SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
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Exchange Act of 1934 For the quarterly period ended JULYOCTOBER 31, 1998 or
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Transition report pursuant to Section 13 or 15(d) of the Securities
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Exchange Act of 1934 For the transition period
from ____________ to
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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
------------------------------- ---------------------- ---------------------------------------- ------------------------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number
48500 KATO RD., 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
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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 8,DECEMBER 10, 1998
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COMMON STOCK 2,241,3102,228,412
1
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 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
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, 1998 and January 31, 1998 3
Consolidated Statements of Income -
Three months and nine months ended October 31, 1998 and 1997 4
Consolidated Statements of Cash Flows -
Nine months ended July 31, 1998 and 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
Item 6. Exhibits and Reports on Form 8-K. 10
Signatures 11
2
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
July 31, January 31,
1998 1998
----------- -----------
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
October 31, January 31,
1998 1998
------------ -----------
ASSETS (Unaudited)
Current assets:
Cash and certificates of deposit $ 1,040 $ 4,701
Accounts receivable 7,807 5,581
Inventories 3,949 2,682
Deferred income taxes 577 577
Prepaid expenses 354 216
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Total current assets 13,727 13,757
Property and equipment 2,298 1,341
Cost in excess of net assets of acquired
business 156 244
Other assets 1,565 1,388
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$17,746 $16,730
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 942 $ 687
Accrued liabilities 4,031 3,755
Income taxes payable 747 1,142
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Total current liabilities 5,720 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: 2,228,412 at
October 31 and 2,264,860 at January 31 2,961 3,301
Retained earnings 8,604 7,356
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Total shareholders' equity 11,565 10,657
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$17,746 $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 SixNine months ended
JulyOctober 31, JulyOctober 31,
------------------ ------------------------------ ---------------
1998 1997 1998 1997
-------- -------------- ------ ------- -------
Net sales $5,792 $5,445 $11,311 $9,912$6,924 $5,892 $18,235 $15,804
Cost of sales 2,765 2,570 5,306 4,7373,157 2,640 8,463 7,377
------ ------ ------- -------------
Gross profit 3,027 2,875 6,005 5,1753,767 3,252 9,772 8,427
Operating expenses:
Research and development 597 530 1,190 1,108737 718 1,927 1,826
Marketing, general and administrative 1,837 1,605 3,792 3,3102,148 1,719 5,940 5,029
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2,434 2,135 4,982 4,418-------
2,885 2,437 7,867 6,855
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Operating income 593 740 1,023 757882 815 1,905 1,572
Other income 50 69 106 10947 47 153 156
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Income before income taxes 643 809 1,129 866929 862 2,058 1,728
Income taxes 236 324 426 346343 345 769 691
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Net income $ 407586 $ 485517 $ 7031,289 $ 5201,037
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Net income per share:
Basic $ .18 $ .22 $ .31 $ .24$.26 $.23 $.57 $.47
====== ====== ======= =============
Diluted $ .16 $ .21 $ .28 $ .22$.24 $.21 $.52 $.43
====== ====== ======= =============
Weighted average shares used in computing
basic net income per share 2,264 2,187 2,269 2,1832,239 2,216 2,259 2,194
====== ====== ======= =============
Weighted average shares and equivalents used
in computing diluted net income per share 2,417 2,519 2,321 2,537 2,3292,497 2,392
====== ====== ======= =============
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,
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1998 1997
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(Unaudited)
Cash flows from operating activities:
Net income $ 7031,289 $ 4851,037
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 485 537743 804
Changes in current assets and liabilities:
Accounts receivable (997) (2,313)(2,226) (3,600)
Inventories (751) (718)(1,267) (719)
Prepaid expenses (20) (36)(138) (6)
Accounts payables 103 231255 (399)
Accrued liabilities (728) 1,445276 2,870
Income taxes payable (600) 435(395) 556
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Net cash provided by (used in) operating activities (1,805) 66(1,463) 543
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Cash flows from investing activities:
Purchases of property and equipment (999) (195)(1,362) (268)
Investment in software development (294) (195)(340) (320)
Other (121) 116(156) 52
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Net cash (used in) investing activities (1,414) (274)(1,858) (536)
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Cash flows from financing activities:
Repurchase of common stock (238)(398) --
Proceeds from issuance of common stock 58 24249
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Net cash provided by financing activities (180) 24(340) 249
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Decrease(Decrease) Increase in cash (3,399) (184)(3,661) 256
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Cash at beginning of period 4,701 1,323
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Cash at end of period $ 1,3021,040 $ 1,1391,579
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Supplemental disclosure of cash flow information:
Cash paid during period for income taxes $ 8651,003 $ 1077
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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.January
effective on the fiscal year beginning February 1, 1997. However, for
financial reporting purposes, each fiscal quarter or year is presented as
if it ended on the last day of such period. The secondthird quarter fiscal 1999
ended August 2,November 1, 1998.
2. Inventories. Inventories are stated at the lower of cost (first-in, first-
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out) or market. Inventories consist of:
July 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
October 31, January 31,
1998 1998
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(thousands)
Raw materials $1,761 $1,695
Work in process 1,563 637
Finished goods 625 350
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$3,949 $2,682
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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
- ---------------------
The period-to-period comparisons being reported are for the same amount of
weeks, that is, thirteen weeks for the third quarter and thirty nine weeks for
the nine months.
