SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 31, 1998 or
----------------
TRANSITION REPORT PURSUANT TO SECTION 14 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 incorporation or organization) (IRS Employer Identification No.)
48500 KATO ROAD, FREMONT, CALIFORNIA 94538
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (510) 657-7555
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ______
The aggregate market value of registrant's voting Common Stock held by non-
affiliates of the registrant was approximately $16,316,000 (based on the closing
sales price of the Company's Common Stock at March 31,1998 as reported by
NASDAQ). Shares of Common Stock held by each officer and director and by each
person who owns more than 5% of the Company's Common Stock have been excluded
because such persons may be deemed to be affiliates. This is not intended to be
a conclusive determination of affiliate status for any other purposes. The
number of shares outstanding of the registrant's Common Stock at March 31, 1998
was 2,277,360.
DOCUMENTS INCORPORATED BY REFERENCE:
Information in Part III is incorporated by reference to the Proxy Statement
for the Company's 1998 Annual Meeting of Shareholders which is to be filed with
the Securities and Exchange Commission before May 1, 1998.
This report (including exhibits) contains 71 pages. The Index to Exhibits
begins on page 33 of this report.
1
PART I
ITEM 1: BUSINESS
This report contains, in addition to historical information, forward-
looking statements which reflect the Company's current views with respect to
future events and financial performance. These foward-looking statements are
subject to certain risks and uncertainties, including those discussed in this
report. Actual results could differ materially from those projected in the
forward-looking statements as a result of competition, technological change and
other risks detailed in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors that May Affect Future
Results". In this report the words "anticipates," "believes," "expects,"
"intends," "may," "future," and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date hereof. The following
discussion should be read in conjunction with the Consolidated Financial
Statements and Notes thereto.
INTRODUCTION
The Company designs, develops, manufactures, markets and integrates high-
speed computer-automated instrumentation for measurement and control
applications in three major areas: powertrain testing, vehicle safety and
component testing, and general data acquisition and signal analysis. The
transportation industry is currently its largest market and major focus.
The Company's products are used to gather and measure analog signals
generated by transducers and/or detectors which measure physical properties such
as temperature, pressure, acceleration and radiation. These products have been
used primarily in the transportation industry in applications as diverse as
powertrain testing, dynamometer control, automotive combustion research, and
vehicle impact testing. To a lesser extent, aerospace companies, universities
and government-funded agencies use the Company's products in ultrasonics,
chemical kinetics, plasma diagnostics, spectroscopy, fusion research, explosives
testing, and vibration analysis.
In February 1995, the Company entered into a strategic alliance agreement
with FEV Motorentechnik GmbH & CO KG ("FEV"). The purpose of the alliance is to
develop and distribute test instrumentation and control products for the
transportation industry. FEV is a privately-held company based in Aachen,
Germany, and is a leader in complete engine and powertrain research and
development and instrumentation for the transportation industry.
DSP Technology Inc. (the "Company") was incorporated in California in July
1982 and commenced operations in May 1984. The Company reincorporated in
Delaware in September 1997. All references in this report to the "Company" and
"DSPT" refer to DSP Technology Inc. and its wholly-owned subsidiaries.
STRATEGY
The Company's strategy is to focus its resources on its largest market, the
transportation market. The Company defines the transportation market as
including the following industries and segments: major vehicle manufacturers
and their suppliers, the diesel industry (e.g., manufacturers of heavy trucks,
farm and construction equipment, and large stationary engines), the fuels and
lubricants industry, and small engine manufacturers. The Company believes that
the fundamental factors of government environmental regulation, global
competition among vehicle manufacturers, and rapid technological progress are
expanding the demand for advanced turnkey powertrain test solutions. Large
domestic and international customers demand more custom turnkey solutions that
require more complex services. The Company believes that investments in this
area are necessary and logical steps towards expanding its
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share of the transportation market.
To address its transportation industry customers' needs, the Company
announced its strategic decision, in the beginning of fiscal 1997, to: (1) focus
more heavily and expand its capabilities on the services side of the business;
(2) continue development of new products with higher levels of capability and
integration; and (3) take a more aggressive approach to marketing with the goal
of becoming a full-service company capable of manufacturing and providing
turnkey integration of the Company's products.
The Company, starting in fiscal 1997, invested heavily in developing
significant service capabilities in the areas of custom manufacturing, system
integration, project engineering and management, installation and commissioning.
These services are now offered as part of the sale of transportation products as
Test Cell Services.
The Company continues to invest in the development of data acquisition
products. The following systems, BaseLine ADAPT, ADAPT-DAC and ADAPT-CAS, were
introduced at the 1998 Society of Automotive Engineers ("SAE") show in Detroit,
Michigan in February 1998. See "Products and Customers---Powertrain Testing
Products" for description of these products.
In fiscal 1997, the Company also invested in new sales and marketing
personnel to support the expected growth in sales and increased marketing
activity. The added personnel were hired three to six months in advance of the
revenue opportunities to permit formal and on-the-job training in the Company's
products and processes. The Company has also embarked on setting up marketing
alliances to enhance its product offerings. This has resulted in the
introduction at the SAE show of RedLine Dyno, a line of low inertia, high
response dynamometers.
PRODUCTS AND CUSTOMERS
The Company manufactures and markets data acquisition and control products
in the form of integrated systems, modules and proprietary software developed by
the Company. These products are categorized into three application areas:
powertrain testing, vehicle safety and component testing, and general data
acquisition and signal analysis.
Powertrain Testing Products:
----------------------------
Powertrain testing is a critical discipline in the transportation industry.
DSPT supplies a wide range of products and services for powertrain test cells.
DSPT's RedLine and BaseLine products are accepted as standards by leading
automakers around the world. These systems help its customers develop more cost
effective, fuel efficient engines. By integrating hardware, software, services
and expertise into a cost-effective system, DSPT creates solutions that focus on
its customers' specific needs. These solutions, based on industry standards,
provide long-term flexibility for changing test requirements. The Company's
major customers in the transportation market are General Motors ("GM"), Hyundai
Motor ("Hyundai"), Sverdrup Technology, Inc. ("Sverdrup"), Waukesha Engine, FEV,
Lubrizol Corporation, Lotus Engineering, Ltd., and Chrysler Corporation.
RedLine ADAPT-DAC. The data acquisition and control system is a crucial
------------------
component in a powertrain test cell. RedLine ADAPT-DAC offers real-time control
over the engine under test. Multi-processor architecture allows the system to
acquire data on hundreds of preset parameters simultaneously as the engine
responds to test conditions. It can interface with and control a wide variety
of other test instruments and systems, including emission benches, combustion
analyzers and other devices. With its networking capabilities, ADAPT-DAC can
provide centralized, remote control of an entire suite of test cells. It
features innovative graphics and runs on a PC in the Windows environment. The
systems sell from $60,000 for a base system up to $500,000 with accessory
products, hardware spares, custom software, integration, installation and
training.
