SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
For the quarterly period ended OCTOBER 31, 19961997 or
----------------
_____[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________________________ to ___________________
0-14677____________
Commission File Number ________________________________________________________0-14677
-------------
DSP TECHNOLOGY INC.
_______________________________________________________________________________-------------------
(Exact name of registrant as specified in its charter)
CALIFORNIADELAWARE 94-2832651
- -------------------------------- ----------------------------------------- ---------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number
48500 KATO RD., FREMONT, CA 94538
- ---------------------------------------- ---------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(510) 657-7555
- ------------------------------------------------------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
____
_____------ ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES ______ NO
________------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate number of shares outstanding of each of the issuer's classes of common
stock, at the latest practical date:
CLASS OUTSTANDING AS OF DECEMBER 20, 199612, 1997
----- -----------------------------------
COMMON STOCK 2,179,9622,241,161
1
DSP TECHNOLOGY INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
October 31, 1996 and January 31, 1996 3
Consolidated Statements of Income -
Three months and nine months ended October 31,
1996 and 1995 4
Consolidated Statements of Cash Flows -
Nine months ended October 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K. 8
DSP TECHNOLOGY INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
October 31, 1997 and January 31, 1997 3
Consolidated Statements of Income -
Three months and nine months ended October 31, 1997 and 1996 4
Consolidated Statements of Cash Flows -
Nine months ended October 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K. 9
Signatures 9
2
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
October 31, January 31,
1996 1996
------------ -----------
ASSETS (Unaudited)
Current assets:
Cash and certificates of deposit $ 898 $ 2,015
Accounts receivable 4,360 3,302
Inventories 2,432 2,195
Deferred income taxes 257 257
Prepaid expenses 217 155
------- -------
Total current assets 8,164 7,924
Property and equipment 1,484 1,044
Cost in excess of net assets of acquired
business 372 403
Other assets 1,225 923
------- -------
$11,245 $10,294
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
October 31, January 31,
1997 1997
------------ -----------
ASSETS (Unaudited)
Current assets:
Cash and certificates of deposit $ 1,579 $ 1,323
Accounts receivable 8,384 4,784
Inventories 2,734 2,015
Deferred income taxes 154 154
Prepaid expenses 310 304
------- -------
Total current assets 13,161 8,580
Property and equipment 1,359 1,540
Cost in excess of net assets of acquired
business 307 362
Other assets 1,314 1,317
------- -------
$16,141 $11,799
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 400 $ 799
Accrued liabilities 4,719 1,849
Income taxes payable 762 206
------- -------
Total current liabilities 5,881 2,854
Deferred income taxes 258 258
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock. Authorized 2,500,000 shares;
one issued -- --
Common stock. 25,000,000 shares authorized;
shares issued and outstanding: 2,240,261 at
October 31 and 2,179,962 at January 31 3,237 2,988
Retained earnings 6,765 5,699
------- -------
Total shareholders' equity 10,002 8,687
------- -------
$16,141 $11,799
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 421 $ 459
Accrued liabilities 1,860 1,371
Income taxes payable 350 622
------- -------
Total current liabilities 2,631 2,452
Deferred income taxes 145 144
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: 2,179,962 at
October 31 and 2,154,463 at January 31 2,987 2,920
Retained earnings 5,482 4,778
------- -------
Total shareholders' equity 8,469 7,698
------- -------
$11,245 $10,294
======= =======
The accompanying notes are an integral part of these financial statements.
3
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three months ended Nine months ended
October 31, October 31,
--------------------- ----------------------------------------- -----------------
1997 1996 19951997 1996
1995
----------- ------ ----------- -------------- ------- -------
Net sales $5,892 $4,572 $4,215$15,804 $12,758 $11,028
Cost of sales 2,640 1,868 1,6557,377 5,306 4,235
------ ------ ------- -------
Gross profit 3,252 2,704 2,5608,427 7,452 6,793
Operating expenses:
Research and development 718 564 6211,826 1,633 1,623
Marketing, general and administrative 1,719 1,737 1,3575,029 4,859 3,918
------ ------ ------- -------
2,437 2,301 1,9786,855 6,492 5,541
------ ------ ------- -------
Operating income 815 403 5821,572 960 1,252
Interest income 47 13 32 95156 95
------ ------ ------- -------
Income before income taxes 862 416 6141,728 1,055 1,347
Income taxes 345 140 239691 351 520
------ ------ ------- -------
Net income $ 517 $ 276 $ 3751,037 $ 704 $ 827
====== ====== ======= =======
Net income per common and common
equivalent share $ .22 $ .12 $ .16.45 $ .31 $ .36
====== ====== ======= =======
Weighted average common and common
equivalent shares outstanding 2,350 2,290 2,3572,323 2,305 2,329
====== ====== ======= =======
The accompanying notes are an integral part of these financial statements.