Net sales for the secondthird quarter of fiscal 1999 ended August 2,November 1, 1998
increased by 6%18% to $5,792,000$6,924,000 from $5,445,000$5,892,000 in the secondthird quarter of fiscal
19971998 ended August 3,November 2, 1997. Net sales for the first sixnine months of fiscal 1999
were $11,311,000$18,235,000 or 14%15% higher than net sales of $9,912,000$15,804,000 in the first sixnine
months of fiscal 1998. The increases were due to higher shipments across allmost
product lines, particularly ADAPT systems and custom services.
Cost of sales as a percentage of net sales remained induring the 47%-48% range
for allthird quarter this
year and last year were approximately the periods being reported. The Company's overallsame at the 45%-46% range. During the
first nine months, cost of sales as a percentage of sales were approximately
similar at the 46%-47% range this year compared to a year ago. Cost of sales
percentage in the fourth quarter of this year will approximate 45%-46% based on
the Company's expectation that product and service mix will remain stable. Cost
of sales as a percentage of sales is subject to change due to various factors,
including variation in product mix, changes in component costs and timing of
custom service revenues.
Research and development expenses increased by $67,000$19,000 to $597,000$737,000 in the
secondthird quarter this year compared to $530,000 in the same period last year while
expensesand by $101,000 to
$1,927,000 in the first half of this year increased by $82,000 to $1,190,000 from
$1,108,000 in the first halfnine months of fiscal 1998.1999 compared to the previous
year's first nine months. 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 percentage of net
sales, however, research and development expenses remained at
about 11% for all the periods being reported
decreased to 11% this year from 12% in the third quarter and nine months a year
ago. The Company anticipates expenses to continue to increase in dollars as it
adds personnel and development projects. However, it is expected that research
and development expenses will remain at approximately 11% of net sales.
Marketing, general and administrative expenses in the secondthird quarter of
fiscal 1999 increased by 14%25% to $1,837,000$2,148,000 compared to the same period a year
ago. Expenses in the first sixnine months of this year increased by 15%18% to
$3,792,000 from $3,310,000 last year.$5,940,000. As a percentage of sales expenses increased to 32%31% from 29% in the
secondthird quarter this year and to 34%33% from 33%32% in the first halfnine months of this
year compared to the respective periods last year. The increases in spending in
this year's secondthird quarter and first halfnine months were due to higherincreased sales and
marketing related expenses to support our increased focus on industrial
manufacturers and a broad range of transportation industry equipment suppliers.
The Company also increased trade show expenses to introduce new products and
increasedincurred one-time administrative and sales related
expenses due to the increase in sales activity.costs this year. The Company expects
that marketing, general and administrative expenses will decrease as a
percentage of net sales in the second halffourth quarter of this year as a result of the
anticipated growth in revenues.
7
Other income, net of interest expense was $50,000the same at $47,000 in this
year's second
quarterand last year's third quarter. In the first nine months other income
reached $153,000 this year compared to $69,000 last year and $106,000 in the first half compared to
$109,000$156,000 in the same period last year.
The effective tax rates computed for the secondthird quarter and first halfnine
months this year were in thewas 37%-38% range compared to 40% in last year's secondthird quarter and first
half, respectively.nine months. The lower tax rates this year reflect the higher foreign income
contribution 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
rates. The Company 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$3,661,000 during the sixnine month period ended JulyOctober 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
28,000approximately 51,000 shares of the Company's common stock at an average price of
$8.35$7.72 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. The Company is currently in negotiations with builders
to build the first phase on the property. 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. The Company expects to finance the building
construction with Michigan Strategic Fund revenue bonds and expects to begin
construction of the first phase in January 1999.
The Company plans to repurchase up to 225,000 shares of its outstanding
common stock, which represents approximately 10% of its shares, at prevailing
market prices because it deems the plan as a good investment for the Company.
It expects that the repurchase will be largely offset by stock option exercises
and therefore, has minimal effect on net income per share.
Working capital at JulyOctober 31, 1998 was $7,767,000$8,007,000 compared to $8,173,000
at the beginning of the fiscal year, while the current ratios stood at 2.82.4 to
1.0 at JulyOctober 31, 1998 and at 2.5 to 1.0 at January 31, 1998. At JulyOctober 31,
1998, the Company has a $4,000,000 secured bank line of credit. The Company
currently anticipates that internally generated funds, and bank borrowings and
anticipated revenue bonds will be sufficient to satisfy its anticipated
operating and capital needs over the foreseeable future.
At JulyOctober 31, 1998, 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
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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.
8
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
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
9
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 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
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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
- --------- ------- ----------- ----------------
1,684,930 450,575 0 26,395
The stockholders ratified the appointment of the accounting firm of Grant
Thornton as independent accountants of the Company for 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
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A. Exhibits: Exhibit 27-Financial Data Schedule.
B. Reports on Form 8-K: 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.
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(Registrant)
By: /s/ Jose M. Millares
----------------------------------------------------
Jose M. Millares
Chief Financial Officer
Date: September 10,December 15, 1998
11