SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934
For the quarterly period ended APR 30,JULY 31, 1998 or
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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
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DSP TECHNOLOGY INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 94-2832651
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(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number
48500 Kato Rd.KATO RD., Fremont,FREMONT, CA 94538
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(Address of principal executive offices) (Zip Code)
(510) 657-7555
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(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
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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 MAY 3,SEPTEMBER 8, 1998
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COMMON STOCK 2,279,360
12,241,310
DSP TECHNOLOGY INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
April 30,DSP TECHNOLOGY INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
July 31, 1998 and January 31, 1998 3
Consolidated Statements of Income -
Three months and six months ended July 31, 1998 and 1997 4
Consolidated Statements of Cash Flows -
Six months ended July 31, 1998 and January 31, 1998 3
Consolidated Statements of Income -
Three months ended April 30, 1998 and April 30, 1997 4
Consolidated Statements of Cash Flows -
Three months ended April 30, 1998 and April 30, 1997 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. 10
Signatures 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
2
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
Apr 30, Jan 31,
1998 1998
----------- -------
ASSETS (Unaudited)
Current assets:
Cash and certificates of deposit 3,040 4,701
Accounts receivable 6,589 5,581
Inventories 3,172 2,682
Other Current Assets 740 793
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Total current assets 13,541 13,757
Property and equipment 1,381 1,341
Other assets 1,657 1,632
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$16,579 $16,730
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 846 $ 687
Accrued liabilities 3,711 3,755
Income taxes payable 623 1,142
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Total current liabilities 5,180 5,584
Deferred income taxes 461 489
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock. Authorized 2,500,000 shares;
none issued -- --
Common stock. 25,000,000 shares authorized;
shares issued and outstanding: 2,279,360 at
April 30 and 2,264,860 at January 31 3,357 3,301
Retained earnings 7,581 7,356
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Total shareholders' equity 10,938 10,657
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$16,579DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
July 31, January 31,
1998 1998
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ASSETS (Unaudited)
Current assets:
Cash and certificates of deposit $ 1,302 $ 4,701
Accounts receivable 6,578 5,581
Inventories 3,433 2,682
Deferred income taxes 577 577
Prepaid expenses 236 216
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Total current assets 12,126 13,757
Property and equipment 2,081 1,341
Cost in excess of net assets of acquired
business 185 244
Other assets 1,518 1,388
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$15,910 $16,730
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 790 $ 687
Accrued liabilities 3,027 3,755
Income taxes payable 542 1,142
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Total current liabilities 4,359 5,584
Deferred income taxes 461 489
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock. Authorized 2,500,000
shares; none issued -- --
Common stock. 25,000,000 shares
authorized; shares issued and
outstanding: 2,251,610 at July 31
and 2,264,860 at January 31 3,121 3,301
Retained earnings 7,969 7,356
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Total shareholders' equity 11,090 10,657
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$15,910 $16,730
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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 April 30, April 30,Six months ended
July 31, July 31,
------------------ ----------------
1998 1997 --------- ---------1998 1997
-------- -------- ------- -------
Net sales $5,519 $4,467$5,792 $5,445 $11,311 $9,912
Cost of sales 2,541 2,1672,765 2,570 5,306 4,737
------ ------ ------- ------
Gross profit 2,978 2,3003,027 2,875 6,005 5,175
Operating expenses:
Research and development 593 578597 530 1,190 1,108
Marketing, general and administrative 1,955 1,7051,837 1,605 3,792 3,310
------ ------ 2,548 2,283------- ------
2,434 2,135 4,982 4,418
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Operating income 430 17
Interest593 740 1,023 757
Other income 56 4050 69 106 109
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Income before income taxes 486 57643 809 1,129 866
Income taxes 190 22236 324 426 346
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Net income $ 296407 $ 35485 $ 703 $ 520
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Net income per shareshare:
Basic $ .13.18 $ .02.22 $ .31 $ .24
====== ====== ======= ======
Diluted $ .12.16 $ .01.21 $ .28 $ .22
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Weighted average shares used in computing
basic net income per share 2,274 2,1802,264 2,187 2,269 2,183
====== ====== ======= ======
Weighted average shares and equivalents used
in computing diluted net income per share 2,555 2,3372,519 2,321 2,537 2,329
====== ====== ======= ======
The accompanying notes are an integral part of these financial statements.