3
RedLine ADAPT-CAS. The Company introduced the RedLine ADAPT-CAS at the SAE
------------------
show in February 1998. It is the third generation combustion analysis product
of RedLine ACAP which was introduced in 1991. ADAPT-CAS incorporates years of
feedback from industry leaders around the world. Designed for seamless
integration with ADAPT-DAC or with VME or VXI systems from other vendors, it
enhances the usefulness and quality of test data, raises the efficiency of test
cell operations and increases test safety. It is easy to use and features
dynamic graphic displays. Integrated with ADAPT-DAC, the combined system offers
a single user interface for operation, display of data, and system
configuration. The systems range in price from approximately $30,000 for a base
system to over $150,000.
RedLine DYNO. The Company offers a line of dynamometers called RedLine
-------------
DYNO. These dynamometers are low-inertia, high-response units designed for the
quick transient conditions of sophisticated powertrain testing. They interface
directly with RedLine ADAPT-DAC and provide another element in the complete
solution for powertrain testing. The systems range in price from approximately
$25,000 to $125,000.
RedLine CONNECT. As test cell electronics proliferate, test-cell wiring
----------------
becomes more complex, time-consuming and error-prone. The RedLine CONNECT
system provides a fast, simple, modular solution for interfacing test cell
instrumentation and signals. It combines the flexibility of individual signal
connections with the speed and convenience of single-point mass termination.
These systems range in price from approximately $10,000 to $25,000.
BaseLine ADAPT. BaseLine ADAPT is a self-contained data acquisition and
---------------
control system needing only a PC workstation and test cell interfaces to
implement an operational test system. It is the lower cost alternative to
RedLine ADAPT and offers space savings of approximately 70%, a significant
advantage in the equipment-crammed environment of today's test cell. Typical
systems range in price from approximately $35,000 to $45,000.
Test Cell Instrumentation and Accessory Products. The Company provides a
-------------------------------------------------
comprehensive array of test cell accessories (e.g., engine supports, coolant
control systems, containerized powertrain test cells) as integral parts of
RedLine installations.
Test Cell Services. Test Cell services personnel work in close partnership
-------------------
with its customers to design, install and service a wide variety of powertrain
test facilities. In the planning phase, project and applications engineers work
closely with customers' selected contractors to design and integrate complex
systems and facilities that will meet their needs. During installation, the
Company's installers and commissioning engineers work with the customer to
ensure timely completion and thorough testing of all equipment.
Vehicle Safety and Component Testing Products.
----------------------------------------------
IMPAX Data Acquisition Systems ("IMPAX"). IMPAX is a system typically used
-----------------------------------------
in collecting and processing data from full-scale vehicle crash tests, sled
simulators and component test stands. In addition, they have been used for
investigating lift-off dynamics for space launch vehicles. Systems prices range
from about $150,000 to $600,000 depending on the configuration. Major customers
for this product are General Motors, Autoliv, Lockheed-Martin, Sandia National
Laboratory and Morton International.
General Data Acquisition and Signal Analysis Products.
------------------------------------------------------
4
Signal Acquisition Products ("SigLab"). SigLab high-performance signal
---------------------------------------
acquisition products are subsystems for personal computers and workstations in
the electronic and electro-mechanical device analysis market. SigLab products
provide a cost-effective, portable technology for measurement applications like
computer hard disk head positioning or acoustic noise suppression systems in
automobiles. The products are controlled by and integrated with the MATLAB
software from The MathWorks Inc., of Natick, Massachusetts. The products range
in price from $ 5,000 for a base 2-channel unit to $21,000 for an 8-channel
system with optional software and additional memory. Major customers for these
products are distributors such as Signaltech, Phase Metrics, USAF-Phillips Lab,
Honeywell Satellite Systems, Southwest Research Institute and Sigmatest.
Custom Data Acquisition Systems. The Company also designs custom systems
--------------------------------
for customer-specific measurement or control applications. These systems are
configured from the Company's line of modules, such as, signal conditioners,
transient recorders, analog-to-digital converters and interface modules. These
systems are typically sold to universities, government-funded labs and research
and development labs. The typical selling price of a system ranges from about
$25,000 to about $300,000 for a complex installation. Major customers for these
products are Naval Air Warfare Center, Westinghouse Electric and Aberdeen
Proving Grounds.
MANUFACTURING AND SUPPLIERS
The Company manufactures its products from components and prefabricated
parts such as integrated circuits, printed circuit boards, power supplies, and
enclosures manufactured by others. Manufacturing operations consist of assembly
of printed circuit boards, power supplies, and crates, system integration and
final testing. Materials and components used by the Company in manufacturing
are available primarily from domestic sources. Where possible, the Company buys
from multiple sources to avoid dependence on any single supplier. However,
certain custom analog devices are only available from a limited number of
suppliers.
MARKETING AND SALES
In the United States, the Company primarily sells and services its products
through its own sales and service organizations located in Michigan and
California. In Canada, Western Europe, Korea and Japan, the Company sells its
products through independent distributors through whom the Company provides
technical and administrative assistance. For its transportation market
products, the Company distributes its products through FEV in Europe except for
the United Kingdom. In the United Kingdom, the Company operates a sales and
customer support subsidiary for its powertrain testing products. The Company's
standard terms of sale generally require payment within 30 days of shipment.
The following customers accounted for over 10% of fiscal 1998 net sales: GM
at 21% of net sales and Hyundai at 14% of net sales. GM accounted for 18% and
11% of net sales in fiscal 1997 and fiscal 1996, respectively. No other customer
accounted for 10% or more of the Company's net sales in fiscal years 1998, 1997
or 1996.
Export sales, primarily to the United Kingdom, Western Europe, and the Far
East, accounted for approximately 35%, 32%, and 18% of sales in 1998, 1997 and
1996, respectively (See Note J of Notes to Consolidated Financial Statements).
At January 31, 1998 the Company had an order backlog of approximately
$11,500,000, compared to a backlog of approximately $9,500,000 at January 31,
1997, and approximately $4,900,000 at January 31, 1996. Backlog consists of
orders believed by management to be firm and scheduled for delivery within
twelve months. However, most orders can be rescheduled or canceled by customers
without significant penalty. In addition, backlog is dependent on the timing of
orders, particularly large orders, and on seasonal spending for capital
requirements. Accordingly, backlog at January 31, 1998, or at any other
5
date, may not be indicative of prospective sales.
SERVICE AND WARRANTY
The Company maintains a telephone "hotline" staffed with qualified
technicians to respond to service calls. Most servicing is performed at its
facilities in Fremont, California and Ann Arbor, Michigan.
