3233,040 4,701 Accounts receivable 8,384 4,7846,589 5,581 Inventories 2,734 2,015 Deferred income taxes 154 154 Prepaid expenses 310 3043,172 2,682 Other Current Assets 740 793 ------- ------- Total current assets 13,161 8,58013,541 13,757 Property and equipment 1,359 1,540 Cost in excess of net assets of acquired business 307 3621,381 1,341 Other assets 1,314 1,3171,657 1,632 ------- ------- $16,141 $11,799$16,579 $16,730 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 400846 $ 799687 Accrued liabilities 4,719 1,8493,711 3,755 Income taxes payable 762 206623 1,142 ------- ------- Total current liabilities 5,881 2,8545,180 5,584 Deferred income taxes 258 258461 489 Commitments and contingencies -- -- Shareholders' equity: Preferred stock. Authorized 2,500,000 shares; onenone issued -- -- Common stock. 25,000,000 shares authorized; shares issued and outstanding: 2,240,2612,279,360 at October 31April 30 and 2,179,9622,264,860 at January 31 3,237 2,9883,357 3,301 Retained earnings 6,765 5,6997,581 7,356 ------- ------- Total shareholders' equity 10,002 8,68710,938 10,657 ------- ------- $16,141 $11,799$16,579 $16,730 ======= =======
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 Nine months ended October 31, October 31, ------------------- -----------------April 30, April 30, 1998 1997 1996 1997 1996 ------ ------ ------- ---------------- --------- Net sales $5,892 $4,572 $15,804 $12,758$5,519 $4,467 Cost of sales 2,640 1,868 7,377 5,3062,541 2,167 ------ ------ ------- ------- Gross profit 3,252 2,704 8,427 7,4522,978 2,300 Operating expenses: Research and development 718 564 1,826 1,633593 578 Marketing, general and administrative 1,719 1,737 5,029 4,8591,955 1,705 ------ ------ ------- ------- 2,437 2,301 6,855 6,4922,548 2,283 ------ ------ ------- ------- Operating income 815 403 1,572 960430 17 Interest income 47 13 156 9556 40 ------ ------ ------- ------- Income before income taxes 862 416 1,728 1,055486 57 Income taxes 345 140 691 351190 22 ------ ------ ------- ------- Net income $ 517296 $ 276 $ 1,037 $ 70435 ====== ====== ======= ======= Net income per common and common equivalent share Basic $ .22.13 $ .02 ====== ====== Diluted $ .12 $ .45 $ .31.01 ====== ====== ======= ======= Weighted average common and common equivalent shares outstanding 2,350 2,290 2,323 2,305used in computing basic net income per share 2,274 2,180 ====== ====== ======= =======Weighted average shares and equivalents used in computing diluted net income per share 2,555 2,337 ====== ======
The accompanying notes are an integral part of these financial statements. 4
DSP TECHNOLOGY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands) Nine
Three months ended October 31, ---------------------------April 30, April 30, 1998 1997 1996 ------- -------------------------- ----------- (Unaudited) Cash flows from operating activities: Net income $ 1,037296 $ 70435 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 804 610220 240 Changes in current assets and liabilities: Accounts receivable (3,600) (1,058)(1,008) 28 Inventories (719) (237)(490) (434) Prepaid expenses (6) (62)53 90 Accounts payables (399) (38)payable 159 (119) Accrued liabilities 2,870 (489)(44) 782 Income taxes payable 556 (272)(519) (130) ------- ------------- Net cash provided by (used in) operating activities 543 136(1,333) 492 ------- ------------- Cash flows from investing activities: Purchases of property and equipment (268) (806)(163) (110) Investment in software development (320) (405)(159) (170) Other 52 (109)(62) 16 ------- ------------- Net cash used in investing activities (536) (1,320)(384) (264) ------- ------------- Cash flows from financing activities: Proceeds from issuance of common stock 249 6756 2 ------- ------------- Net cash provided by financing activities 249 6756 2 ------- ------------- Increase (decrease) in cash 256 (1,117)(1,661) 230 ------- ------------- Cash at beginning of period 4,701 1,323 2,015 ------- ------------- Cash at end of period $ 1,579 $ 8983,040 $1,553 ======= ============= Supplemental disclosure of cash flow information: Cash paid during period for income taxes $ 77690 $ 55910 ======= =============
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, 19971998 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 thirdfirst quarter fiscal 19981999 ended November 2, 1997.May 3, 1998. 2. Inventories. Inventories are stated at the lower of cost (first-in, first- ----------- out) or market. Inventories consist of:
October 31,Apr 30, January 31, 1997 19971998 1998 ------- ----------- ------------ (thousands) (thousands) Raw materials $1,325 $1,221$1,579 $1,695 Work in process 1,092 4761,004 637 Finished goods 317 318589 350 ------ ------ $2,734 $2,015$3,172 $2,682 ====== ======
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 thirdfirst quarter of fiscal 1998 ended November 2, 19971999 increased by $1,320,000$1,052,000 or 29%24% to $5,892,000$5,519,000 from $4,572,000$4,467,000 in the thirdfirst quarter of fiscal 1996 ended October 31, 1996. Net sales for the first nine months of fiscal 1998 were $15,804,000 or 24% higher than1998. The increase in net sales of $12,758,000 in the first nine months of fiscal 1997. The increases werewas due to continued strong demand forshipments across all product lines including the company's RedLine data acquisition products and turnkey services. ThirdCompany's custom service operation. This year's first quarter cost of sales as a percentage of net sales increaseddecreased to 45% in this year46% from 41%49% in the same period last year. Cost of sales as a percentagewas favorably affected by increased revenues of net saleshigher margin products across all product lines. The Company also increasedexperienced significantly improved margins this quarter in its growing custom service operations compared to 47% in the first nine months this year comparedquarter of last year. Its overall gross margin is subject to 42%change due to various factors, including variation in fiscal 1997's first nine months. As anticipated, the increases in cost of sales were a result of product mix with lower-margin service-related revenues becoming a bigger partand component costs and timing of