4
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
ThreeSix months ended
April 30, April 30,July 31,
-----------------
1998 1997
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(Unaudited)
Cash flows from operating activities:
Net income $ 296703 $ 35485
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 220 240485 537
Changes in current assets and liabilities:
Accounts receivable (1,008) 28(997) (2,313)
Inventories (490) (434)(751) (718)
Prepaid expenses 53 90(20) (36)
Accounts payable 159 (119)payables 103 231
Accrued liabilities (44) 782(728) 1,445
Income taxes payable (519) (130)(600) 435
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Net cash provided by (used in) operating activities (1,333) 492(1,805) 66
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Cash flows from investing activities:
Purchases of property and equipment (163) (110)(999) (195)
Investment in software development (159) (170)(294) (195)
Other (62) 16(121) 116
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Net cash used in(used in) investing activities (384) (264)(1,414) (274)
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Cash flows from financing activities:
Repurchase of common stock (238) --
Proceeds from issuance of common stock 56 258 24
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Net cash provided by financing activities 56 2(180) 24
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Increase (decrease)-------
Decrease in cash (1,661) 230(3,399) (184)
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Cash at beginning of period 4,701 1,323
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Cash at end of period $ 3,040 $1,5531,302 $ 1,139
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Supplemental disclosure of cash flow information:
Cash paid during period for income taxes $ 690865 $ 10
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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.
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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, 1998 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 firstsecond
quarter fiscal 1999 ended May 3,August 2, 1998.
2. Inventories. Inventories are stated at the lower of cost (first-in, first-
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out) or market. Inventories consist of:
Apr 30, January 31,
1998 1998
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(thousands)
Raw materials $1,579 $1,695
Work in process 1,004 637
Finished goods 589 350
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$3,172July 31, January 31,
1998 1998
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(thousands)
Raw materials $1,962 $1,695
Work in process 983 637
Finished goods 488 350
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$3,433 $2,682
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6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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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
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Net sales for the firstsecond quarter of fiscal 1999 ended August 2, 1998
increased by $1,052,0006% to $5,792,000 from $5,445,000 in the second quarter of fiscal
1997 ended August 3, 1997. Net sales for the first six months of fiscal 1999
were $11,311,000 or 24% to $5,519,000 from $4,467,00014% higher than net sales of $9,912,000 in the first quartersix
months of fiscal 1998. The increase in net sales wasincreases were due to stronghigher shipments across all
product lines including the Company'sand custom service operation.
This year's first quarter costservices.
Cost of sales as a percentage of net sales decreased to 46% from 49%remained in the same period last year. Cost47%-48% range
for all the periods being reported. The Company's overall cost of sales
was
favorably affected by increased revenues of higher margin products across all
product lines. The Company also experienced significantly improved margins this
quarter in its growing custom service operations compared to the first quarter
of last year. Its overall gross marginpercentage is subject to change due to various factors, including variation in
product mix, andchanges in component costs and timing of custom service revenues.
Research and development ("R&D") expenses increased by $15,000$67,000 to $593,000$597,000 in the
firstsecond quarter this year compared to $578,000$530,000 in the same period last year while
expenses in the first half of this year increased by $82,000 to $1,190,000 from
$1,108,000 in the first half of fiscal 1998. The increases were due primarily
to addition of engineering personnel to develop new products. These expenses
have resulted in several new product introductions so far, this year. As a
percentpercentage of net sales, R&D declined tohowever, research and development expenses remained at
about 11% in this years first quarter
versus 13% for all the comparable period last year.periods being reported The Company anticipates that
R&D expenses
willto continue to increase in total dollars this year as it adds personnel and programs are added to develop new products with higher levels of capability
and integration.development
projects. However, it is expected that R&Dresearch and development expenses will
remain at the
first quarter level of aboutapproximately 11% as a percentage of net sales.
Marketing, general and administrative expenses forin the second quarter of
fiscal 1999 increased by 14% to $1,837,000 compared to the same period a year
ago. Expenses in the first quartersix months of this year increased by 15% to
$1,955,000$3,792,000 from $1,705,000 in the same quarter$3,310,000 last year. As a percentage of sales however, expenses
decreasedincreased to 35%32% from 38%29% in the second quarter this year and to 34% from 33% in
the first half of this year compared to the respective periods last year. The
increaseincreases in actual spending was a result ofin this year's second quarter and first half were due to
higher trade show related
expenses to introduce several new products at the SAE show (February 98) and increased sales related
expenses due to the increase in sales activity. The Company expects that
marketing, general 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 leveldecrease as a percentage of
sales.net sales in the second half of this year as a result of the anticipated growth
in revenues.
Other income, net of interest expense increased 40% to $56,000was $50,000 in fiscal
1999's firstthis year's second
quarter compared to $69,000 last year and $106,000 in the first half compared to
$109,000 in the same period last year due to interest
earnings on a higher level of invested cash and full utilization of vendor early
payment discounts.year.