The Company generally extends a one year warranty for its products.
Warranty costs have been nominal to date.
RESEARCH AND DEVELOPMENT
The Company's ability to compete successfully in an industry subject to
rapid technological change depends on, among other things, its ability to
anticipate and respond to such change. Accordingly, the Company is committed to
a high level of research and development activity. The Company incurred
expenditures for research and development of $2,352,000 in fiscal 1998,
$2,203,000 in fiscal 1997, and $2,250,000 in fiscal 1996, representing 11%, 12%,
and 14%, of total sales in each such period. In accordance with the Statement
of Financial Accounting Standards No. 86 which requires the capitalization of
software development costs incurred subsequent to establishment of the
technological feasibility of producing the finished software product, the
Company capitalized $517,000, $630,000, and $322,000, in fiscals 1998, 1997 and
1996, respectively.
There can be no assurance that customers' budgets in the automotive and
advanced research markets for data acquisition and control products will
continue at present levels or that the Company will be successful in marketing
any new product it develops. In addition, there can be no assurance that the
Company will be able to develop, manufacture or market additional products as a
result of its efforts; that expenditures in addition to those currently
anticipated may not be required to complete the research and development or
that, if required, financing for these expenditures will be available; that
future sales from existing or developed products will be significant; or that
any sales will be profitable.
COMPETITION
Competition, from both U.S. and foreign competitors, is strong and active.
Some of these competitors are substantially larger companies with greater
resources. Management believes that these companies include AVL located in
Graz, Austria, and Sverdrup, a system integrator based in Tennessee.
The Company competes primarily on the basis of product diversity, features
and functions, price/performance, flexibility, and technical support. In
addition, the Company believes that an additional competitive factor in the
automotive market is its installed base in the United States. The Company
believes that it competes favorably with respect to all these factors. Systems
integration experience and ability is increasingly a factor in large system
orders and the Company believes that it has the personnel and the resources to
ably compete in this area, although many of its competitors are substantially
larger with greater resources.
PROPRIETARY RIGHTS
The Company relies upon a combination of copyright, trade secret laws and
non-disclosure and licensing agreements to establish and maintain its
proprietary rights to its products. The laws of certain foreign countries may
not protect the Company's proprietary rights to the same extent as do the laws
of the United States. Although the Company continues to implement protective
measures and intends to defend its proprietary rights, there can be no assurance
that these measures will be successful. The Company believes, however, that,
because of the rapid pace of technological change in the automated test,
measurement and control industries, the legal protections for its products are
less significant factors in the Company's success than the knowledge, ability,
and experience of the Company's employees, the frequency of product enhancements
and the timeliness and quality of support services provided by the
6
Company.
The Company is subject to the risk of adverse claims and litigation
alleging infringement of intellectual property rights. Certain technology used
in the Company's products is licensed from third parties on a non-exclusive
basis. These license agreements generally require the Company to pay royalties
and to fulfill confidentiality obligations in order to maintain the licenses.
The termination of any of these licenses may have a material adverse effect on
the Company's operations. While it may be necessary or desirable in the future
to obtain other licenses relating to one or more of its products or relating to
current or future technologies, there can be no assurance that the Company will
be able to do so on commercially reasonable terms.
EMPLOYEES
The Company had 145 employees at January 31, 1998. Of these employees, 92
worked in manufacturing and engineering, 37 in marketing and sales and 16 in
administration. None of the Company's employees is represented by a labor union
and there has never been a disruption of operations due to labor dispute.
7
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth information as to each executive officer as
of March 31, 1998:
NAME AGE OFFICE
F. Gil Troutman, Jr. 54 President and Chief Executive Officer
Alan S. Broad 51 Senior Vice President
Joe M. Millares, Jr. 44 Vice President, Finance, Chief Financial Officer and Secretary
Larry Moulton 52 Director of Operations
All officers are elected by the Board of Directors (the "Directors").
Elected officers hold office until the first meeting of the Directors following
the Annual Meeting of Shareholders (the "Annual Meeting") and thereafter until a
successor is chosen and qualified. There are no family relationships among the
officers and/or directors.
Mr. Troutman has served as Chief Executive Officer since October 1989 and
as a Director and President since July 1988. From 1985 until July 1988, Mr.
Troutman held the position of Product Line Manager of the Test Systems and
Instruments Group of GenRad, Inc. Prior to this, he held various other
management positions with GenRad, Inc. since 1967, including the position of
National Sales Manager of all GenRad products from 1982 to 1985.
Dr. Broad has served as Senior Vice President since March 1986 and as Vice
President of Engineering since April 1985. In 1981, Dr. Broad co-founded
Transiac and served as Director and Vice President of Transiac until it was
acquired by the Company in 1985.
Mr. Millares has served as Vice President, Finance, Chief Financial Officer
and Secretary since October 1989, and as Controller since September 1984. From
1980 to 1984, he served as Corporate Controller for Transend Corporation, a data
communications software/hardware company. Mr. Millares is a Certified Public
Accountant in California.
Mr. Moulton has served as Director of Operations since November 1996 and
was elected as an executive officer of the Company in February 1997. From 1994
to 1996, he served as Vice President of Sales and Marketing for Eagle Test
Systems, Inc., a manufacturer of test systems for the semiconductor industry.
From 1990 to 1994, he held the positions of General Manager, Data Acquisition
Division and Vice President of Keithley Instruments, Inc., a publicly-held
manufacturer of hardware and software data acquisition products.
ITEM 2: PROPERTIES
The Company's facilities consist of approximately 28,000 square feet of
space in Fremont, California and about 21,000 square feet of space in Ann Arbor,
Michigan which are leased under operating leases. The Fremont facility lease
which expires in October 1998 provides for monthly rent payments of $13,009
during the first year and progressing to $15,146 during the final year. The
Company is currently negotiating to extend its Fremont facility lease. The Ann
Arbor facility leases consist of a) a seven year lease for one building which
expires in January 2000, providing for monthly rent payments starting in January
1993 of $8,551 during the first year and increasing annually until the monthly
payments reach $10,257 during the seventh year; and b) a 31-month lease which
expires in June 1999, with monthly rent payments of $4,308 from December 1996
through May 1998 and increasing to $4,602 per month thereafter. The Company is
obligated to pay real estate taxes, insurance and maintenance expenses
associated with the leased facilities. Management believes that the existing
facilities are adequate for the Company's present operation.
8
ITEM 3: LEGAL PROCEEDINGS
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended January 31, 1998.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's Common Stock is currently traded on the NASDAQ Market under
the symbol DSPT. The following table sets forth, for the periods indicated, the
high and low closing sales prices of the Common Stock as reported by NASDAQ.