the Company's business.custom service revenues. Research and development ("R&D") expenses increased by $154,000$15,000 to $718,000$593,000 in the thirdfirst quarter this year compared to $564,000$578,000 in the same period last year. As a percent of net sales R&D declined to 11% in this years first quarter versus 13% for the comparable period last year. The Company anticipates that R&D expenses will continue to increase in total dollars this year as personnel and programs are added to develop new products with higher levels of capability and integration. However, it is expected that R&D expenses will remain at the first nine monthsquarter level of this year increased slightly to $1,826,000 from $1,633,000 in the first nine monthsabout 11% as a percentage of fiscal 1997. The increases in expenses in both the third quarter and the first nine months were primarily due to higher development costs associated with new RedLine products scheduled for introduction in the Spring of 1998 and beyond.net sales. Marketing, general and administrative expenses infor the thirdfirst quarter of fiscal 1998 decreased slightlythis year increased to $1,719,000$1,955,000 from $1,737,000$1,705,000 in the same quarter last year. For the first nine months of this year, marketing, general and administrative expenses increased by $170,000 or 3% to $5,029,000 compared to $4,859,000 last year. As a percentage of sales, however, expenses decreased to 29%35% from 38% last year. The increase in actual spending was a result of higher trade show related expenses to introduce several new products at the thirdSAE show (February 98) and increased sales and administrative expenses to support continued growth. The Company anticipates that MG&A dollar expenses will increase in fiscal 1999 but should be below the 35% first quarter andlevel as a percentage of sales. Other income, net of interest expense, increased 40% to 32% from 38%$56,000 in thefiscal 1999's first nine months of this yearquarter compared to the respective periodssame period last year. The higher expenses were principallyyear due to additional salesinterest earnings on a higher level of invested cash and marketing staff, and higher internal sales commissions due to higher sales bookings.full utilization of vendor early payment discounts. The effective tax rate computed were 40% for the third quarter and 40%was 39% for the first nine months this year comparedquarter which was identical to 34% for the third quarter and 33% for thefiscal 1998's first nine months last year.quarter. The tax rates computed depend primarily on the profit contribution mix between the Company's U.S. operations and U.K. subsidiary. The higher rates this year reflect higher domestic profit contribution this year versus last year. Domestic tax rates tend to be higher than the foreign subsidiary's tax rate. Other factors that may affect the tax rates include R&D tax credits, state tax jurisdictions, 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 increased by $256,000 during the nine month period ended November 2, 1997. Accounts receivable increased by $3,600,000 brought about by high shipments in the last month of the 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 nine months of fiscal 1998 has been: the purchase of capital equipment used to equip additional personnel and to upgrade our information systems capabilities, and investment in software development. Working capital at November 2, 1997May 3, 1998 improved to $7,911,000$8,361,000 compared to $5,726,000$8,173,000 at the beginning of the fiscal year, while the current ratio stood at 2.6 to 1.0 at November 2, 1997 and at 3.0May 3, 1998 versus 2.5 to 1.0 at January 31, 1997. At November 2, 1997,1998. Cash decreased by $1,661,000 during the first quarter of fiscal 1999. Accounts receivable increased by $1,008,000 due to high shipments in the last month of the period and granting of extended payment terms on certain long-term projects. The primary use of the Company's cash in the first quarter of fiscal 1999 was: the purchase of capital equipment used to equip additional personnel, investment in software development, federal income tax payments, and additional inventory purchases and growth in accounts receivable. The Company has a $1,000,000 secured bank line of credit.credit available which was unused at the end of the quarter. The Company currently anticipatesbelieves that internally generated funds and bank borrowings will be sufficient to satisfy its anticipated operating and capital needs over the foreseeable future. At November 2, 1997,May 3, 1998, the Company had no material outstanding commitments to purchase capital equipment. However, the Company believes that it will need approximately 10,000 square feet of additional manufacturing space to accommodate anticipated growth during the current fiscal year. New space may be at a higher cost than existing space and will add to the Company's expense base. Although the Company expects revenue growth to cover this additional cost, there can be no assurance that this growth will materialize. Factors That May Affect Future Results - - -------------------------------------- In addition to the other information contained in this Report, the following are important factors that should be considered carefully in evaluating the Company and its business. New Products and Rapid Technological Change. The Company's future operating results may be affected by a number of factors, including: timing of receipt of major system orders; timing of service revenues; product mix;markets for the Company's ability to timely introduce new products services and enhancements for its customers and achieve market acceptance asare characterized by continued demands for increasingly sophisticated measurement and control systems continue; uncertainties relative to global economic conditions;and turnkey solutions. The Company's success depends upon its ability to attractintroduce new products and retain for qualified personnelto enhance its existing products with features that meet changing end user requirements. There can be no assurance that new products or enhancements will gain market acceptance or that the Company