4
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
Nine months ended
October 31,
-----------------------
1996 1995
-------- -------
(Unaudited)
Cash flows from operating activities:
Net income $ 704 $ 827
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 610 501
Changes in current assets and liabilities:
Accounts receivable (1,058) 872
Inventories (237) (754)
Prepaid expenses (62) (26)
Accounts payables (38) 248
Accrued liabilities 489 (412)
Income taxes payable (272) 131
------- ------
Net cash provided by (used in) operating
activities 136 1,387
------- ------
Cash flows from investing activities:
Purchases of property and equipment (806) (343)
Investment in software development (405) (117)
Other (109) (68)
------- ------
Net cash investing activities (1,320) (528)
------- ------
Cash flows from financing activities:
Proceeds from issuance of common stock 67 150
------- ------
Net cash provided by financing activities 67 150
------- ------
Increase (decrease) in cash (1,117) 1,009
------- ------
Cash at beginning of period 2,015 1,334
------- ------
Cash at end of period $ 898 $2,343
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
Nine months ended
October 31,
---------------------------
1997 1996
------- -------
(Unaudited)
Cash flows from operating activities:
Net income $ 1,037 $ 704
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 804 610
Changes in current assets and liabilities:
Accounts receivable (3,600) (1,058)
Inventories (719) (237)
Prepaid expenses (6) (62)
Accounts payables (399) (38)
Accrued liabilities 2,870 (489)
Income taxes payable 556 (272)
------- -------
Net cash provided by (used in) operating activities 543 136
------- -------
Cash flows from investing activities:
Purchases of property and equipment (268) (806)
Investment in software development (320) (405)
Other 52 (109)
------- -------
Net cash investing activities (536) (1,320)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 249 67
------- -------
Net cash provided by financing activities 249 67
------- -------
Increase (decrease) in cash 256 (1,117)
------- -------
Cash at beginning of period 1,323 2,015
------- -------
Cash at end of period $ 1,579 $ 898
======= =======
Supplemental disclosure of cash flow information:
Cash paid during period for income taxes $ 77 $ 559
======= =======
======
Supplemental disclosure of cash flow information:
Cash paid during period for income taxes $ 559 $ 433
======= ======
The accompanying notes are an integral part of these financial statements.
5
DSP TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation.
---------------------
The accompanying consolidated financial statements have been prepared,
without audit, in accordance with Securities and Exchange Commission
requirements for interim financial statements. Therefore, they do not
include all the disclosures that would be presented in the Company's Annual
Report on Form 10-K. The financial statements should be read in conjunction
with the Company's January 31, 19961997 financial statements and accompanying
notes thereto.
The information furnished reflects all adjustments (consisting only of
normal recurring adjustments) that are, in the opinion of management,
necessary for a fair presentation of financial position, results of
operations and cash flows for the interim period. The results of operations
for the periods presented are not necessarily indicative of results to be
expected for the full year.
For accounting purposes, the Company changed to a 52/53 week convention
with the fiscal year ending on the Sunday nearest the end of January.
However, for financial reporting purposes, each fiscal quarter or year is
presented as if it ended on the last day of such period. The third quarter
fiscal 1998 ended November 2, 1997.
2. Inventories. Inventories are stated at the lower of cost (first-in, first-
-----------
out) or market. Inventories consist of:
October 31, January 31,
1997 1997
----------- ------------
(thousands)
Raw materials $1,325 $1,221
Work in process 1,092 476
Finished goods 317 318
------ ------
$2,734 $2,015
====== ======
3. Accounts Receivable and Accrued Liabilities. Accounts receivable and
--------------------------------------------
accrued liabilities at October 31, January 31,
1996 1996
----------- -----------
(thousands)
Raw materials $1,314 $1,247
Work1997 include $1,833,000 in process 739 492
Finished goods 379 456
------ ------
$2,432 $2,195
====== ======receivables
for customer advanced payment commitments against contracts. In the future,
the Company will not recognize the receivable; instead, it will recognize
the accrued liability at the time the Company receives the advance payment
from the customer.