Year ended January 31, 1998 Year ended January 31, 1997
--------------------------- ---------------------------
High Low High Low
---- --- ---- ---
First Quarter $ 6-3/8 $5-3/8 $6-5/8 $4-1/4
Second Quarter 6 4-7/8 6-3/4 5
Third Quarter 11-5/8 5-5/8 5-3/4 4-1/2
Fourth Quarter 11-5/16 8 6-5/8 4-1/4
HOLDERS
The approximate number of holders of record of the Company's Common Stock
at March 31, 1998 was 86. The Company believes that these recordholders hold
beneficially for more than 500 shareholders.
DIVIDEND POLICY
The Company has not paid dividends on its common stock. The Board of
Directors intends to retain earnings for the foreseeable future for the
Company's business. There are no dividend restrictions in the Company's bank
line of credit.
ITEM 6: SELECTED FINANCIAL DATA
The following table presents selected historical financial data for the
Company derived from the audited financial statements of the Company and should
be read in conjunction with Item 7: "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and respective Notes thereto, included elsewhere in this report.
9
DSP Technology Inc.
(In thousands, except per share amounts)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Operating Results Data (for the year):
- -------------------------------------
Net sales $22,038 $17,987 $15,538 $12,977 $9,180
Net income 1,646 914 1,277 874 250
Net income per common share (diluted) .68 .40 .55 .40 .12
Balance Sheet Data (at year end):
- --------------------------------
Working capital $ 8,173 $ 5,726 $ 5,472 $ 4,190 $3,644
Total assets 16,730 11,799 10,294 8,744 6,774
Long-term obligations -- -- -- -- --
Stockholders' equity 10,657 8,687 7,698 6,268 5,390
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth, for the indicated periods, the percentages
that certain items in the Consolidated Statements of Income bear to net sales.
The table and subsequent discussion should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto included elsewhere in
this report.
Year ended January 31,
-------------------------
1998 1997 1996
------- ------ ------
Net sales 100% 100% 100%
Cost of sales 46 44 40
Research and development 11 12 14
Marketing, general and administrative 31 37 33
Operating income 12 7 13
Net income 7 5 8
Net sales increased by 23% to $22,038,000 in fiscal 1998 and by 16% to
$17,987,000 in fiscal 1997. The increases in fiscal 1998 and fiscal 1997 were
primarily due to continued increase in demand for the Company's RedLine data
acquisition and control products and custom turnkey services.
Cost of sales as a percentage of net sales were 46%, 44%, and 40% in
fiscals 1998, 1997 and 1996, respectively. As anticipated, the increase in cost
of sales for fiscal 1998 is a result of product mix with lower margin turnkey
service-related revenues becoming a bigger part of the Company's business. The
increase in cost of sales in fiscal 1997 primarily reflects the expansion of the
service staff to increase the Company's capacity to build, install and
commission RedLine products. These new personnel were brought on-board ahead of
time to support expected growth in service-related revenues. Cost of sales for
the Company's core products (e.g., RedLine ADAPT, RedLine ACAP) remain at
historical 40% levels.
Research and development expenses remained in the $2.2 million to $2.3
million range for the three years reported. As a percentage of net sales,
however, research and development expenses decreased to 11% in fiscal 1998 from
12% and 14% in fiscals 1997 and 1996, respectively. The slight
10
increase in fiscal 1998 expenses in absolute dollars over the previous year was
due to higher development costs associated with the new RedLine products that
were recently introduced at the SAE Show in Detroit, Michigan. The decrease in
expenses in fiscal 1997 was due primarily to the higher capitalization of
software development costs in fiscal 1997 which more than offset increased
personnel staffing.
Marketing, general and administrative ("MG&A") expenses increased by 3% to
$6,916,000 in fiscal 1998, and decreased as a percentage of sales to 31% in
fiscal 1998 from 37% in fiscal 1997. The numbers reflect the Company's success
this year in using its resources more efficiently. MG&A expenses increased by
30% to $6,708,000 (or 37% of sales) in 1997 from $5,145,000 (or 33% of net
sales) in fiscal 1996. The increase in fiscal 1997 resulted from additional
sales and marketing staff, costs associated with improvements in the Company's
information technology infrastructure, and higher internal sales commissions due
to higher shipments and sales bookings.
Net other income in fiscal 1998 increased to $225,000 after decreasing to
$123,000 in fiscal 1997 from $136,000 in fiscal 1996. On average, in 1998, the
Company had greater available cash to invest or to take advantage of vendor
early payment discounts this year than in fiscal 1997. The lower net other
income in fiscal 1997 reflects lower available cash invested in interest-bearing
accounts compared to fiscal 1996.
The effective tax rates were approximately 40% in fiscal 1998, 33% in
fiscal 1997, and 39% in fiscal 1996. The higher tax rates this year reflect
higher domestic income contribution this year compared to last year. Domestic
tax rates historically have been higher than the Company's foreign subsidiary's
tax rates. The lower tax rates in fiscal 1997 reflect the increased profit
contributions of the Company's UK subsidiary which benefited from a lower tax
rate. Other factors that may affect the tax rates include R&D tax credits,
differences in state tax rates, software capitalization levels and foreign
income contributions.
As a result of the factors discussed above, net income increased to
$1,646,000, or $.68 per diluted share in fiscal 1998 compared to $914,000, or
$.40 per diluted share in fiscal 1997 and to $1,277,000, or $.55 per diluted
share in fiscal 1996.
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 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 our
transportation market business. These services include systems integration,
project management, commissioning and installation and, coupled with our RedLine
products, management believes these capabilities will allow us to pursue further
our growth in the transportation market by providing full-service to our
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
11
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 offer these services. However, the introduction of these
services raises several risks for the Company. Specifically, the success
depends on the time it takes for these personnel and future staff to come up to
speed on our 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 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
12
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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $8,145,000 at January 31, 1998 from $5,726,000
at January 31, 1997, while the current ratio decreased to 2.5 to 1.0 from 3.0 to
1.0. In fiscal 1998, cash and cash equivalents increased to $4,701,000 from
$1,323,000 due primarily to a $3,915,000 increase in operating activities and
lower capital expenditure levels. At January 31, 1998, the Company had a
$1,000,000 secured bank line of credit. Cash flows generated from operations in
fiscal 1998 include $1,128,000 received from customers as deposits on future
orders, the revenues of which will be recognized in future periods. As such,
cash flows from operations will be proportionately reduced in these periods.
The Company's management believes that cash and cash equivalents, funds
from operations and funds available under its bank line of credit will be
sufficient to satisfy its anticipated requirements in 1999. At January 31,
1998, the Company had no material outstanding commitments to purchase capital
equipment.