The effective tax raterates computed was 39% for the second quarter and first half this
year were in the 37%-38% range compared to 40% in last year's second quarter which was
identical to fiscal 1998'sand
first quarter.half, respectively. The lower tax rates computed depend
primarily onthis year reflect the profithigher
foreign income contribution mix between the Company's U.S. operations
and U.K. subsidiary.along with lower state tax rates this year compared
to last year. Domestic tax rates tend to be higher than the Company's foreign
subsidiary's tax rate. Other factors that may affect tax rates include R&D tax
credits, state tax jurisdictions, and software capitalization levels.rates. The companyCompany reviews the tax rate quarterly and could
make minor adjustments to reflect changing estimates.
7
Liquidity and Capital Resources
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Cash decreased by $3,399,000 during the six month period ended July 31,
1998. The decrease was due to the increase in accounts receivable brought about
by high shipments in the last month of the period, increase in inventory in
anticipation of certain large system orders, the purchase of eight acres of land
near the Company's Ann Arbor facility for $732,000 and the repurchase of 28,000
shares of the Company's common stock at an average price of $8.35 per share
under its stock repurchase program.
The purchase of land late in the second quarter was in anticipation of
growth over the next 3-5 years. The Company is currently in the process of
obtaining building permits to build the first phase on the property. Due to the
rising building lease costs in the Ann Arbor, Michigan area, the Company found
that it would cost the Company less to own its own facility. Based on the
current building plans, the Company feels that the building site is sufficient
to allow the Company to grow over the next five years.
Working capital at May 3,July 31, 1998 improved to $8,361,000was $7,767,000 compared to $8,173,000 at
the beginning of the fiscal year, while the current ratioratios stood at 2.62.8 to 1.0
at May 3,July 31, 1998 versusand at 2.5 to 1.0 at January 31, 1998. Cash decreased
by $1,661,000 duringAt July 31, 1998, 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$4,000,000 secured bank line of credit available which was unused at the end of the
quarter.credit. The Company believescurrently
anticipates that internally generated funds and bank borrowings will be
sufficient to satisfy its anticipated operating and capital needs over the
foreseeable future.
At May 3,July 31, 1998, the Company had no material outstanding commitments to
purchase capital equipment. However, the CompanyManagement 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
atinflation has not had a
higher cost than existing space and will add tomaterial effect on 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.operations or financial condition.
Factors That May Affect Future Results
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- --------------------------------------
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 markets for the Company's
products are characterized by continued demands for increasingly sophisticated
measurement and control systems and turnkey solutions. The Company's success
depends upon its ability to introduce new products and to 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 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
beginning of fiscal 1997, management began to expand the services side of the
company's transportation market business. These services include systems
integration, project management, commissioning and installation and, coupled
with the company's RedLine products, management believes these capabilities will
allow us to pursue further the company's growth in the transportation market by
providing full-service to the company's customers. These services provide us
the capability to provide turnkey systems 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
8
dependent on its ability to offer these services. However, the introduction of
these services raises several risks for the Company. Specifically, success
depends on the time it takes for
8
these personnel and future staff to come up to
speed on the 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. 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 different products from
a variety of vendors effectively and the management of difficult scheduling and
delivery 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.
9
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.
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The annual meeting of stockholders was held on May 18, 1998.
The stockholders approved a proposal to elect the Board of Directors of the
Company to serve for the ensuing fiscal year. The proposal received the
following votes:
FOR AGAINST ABSTENTIONS
--------- ------- -----------
Howard O. Painter, Jr. 2,088,150 0 73,750
F. Gil Troutman, Jr. 2,088,150 0 73,750
J. Scott Kamsler 2,088,150 0 73,750
Michael A. Ford 2,076,250 0 85,650
The stockholders approved a proposal to increase the number of shares of
the Company's Common Stock reserved for issuance under its 1991 Stock Option
Plan by 111,000 shares. The proposal received the following votes:
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
- ------------------------------------------------------------
There were no matters submitted to a vote--------- ------- ----------- ----------------
1,684,930 450,575 0 26,395
The stockholders ratified the appointment of security holders during the periodaccounting firm of Grant
Thornton as independent accountants of the Company for which this report is filed.the fiscal year ending
January 31, 1999. The proposal received the following votes:
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
- --------- ------- ----------- ----------------
2,149,750 10,550 1,600 0
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
- - ------- -----------
27 FinancialExhibit 27-Financial Data ScheduleSchedule.
B. Reports on Form 8-K: There were no Reports on Form 8-K filed during the period for which this
report is filed.None.
10
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
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Jose M. Millares
Chief Financial Officer
DATE: JUNE 16,Date: September 10, 1998
1011