4. The Company reincorporated in Delaware on September 12, 1997.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
This section of the report contains forward-looking statements regarding
the Company's expected growth and enhanced future performance. All forward-
looking statements are subject to risk and actual results could differ
materially from those projected in the forward-looking statements as a result of
many factors which are set forth below.
Results of Operations
- ---------------------
Net sales for the third quarter of fiscal 19971998 ended October 31, 1996November 2, 1997
increased by $357,000$1,320,000 or 8%29% to $4,572,000$5,892,000 from $4,215,000$4,572,000 in the third
quarter of fiscal 1996 ended October 31, 1995.1996. Net sales for the first nine
months of fiscal 19971998 were $12,758,000$15,804,000 or 16%24% higher than net sales of
$11,028,000$12,758,000 in the first nine months of fiscal 1996.1997. The increases were due to
continued strong demand for the company's RedLine test cell products. Sales growth in the thirddata acquisition products and
turnkey services.
Third quarter was limited by delays in the receipt of certain expected orders, coupled
with a vendor's delay in the delivery of necessary components.
Costcost of sales as a percentage of net sales increased to 41%45%
in this year's
third quarteryear from 39%41% in the same period last year. Cost of sales as a
percentage of net sales also increased to 42%47% in the first nine months this year
compared to 38%42% in fiscal 1997's first nine months. As anticipated, the
same periodincreases in cost of fiscal 1996. The increases primarily
reflect the expansionsales were a result of product mix with lower-margin
service-related revenues becoming a bigger part 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 this area.Company's business.
Research and development ("R&D") expenses decreasedincreased by $57,000$154,000 to $564,000$718,000
in the third quarter this year compared to $621,000$564,000 in the same period last
year whileyear. R&D expenses in the first nine months of this year increased slightly to
$1,633,000$1,826,000 from $1,623,000$1,633,000 in the first nine months of fiscal 1996.1997. The
slight increaseincreases in expenses in both the third quarter and the first nine months resultedwere
primarily from the ramp up of joint
new product development with FEV, the Company's strategic ally in Germany and
offset bydue to higher capitalization of software development costs associated with new RedLine products
scheduled for introduction in this year's
first nine months.the Spring of 1998 and beyond.
Marketing, general and administrative expenses in the third quarter of
fiscal 1997 increased by $380,000 or 28%1998 decreased slightly to $1,719,000 from $1,737,000 compared toin the same period a year ago. Expenses inquarter
last year. For the first nine months of this year, marketing, general and
administrative expenses increased by $941,000$170,000 or 3% to $5,029,000 compared to
$4,859,000 from $3,918,000 last year. As a percentage of sales, however, expenses remained consistent throughout the year atdecreased to
29% from 38% compared with
last year's expenses at 32% in the third quarter and 36%to 32% from 38% in the first nine months.months
of this year compared to the respective periods last year. The higher expenses
were principally due to additional sales and marketing staff, costs associated with improvements in the company's information
technology infrastructure and higher
internal sales commissions due to higher sales bookings.
Net interest income was $13,000 in this year'sThe effective tax rate computed were 40% for the third quarter compared to
$32,000 last year. Net interest incomeand 40% for
the first nine months this year was
the same as last year's at $95,000. The lower interest income in the third
quarter this year reflect lower available cash invested in interest-bearing
accounts.
The effective tax rate computed werecompared to 34% for the third quarter and 33%
for the first nine months this year compared to 39% for the third quarter and first
nine months last year. The lower tax rates computed depend primarily on
the profit contribution mix between the Company's U.S. operations and U.K.
subsidiary. The higher rates this year reflect higher domestic profit
contribution this year versus last year. Domestic tax rates tend to be higher
than the increased
profit contributions of the company's UK subsidiary which benefits from a lowerforeign subsidiary's tax rate. Other factors that may affect the tax
rates include R&D tax credits and software capitalization levels. The company
reviews the tax rate quarterly and could make minor adjustments to reflect
changing estimates.