YEAR 2000 COMPLIANCE
The Company believes that its products are Year 2000 compliant. The Company
is currently reviewing its internal management information systems, billing,
outside payroll and other informational service functions to determine the
nature and extent of any Year 2000 issues related to such functions. In
addition, Year 2000 issues may also arise with respect to products furnished by
third-party suppliers that may result in unforseen costs or delays to the
Company and therefore may have a material adverse effect on the Company.
13
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DSP TECHNOLOGY INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
----
Report of Independent Certified Public Accountants 15
Consolidated Balance Sheets 16
Consolidated Statements of Income 17
Consolidated Statement of Stockholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20
Index to Supplementary Data
Auditors Report on Schedule 29
Valuation and Qualifying Accounts 30
14
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of DSP Technology Inc.:
We have audited the accompanying consolidated balance sheets of DSP
Technology Inc. and subsidiaries as of January 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended January 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of DSP Technology
Inc. and subsidiaries as of January 31, 1998 and 1997, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended January 31, 1998, in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
San Jose, California
March 6, 1998
15
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
January 31,
------------------------
1998 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 4,701 $ 1,323
Accounts receivable, net of allowance for doubtful
accounts of $150 in 1998 and $50 in 1997 5,581 4,784
Inventories 2,682 2,015
Deferred income taxes 577 266
Prepaid expenses and other 216 192
------- -------
Total current assets 13,757 8,580
Property and equipment, net 1,341 1,540
Cost in excess of net assets of acquired business, net of
accumulated amortization of $641 in 1998 and $523
in 1997 244 362
Other assets 1,388 1,317
------- -------
$16,730 $11,799
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 687 $ 799
Accrued liabilities 3,755 1,849
Income taxes payable 1,142 206
------- -------
Total current liabilities 5,584 2,854
Deferred income taxes 489 258
Commitments -- --
Stockholders' equity:
Preferred stock; 2,500,000 shares authorized;
none issued -- --
Common stock; 25,000,000 shares authorized, $.001 par value;
shares issued and outstanding: 2,264,860 in 1998 and
2,179,962 in 1997 3,301 2,988
Retained earnings 7,356 5,699
------- -------
Total stockholders' equity 10,657 8,687
------- -------
$16,730 $11,799
======= =======
The accompanying notes are an integral part of these financial statements.
16
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year ended January 31,
----------------------------
1998 1997 1996
------- ------- --------
Net sales $22,038 $17,987 $15,538
Cost of sales 10,227 7,842 6,187
------- ------- -------
Gross profit 11,811 10,145 9,351
Operating expenses:
Research and development 2,352 2,203 2,250
Marketing, general and administrative 6,916 6,708 5,145
------- ------- -------
9,268 8,911 7,395
------- ------- -------
Operating income 2,543 1,234 1,956
Other income, net 225 123 136
------- ------- -------
Income before income taxes 2,768 1,357 2,092
Income taxes 1,122 443 815
------- ------- -------
Net income $ 1,646 $ 914 $ 1,277
======= ======= =======
Net income per share:
Basic $ .74 $ .42 $ .60
======= ======= =======
Diluted $ .68 $ .40 $ .55
======= ======= =======
Weighted average shares used in computing
basic net income per share 2,211 2,168 2,130
======= ======= =======
Weighted average shares and equivalents used in computing
diluted net income per share 2,437 2,304 2,331
======= ======= =======
The accompanying notes are an integral part of these financial statements.
17
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
Common stock Total
---------------- Retained stockholders'
Shares Amount earnings equity
------ ------- -------- -------------
Balance at January 31, 1995 2,109 $2,767 $3,501 $ 6,268
Exercise of stock options 45 153 153
Net income 1,277 1,277
----- ------ ------ -------
Balance at January 31, 1996 2,154 $2,920 $4,778 $ 7,698
Exercise of stock options 26 68 68
Foreign exchange translations 7 7
Net income 914 914
----- ------ ------ -------
Balance at January 31, 1997 2,180 $2,988 $5,699 $ 8,687
Exercise of stock options 85 313 313
Foreign exchange translations 11 11
Net income 1,646 1,646
----- ------ ------ -------
Balance at January 31, 1998 2,265 $3,301 $7,356 $10,657
===== ====== ====== =======
The accompanying notes are an integral part of this financial statement.
18
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended January 31,
------------------------------
1998 1997 1996
-------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net income $1,646 $ 914 $ 1,277
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,107 847 741
Deferred income taxes (80) 217 --
Changes in operating assets and liabilities:
Accounts receivable (797) (1,482) (299)
Inventories (667) 180 (388)
Prepaid expenses and other (24) (149) (35)
Accounts payable (112) 340 (103)
Accrued liabilities 1,906 478 (28)
Income taxes payable 936 (416) 252
------ ------- -------
Net cash provided by operating activities 3,915 929 1,417
------ ------- -------
Cash flows from investing activities:
Purchases of property and equipment (407) (1,015) (521)
(Purchases) redemptions of certificates of deposit, net -- 199 (199)
Investment in software development (517) (630) (322)
Other 74 (44) (46)
------ ------- -------
Net cash used in investing activities (850) (1,490) (1,088)
------ ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 313 68 153
------ ------- -------
Increase (decrease) in cash and cash equivalents 3,378 (493) 482
Cash and cash equivalents at beginning of period 1,323 1,816 1,334
------ ------- -------
Cash and cash equivalents at end of period $4,701 $ 1,323 $ 1,816
====== ======= =======
Supplemental disclosure of cash flow information:
Cash paid during year for income taxes $ 23 $ 639 $ 433
====== ======= =======
Cash paid during year for interest $ 22 $ 22 $ 12
====== ======= =======
The accompanying notes are an integral part of these financial statements.
19
DSP TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS. The Company is engaged in a single business consisting of the
design, manufacture, integration, marketing and maintenance of high-speed,
computer-automated measurement and control systems for the worldwide automotive
powertrain, vehicle safety and advanced research and development markets. The
Company's principal markets are in the United States, United Kingdom, Western
Europe, and the Far East.
The Company's fiscal year ends on the Sunday nearest to January 31.
However, for financial statement purposes, each fiscal year is presented as if
it ended on January 31.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
INVENTORIES. Inventories are stated at the lower of cost (first-in, first-
out) or market.
REVENUE RECOGNITION. The Company recognizes revenue primarily upon
shipment. The Company's systems integration projects use fixed price contracts
and revenue is recognized as it is earned pursuant to contract terms.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method based
on the estimated useful lives of the assets (three to seven years) or the lease
term if shorter.
INTANGIBLE ASSETS. Cost in excess of net assets (`goodwill') is amortized
on a straight line basis over 25 years. The Company evaluates the realizability
of goodwill by comparing the carrying value to the undiscounted future cash
flows of the related assets. Purchased technology, is included in other assets
and amortized over five years. Effective February 1, 1996, impairments, if any,
are recognized in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-
Lived Assets to Be Disposed Of," if applicable.