will be successful in various technical positions;developing product enhancements or new products that respond to technological change, evolving industry standards and changing customer requirements. Development and Management of Systems Integration Services. At the Company's abilitybeginning of fiscal 1997, management began 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 expandedexpand the services side of the Company'scompany's transportation market business. These services include systems integration, project management, commissioning and installation. These services are usuallyinstallation and, coupled with the sale of ourcompany's RedLine products, and has allowedmanagement believes these capabilities will allow us to pursue further the company's growth in the transportation market by providing "one-stop" orfull-service to the company's customers. These services provide us the capability to provide turnkey shoppingsystems where they are required. Hence, the Company has invested in project management, custom manufacturing, system integration, installation and commissioning staff during the past two years. The Company believes that the successful marketing and expansion of its transportation products will be increasingly dependent on its ability to our customers. Thisoffer these services. However, the introduction of these services business raises several risk factors.risks for the Company. Specifically, the success depends on the time it takes for services8 these personnel and future staff to come up to speed on ourthe company's products, customers and the services they will provide; ability to compete for qualified personnel in various technical positions; market acceptance of the services; timing of service revenues; and the ability to manage customer projects profitably;profitably. The successful management of these projects depends on the timely availability and quality of key products, the availability of key personnel, the ability to integrate ourdifferent products with other vendors' products; availabilityfrom a variety of vendors effectively and qualitythe management of other vendors' products; and otherdifficult scheduling and delivery risks.problems. Most of the Company's systems integration projects use fixed price contracts. The pricing of fixed price contracts requires accurate cost estimation in order to be profitable. Potential Fluctuations in Quarterly Results. The Company's quarterly operating results may vary significantly, depending on a number of factors, some of which could adversely affect the Company's operating results and the trading price of the Company's Common Stock. These factors include timing of receipt of system orders from and shipments to major customers; variation in the Company's product mix and component costs; economic conditions prevailing within the Company's geographic markets and in the world-wide automotive industry; market acceptance of new products and services; the timing and levels of operating expenditures; and exchange rate fluctuations. Any unfavorable change in these or other factors could have a material adverse effect on the Company's operating results for a particular quarter. Quarterly sales depend in part on the volume and timing of orders received during a quarter, which are difficult to forecast. Moreover, a disproportionate percentage of the Company's net sales in any quarter are typically generated in the last month of a quarter. As a result, a shortfall in net sales in any quarter as compared to expectations may not be identifiable until the end of the quarter. In addition, a significant portion of the Company's sales are derived from a few customers. Hence, a decrease in the purchasing levels from one or more of these customers could adversely impact operating results. Dependence on International Sales. Part of the Company's revenue growth in the past few years was due to increases in the Company's international sales, particularly in Western Europe and Asia. International sales accounted for approximately 35%, 32%, and 18% of net sales in fiscals 1998, 1997 and 1996. The Company's international sales are subject to the risks inherent in international sales, including political and economic changes and disruptions, various regulatory requirements, and tariffs or other barriers. In addition, fluctuations in exchange rates may render the Company's products less competitive relative to local product offerings or may cause foreign customers to delay or decrease potential orders. One or more of these factors may have a material effect on the Company's future international sales and, consequently, on the Company's operating results. Competition. The markets for the Company's products are intensely competitive and subject to rapid technological change. Some of the Company's competitors have significantly greater financial, technical, product development, manufacturing or marketing resources than the Company. In addition, some of these competitors have a larger installed base than the Company, particularly outside the United States. The Company believes that its ability to compete depends on a number of factors, including price, product functionality, product quality and reliability, system integration capabilities, and post-sale service and support. There can be no assurance that the Company will be able to continue to compete successfully with respect to these factors. Competitors could introduce additional products or add features to their existing 9 products that are superior to the Company's products or that achieve greater market acceptance. 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 - - ------------------------------------------------------------ There were no matters submitted to a vote of security holders during the period for which this report is filed. 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 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 B. Reports on Form 8-K: None.There were no Reports on Form 8-K filed during the period for which this report is filed. 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: DecemberDATE: JUNE 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 Schedule1998 10