7
Liquidity and Capital Resources
- -------------------------------
Cash decreasedincreased by $1,117,000$256,000 during the nine month period ended October 31,
1996. The decrease was due to the increase in accountsNovember 2,
1997. Accounts receivable increased by $3,600,000 brought about by high
shipments in the last month of the period.period and the inclusion of approximately
$1,833,000 in customer advanced deposit commitments. The primary use of the
Company's cash in the first nine months of fiscal 19971998 has been: a) the purchase of
capital equipment used to equip additional personnel and to upgrade our
information systems capabilities, and b) investment in software development.
Working capital at October 31, 1996November 2, 1997 improved to $5,533,000$7,911,000 compared to
$5,472,000$5,726,000 at the beginning of the fiscal year, while the current ratio stood at
3.12.6 to 1.0 at October 31, 1996November 2, 1997 and at 3.23.0 to 1.0 at January 31, 1996.1997. At
October 31, 1996,November 2, 1997, the Company has a $1,000,000 secured bank line of credit. The
Company currently anticipates that internally generated funds and bank
borrowings will be sufficient to satisfy its anticipated operating and capital
needs over the foreseeable future.
At October 31, 1996,November 2, 1997, the Company had no material outstanding commitments to
purchase capital equipment. Management believes that inflation has not had a
material effect on the Company's operations or financial condition.
Factors That May Affect Future Results
- --------------------------------------
The Company's future operating results may be affected by a number of
factors, including: itstiming of receipt of major system orders; timing of service
revenues; product mix; the Company's ability to successfullytimely introduce new products,
services and enhancements for its customers and achieve market acceptance as
demands for increasingly sophisticated measurement and control systems and turnkey solutions continue; timing of
receipt of major system orders; product mix;
uncertainties relative to global economic conditions; ability to attract and
retain for qualified personnel in various technical positions; the company'sCompany's
ability to withstand competition particularly from several companies that are
much larger in size than the Company; international currency fluctuations;
natural disasters, particularly earthquakes which may strike the California area
where the Company's headquarters and manufacturing facility are located; and
availability and cost of components for its products.
At the end of last fiscal year, management made a strategic decision to
focus onManagement expanded the services side of ourthe Company's transportation
market business. These services include systems integration, project
management, commissioning and installation andinstallation. These services are usually coupled
with the sale of our RedLine products will allowand has allowed us to fuel ourpursue further
growth in the transportation market by providing one stop"one-stop" or turnkey shopping
to our customers. TheseThis services provide us the capability to provide turnkey systems
where they are required. Hence, we have invested in system integration,
installation and commissioning staff during the first half of the year.
However, the introduction of these servicesbusiness raises several risk factors.
Specifically, the success depends on the time it takes for theseservices personnel
and future staff to come up to speed on our products, customers and the services
they will provide; market acceptance of the servicesservices; the ability to manage
customer projects profitably; the ability to integrate our products with other
vendors' products; availability and pricing;quality of other vendors' products; and
efficientother scheduling and delivery risks.
Because of the foregoing factors, as well as other factors affecting the
Company's operating results, past financial performance should not be considered
to be a reliable indicator of future performance, and investors should not use
of these resources.historical trends to anticipate results or trends in future periods.
8
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
A. Exhibits:
The following exhibits are filed or incorporated by reference as part of
this Report:
Ex. No. Description
- ------- -----------
3.1 Agreement and Plan of Merger between DSP Technology Inc., a California
corporation, and DSP Technology Inc., a Delaware corporation, dated
April 28, 1997, including as Exhibit 27-FinancialA, Registrant's Certificate of
Incorporation.
3.2 Amended Restated By-Laws of Registrant.
10.53 1991 Stock Option Plan, as amended
27 Financial Data Schedule.Schedule
B. Reports on Form 8-K: None.
8
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DSP TECHNOLOGY INC.
-----------------------
(Registrant)
By: /s/ Jose M. Millares
---------------------------------------------
Jose M. Millares
Chief Financial Officer
Date: JanuaryDecember 16, 1997
9
EXHIBIT INDEX
Ex. No. Description
- ------- -----------
3.1 Agreement and Plan of Merger between DSP Technology Inc., a California
corporation, and DSP Technology Inc., a Delaware corporation, dated
April 28, 1997, 9including as Exhibit A, Registrant's Certificate of
Incorporation.
3.2 Amended Restated By-Laws of Registrant.
10.53 1991 Stock Option Plan, as amended
27 Financial Data Schedule
10