RESEARCH AND DEVELOPMENT. Expenditures for research and development are
expensed as incurred, except for certain costs incurred in developing computer
software to be sold, which have been capitalized in accordance with the
provisions of SFAS No. 86, "Accounting for the Costs of Computer Software to Be
Sold, Leased or Otherwise Marketed." Such costs are capitalized once
technological feasibility of the product has been established. Capitalized
software costs aggregated $517,000, $630,000 and $322,000 for the years ended
January 31, 1998, 1997 and 1996, respectively. Capitalized software is included
in other assets and is being amortized over the life of the product on a
straight-line basis. The Company evaluates the realizability of capitalized
software on an ongoing basis relying on a number of factors including operating
results, business plans, market trends and product development cycles.
INCOME TAXES. The Company accounts for income taxes using an asset and
liability approach for financial accounting and reporting purposes.
20
NET INCOME PER SHARE. The Company adopted SFAS No. 128, "Earnings per
Share," in the fourth quarter of fiscal 1998. Under SFAS No. 128, the Company
presents two earnings per share ("EPS") amounts. Basic EPS is calculated based
on net income available to common shareholders and the weighted-average number
of shares outstanding during the reported period. Diluted EPS includes
additional dilution from potential common stock, such as stock issuable pursuant
to the exercise of stock options outstanding. All prior period EPS amounts have
been restated to conform to the provisions of the statement.
Year ended January 31,
------------------------
1998 1997 1996
------ ------ ------
(In thousands, except per share amounts)
Number of shares on which basic EPS is calculated:
Average outstanding during the year 2,211 2,168 2,130
Add: Incremental shares under stock option plans 226 136 201
------ ------ ------
Number of shares on which diluted EPS is calculated 2,437 2,304 2,331
====== ====== ======
Net income $1,646 $ 914 $1,277
====== ====== ======
Basic EPS $ .74 $ .42 $ .60
Diluted EPS $ .68 $ .40 $ .55
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash and
cash equivalents. These instruments are recorded at their carrying values which
approximate fair values because of their short maturity.
USING ESTIMATES. In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as revenue and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS. Certain reclassifications have been made in the fiscal
1997 financial statements to conform with the fiscal 1998 presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS. In fiscal 1999, the Company will
implement two accounting standards issued by the Financial Accounting Standards
Board in June 1997. SFAS No. 130, "Reporting Comprehensive Income," and SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information,"
will have no effect on the Company's financial position or results of operations
as they require only changes in or additions to current disclosures.
During 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 97-2, "Software Revenue
Recognition." This SOP provides guidance on revenue recognition on software
transactions and is effective for transactions entered into in fiscal years
beginning after December 15, 1997. The Company is taking steps to meet the
requirements of the SOP and expects that it will not have a material effect on
the financial position or results of operations of the Company.
21
NOTE B - INVENTORIES
Inventories consist of:
January 31,
-----------
1998 1997
---- ----
(Thousands)
Raw materials $ 1,695 $ 1,221
Work-in-process 637 476
Finished goods 350 318
------- -------
$ 2,682 $ 2,015
======= =======
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consist of:
January 31,
-----------
1998 1997
---- ----
(Thousands)
Machinery and equipment $ 734 $ 717
Office furniture 1,914 1,717
Computer equipment 2,263 2,070
------- -------
4,911 4,504
Accumulated depreciation and
amortization (3,570) (2,964)
------- -------
$ 1,341 $ 1,540
======= =======
NOTE D - Other Assets
Other assets consist of:
January 31,
-----------
1998 1997
---- ----
(Thousands)
Capitalized software, net of accumulated amortization of
$849 in 1998 and $544 in 1997 $ 1,199 $ 987
Purchased technology, net of accumulated amortization
of $264 in1998 and $190 in 1997 104 178
Other 85 152
------- -------
$ 1,388 $ 1,317
======= =======
NOTE E - BANK LINE OF CREDIT
At January 31, 1998, the Company has a $1,000,000 line of credit with a
bank renewable annually in May. Under the provisions of the line of credit
agreement, the Company may borrow amounts up to $1,000,000 at the bank's prime
rate of interest (8.50% at January 31, 1998). Borrowings are collaterized by
all unencumbered assets of the Company and the Company must maintain certain
financial ratios and be profitable on an annual basis. There was no outstanding
balance at January 31, 1998 or 1997. Funds were borrowed at a weighted average
interest rate of 8.63% and 8.15% during 1998 and 1997, respectively.
22
NOTE F - ACCRUED LIABILITIES
Accrued liabilities consist of:
January 31,
-----------
1998 1997
---- ----
(Thousands)
Employee compensation and benefits $ 755 $ 605
Commissions 112 105
Customer deposits 1,969 841
Other 919 298
------ ------
$3,755 $1,849
====== ======
NOTE G - INCOME TAXES
Earnings before taxes consists of:
Year ended January 31,
----------------------
1998 1997 1996
---- ---- ----
(Thousands)
U.S. operations $2,269 $ 962 $1,883
Foreign operations 499 395 209
------ ------ ------
$2,768 $1,357 $2,092
====== ====== ======
Income tax expense consists of:
Year ended January 31,
----------------------
1998 1997 1996
---- ---- ----
(Thousands)
Currently payable:
Federal income taxes $ 800 $ 67 $ 575
State income taxes 227 43 182
Foreign taxes 175 116 58
------ ------ ------
1,202 226 815
Deferred:
Federal income taxes (71) 184 --
State income taxes (9) 33 --
------ ------ ------
(80) 217 --
------ ------ ------
$1,122 $ 443 $ 815
====== ====== ======
The difference between income tax rates computed by applying the Federal
statutory income tax rate to income before income taxes and the actual effective
tax rate is reconciled as follows:
Year ended January 31,
-------------------------
1998 1997 1996
------- ------ ------
Federal statutory rate 34.0% 34.0% 34.0%
Goodwill .5 1.1 .7
State income taxes 5.4 2.7 5.7
Research and development credits (1.8) (3.3) (1.8)
Benefit of foreign sales corporation (1.0) (3.8) (1.6)
Other 2.4 2.0 1.9
---- ---- ----
Effective tax rate 40.5% 32.7% 38.9%
==== ==== ====
At January 31, 1998 and 1997, respectively, the major components of
deferred tax assets are:
23
inventory reserves and cost capitalization - $ 284,000 and $ 102,000; receivable
and warranty reserves - $ 105,000 and $ 35,000; and accrued compensation-$
126,000 and $90,000. The major item in non-current deferred tax liabilities is
research and development expenses of $481,000 at January 31, 1998 and $335,000
at January 31, 1997.
NOTE H - STOCK OPTION PLANS
The Company has two stock option plans, the 1991 Option Plan ("1991 Option
Plan") and the 1991 Directors Option Plan ("1991 Directors Option Plan")
accounted for under APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related interpretations. The 1991 Option Plan provides for the granting of
incentive and non-statutory options to employees (including officers and
directors who are employees). The 1991 Directors Option Plan provides for the
granting of nonqualifed stock options to directors of the Company who are not
employees of the Company. The options, which have terms of five or ten years
when issued, typically vest over three years. The exercise price of each option
equals the market price of the Company's stock on the date of grant or, in the
case of those holding more than 10% of the Company's outstanding common stock,
110% of the market price. Accordingly, no compensation cost has been recognized
for grants from either plan. A total of 1,018,327 shares of the Company's
common stock have been reserved for issuance under the 1991 Option Plan, of
which 214,365 shares are available for grant at January 31, 1998. The 1991
Directors Option Plan has 75,000 common stock shares reserved, of which 12,000
shares are available for grant at January 31, 1998.
Had compensation costs for the plans been determined based on the fair
value of the options at the grant dates consistent with the method of SFAS No.
123, "Accounting for Stock-Based Compensation," the Company's net income and
income per share would have been reduced to the pro forma amounts indicated
below. Pro forma results may not be indicative of pro forma results in future
periods because the pro forma amounts do not include pro forma compensation cost
for options granted prior to February 1, 1995.
Year ended January 31,
-------------------------
1998 1997 1996
------- ----- -------
Net income (In thousands):
As reported $1,646 $ 914 $1,277
Pro forma $1,310 $ 678 $1,158
Net income per share (diluted):
As reported $ .68 $ .40 $ .55
Pro forma $ .55 $ .30 $ .51
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model.
24
A summary of the status of the various stock option plans as of January 31,
and changes during the years ending on those dates is presented
below.
1998 1997 1996
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ---------- ------ --------- ------ ----------
(In thousands) (In thousands) (In thousands)
Outstanding at beginning of
year 602 $4.47 555 $4.29 452 $3.48
Granted 103 6.09 95 5.11 165 6.36
Exercised (85) 3.69 (25) 2.67 (45) 3.40
Forfeited (20) 5.90 (23) 4.81 (17) 5.46
--- --- ---
Outstanding at end of year 600 4.81 602 4.47 555 4.29
Weighted-average fair value of
options granted during the year $4.27 $3.18 $3.99
Expected term (years) 7 6 6
Volatility 67.0% 60.0% 60.0%
Risk free interest rate 6.3% 6.8% 6.5%
Dividend yield -- -- --
The following information applies to options outstanding at January 31, 1998:
Options Outstanding Options Exercisable
--------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 1/31/98 Life Price at 1/31/98 Price
- ----------------------------- ------------ ----------- --------- ------------ ---------
(In thousands) (In years) (In thousands)
$0.875 - 1.250 37 2 $1.23 37 $1.23
2.625 - 3.875 156 6 3.21 156 3.21
4.000 - 6.000 210 8 5.16 112 5.03
6.125 - 9.375 197 9 6.36 92 6.33
NOTE I - COMMITMENTS
Leases. The Company leases its facilities in Fremont, California and Ann
Arbor, Michigan under operating leases which expire in October 1998 and January
2000, respectively. Rental expenses were $350,000 in 1998, $303,000 in 1997, and
$286,000 in 1996.
Future minimum rental commitments for all leases with initial non-
cancelable lease terms of more than one year are $310,000 in 1999 and $141,000
in 2000.
NOTE J - MAJOR CUSTOMERS AND FOREIGN OPERATIONS
One customer accounted for 21%, 18% and 11% of net sales for 1998, 1997 and
1996, respectively. One other customer accounted for 14% of net sales in 1998.
25
Foreign sales were as follows:
Year ended January 31,
-------------------------------
1998 1997 1996
----------- -------- ------
(In thousands)
United Kingdom ("UK") $ 2,636 $2,904 $1,120
Asia/Pacific Rim 3,496 1,476 1,322
Western Europe, excluding UK 1,457 1,352 367
Other countries 152 28 47
------- -------- ------
$ 7,741 $5,760 $2,856
======= ======== ======
A summary of the Company's operations by geographic area is presented
below:
Year ended January 31,
--------------------------
1998 1997
---- ----
(Thousands)
Net Sales
United States $20,514 $16,311
United Kingdom 2,636 2,904
Eliminations (1,112) (1,228)
Operating Margin
United States $ 2,022 $ 885
United Kingdom 501 395
Eliminations 20 (46)
Identifiable Assets
United States $15,229 $10,864
United Kingdom 1,770 1,391
Eliminations (269) (456)
NOTE K - EMPLOYEE BENEFIT PLAN
The Company has established the DSP Technology Inc. 401(k) Profit Sharing
Plan covering substantially all employees of the Company who have at least six
months of service and are at least twenty-one years of age. The amount
participants may voluntarily contribute in any year is established by law and
subject to cost of living adjustments. The Company has the option to make
matching contributions on a year to year basis. Contributions to the plan by
the Company in 1998, 1997, and 1996 aggregated $85,000, $69,000, and $46,000,
respectively.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to the Registrant's directors contained in
Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders under
the caption, "ELECTION OF DIRECTORS," is hereby incorporated by reference.
Information with respect to executive officers of the Registrant is contained in
26
Part I of this Report.
ITEM 11: EXECUTIVE COMPENSATION
Information contained in Registrant's Proxy Statement for its 1998 Annual
Meeting of Stockholders under the caption, "EXECUTIVE COMPENSATION AND OTHER
MATTERS" is hereby incorporated by reference.
ITEM 12: SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information contained in Registrant's Proxy Statement for its 1998 Annual
Meeting of Stockholders under the caption, "GENERAL INFORMATION---Stock
Ownership of Certain Beneficial Owners and Management" is hereby incorporated by
reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained in Registrant's Proxy Statement for its 1998 Annual
Meeting of Stockholders under the caption, "EXECUTIVE COMPENSATION AND OTHER
MATTERS---Certain Relationship and Related Transactions" is hereby incorporated
by reference.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The financial statements required in accordance with this Item have been
filed as part of this Report under Part II, Item 8.
(a)(2) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule has been filed as part of this
Report:
Schedule Description Page No.
- -------- ----------- --------
Auditors' Report on Schedule 29
II Valuation and Qualifying Accounts 30
Financial statement schedules not listed above have been omitted because
the information required to be set forth therein is inapplicable or is shown in
the Consolidated Financial Statements or Notes thereto.
27
(a)(3) Exhibits
The following exhibits are filed or incorporated by reference as part of
this Report:
Ex. No. Description
- ------- ---------------------------------------------
3.1 Certificate of Incorporation (1)
3.2 Amendment to Restated By-laws (1)
10.1 Profit Sharing Plan Employees' Retirement Trust (2) **
10.2 Non-Qualified Unfunded Deferred Compensation Plan (2) **
10.3 1991 Directors Stock Option Plan, as amended (4) **
10.4 Form of 1991 Directors Stock Option Plan Agreement (3) **
10.5 1991 Stock Option Plan , as amended (4) **
10.6 Form of 1991 Stock Option Plan Agreement (3) **
10.7 Lease Agreement dated July 15, 1992 between Varsity Drive
Company Inc. and DSP Technology Inc. (4)
10.8 Lease Agreement dated August 2, 1993 between Minos Management
Company and DSP Technology Inc.(5)
10.9 Strategic Alliance Agreement By and Between FEV
Motorentechnik GmbH & Co. KG and DSP Technology Inc. dated
February 26, 1995. +
10.10 Form of Indemnity Agreement
21.1 Subsidiaries of Registrant (5)
23.1 Consent of independent Certified Public Accountants (to
incorporate report on consolidated financial statements into
Company's Form S-8 Registration Statements)
24.1 Power of Attorney (6)
27.1 Financial Data Schedule
___________________________________
** Compensatory plan or arrangement.____________
+ Confidential treatment has been requested for certain portions of this
exhibit.
(1) Incorporated by reference to the corresponding Exhibit filed as part of the
Company's Quarterly Report on Form 10-Q (File No. 0-13677) on December 18,
1997.
(2) Incorporated by reference to the corresponding Exhibit filed as part of the
Company's Annual Report on Form 10-K (File No. 0-14677) on April 24, 1987.
(3) Incorporated by reference to the corresponding Exhibit filed as part of the
Company's Annual Report on Form 10-K (File No. 0-14677) on April 27, 1992.
(4) Incorporated by reference to the corresponding Exhibit filed as part of the
Company's Annual Report on Form 10-K (File No. 0-14677) on April 27, 1993.
(5) Incorporated by reference to the corresponding Exhibit filed as part of the
Company's Annual Report on Form 10-K (File No. 0-14677) on April 22, 1994.
(6) Included on page 33 to this Report.
(b) REPORTS ON FORM 8-K
None.
28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Stockholders of DSP Technology Inc.:
In connection with our audits of the consolidated financial statements of DSP
Technology Inc. and subsidiary companies referred to in our report dated March
6, 1998, which is included in Part II of this form, we have also audited
Schedule II for each of the three years in the period ended January 31, 1998. In
our opinion, this schedule presents fairly the information required to be set
forth therein.
San Jose, California
March 6, 1998
29
Schedule II
DSP TECHNOLOGY Inc.
Valuation and Qualifying Accounts
(Thousands)
Additions
Balance at Charged to Balance at
Beginning Costs and at End
of Year Expenses Deductions of Year
---------- -------- ----------- ----------
Allowance for doubtful accounts:
Year ended:
January 31, 1996.............. 50 0 0 (1) 50
January 31, 1997.............. 50 0 0 (1) 50
January 31, 1998.............. 50 100 0 (1) 150
Reserve for inventory obsolescence:
Year ended:
January 31, 1996.............. 244 71 (24) 291
January 31, 1997.............. 291 0 (133) 158
January 31, 1998.............. 158 309 0 467
(1) Uncollectible accounts written off, net of recoveries
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, this 21st day of April
1998.
DSP TECHNOLOGY INC.
By: /s/ Jose M. Millares
----------------------------------
JOSE M. MILLARES
Chief Financial Officer
31
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints F. Gil Troutman, Jr. and Jose M. Millares, Jr.,
or either of them, his attorneys-in-fact, each with power of substitution, for
him in any and all capacities, to sign this Annual Report on Form 10-K, and any
amendments thereto, and to file the same, with Exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant, in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Howard O. Painter, Jr. Chairman of the Board April 15, 1998
- --------------------------
Howard O. Painter, Jr.
/s/ F. Gil Troutman, Jr. Director, Chief Executive Officer April 15, 1998
- ------------------------ and President (Principal
F. Gil Troutman, Jr. Executive Officer)
/s/ Jose M. Millares Vice President, Finance April 15, 1998
- -------------------- (Principal Financial
Jose M. Millares and Accounting Officer
and Secretary)
/s/ J. Scott Kamsler Director April 15, 1998
- --------------------
J. Scott Kamsler
/s/ Michael A. Ford Director April 15, 1998
- -------------------
Michael A. Ford
32
EXHIBIT INDEX
Ex. No. Description
- ------- ---------------------------------------------
3.1 Certificate of Incorporation (1)
3.2 Amendment to Restated By-laws (1)
10.1 Profit Sharing Plan Employees' Retirement Trust (2) **
10.2 Non-Qualified Unfunded Deferred Compensation Plan (2) **
10.3 1991 Directors Stock Option Plan, as amended (4) **
10.4 Form of 1991 Directors Stock Option Plan Agreement (3) **
10.5 1991 Stock Option Plan, as amended (4) **
10.6 Form of 1991 Stock Option Plan Agreement (3) **
10.7 Lease Agreement dated July 15, 1992 between Varsity Drive
Company Inc. and DSP Technology Inc. (4)
10.8 Lease Agreement dated August 2, 1993 between Minos Management
Company and DSP Technology Inc.(5)
10.9 Strategic Alliance Agreement By and Between FEV
Motorentechnik GmbH & Co. KG and DSP Technology Inc. dated
February 26, 1995. +
10.10 Form of Indemnity Agreement
21.1 Subsidiaries of Registrant (5)
23.1 Consent of independent Certified Public Accountants (to
incorporate report on consolidated financial statements into
Company's Form S-8 Registration Statements)
24.1 Power of Attorney (6)
27.1 Financial Data Schedule
___________________________________
** Compensatory plan or arrangement.
+ Confidential treatment has been requested for certain portions of this
exhibit.
(1) Incorporated by reference to the corresponding Exhibit filed as part of the
Company's Quarterly Report on Form 10-Q (File No. 0-13677) on December 18,
1997.
(2) Incorporated by reference to the corresponding Exhibit filed as part of the
Company's Annual Report on Form 10-K (File No. 0-14677) on April 24, 1987.
(3) Incorporated by reference to the corresponding Exhibit filed as part of the
Company's Annual Report on Form 10-K (File No. 0-14677) on April 27, 1992.
(4) Incorporated by reference to the corresponding Exhibit filed as part of the
Company's Annual Report on Form 10-K (File No. 0-14677) on April 27, 1993.
(5) Incorporated by reference to the corresponding Exhibit filed as part of the
Company's Annual Report on Form 10-K (File No. 0-14677) on April 22, 1994.
(6) Included on page 33 to this Report.
(b) REPORTS ON FORM 8-K
None.
33