SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934
For the quarterly period ended APRILAPR 30, 19971998 or
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_____ Transition report pursuant to Section 13 or 15(d) of the Securities
-----
Exchange Act of 1934
For the transition period from to
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Commission File Number 0-14677
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DSP TECHNOLOGY INC.
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(Exact name of registrant as specified in its charter)
CALIFORNIADELAWARE 94-2832651
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(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number
48500 KATO RD.Kato Rd., FREMONT,Fremont, CA 94538
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(Address of principal executive offices) (Zip Code)
(510) 657-7555
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(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES _____ NO ------ ------________
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate number of shares outstanding of each of the issuer's classes of common
stock, at the latest practical date:
CLASS OUTSTANDING AS OF JUNE 6, 1997MAY 3, 1998
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Common Stock 2,187,361-----------------------------
COMMON STOCK 2,279,360
1
DSP TECHNOLOGY INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
April 30, 1997 and January 31, 1997 3
Consolidated Statements of Income -
Three months ended April 30, 1997 and 1996 4
Consolidated Statements of Cash Flows -
Three months ended April 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 8
Signatures 9
DSP TECHNOLOGY INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
April 30, 1998 and January 31, 1998 3
Consolidated Statements of Income -
Three months ended April 30, 1998 and April 30, 1997 4
Consolidated Statements of Cash Flows -
Three months ended April 30, 1998 and April 30, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K. 10
Signatures 10
2
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
April 30, January 31,
1997 1997
----------- -----------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 1,553 $1,323
Accounts receivable 4,756 4,784
Inventories 2,449 2,015
Deferred income taxes 154 154
Prepaid expenses 214 304
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Total current assets 9,126 8,580
Property and equipment 1,495 1,540
Cost in excess of net assets of acquired
business 352 362
Other assets 1,399 1,317
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$12,372 $11,799
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
Apr 30, Jan 31,
1998 1998
----------- -------
ASSETS (Unaudited)
Current assets:
Cash and certificates of deposit 3,040 4,701
Accounts receivable 6,589 5,581
Inventories 3,172 2,682
Other Current Assets 740 793
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Total current assets 13,541 13,757
Property and equipment 1,381 1,341
Other assets 1,657 1,632
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$16,579 $16,730
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 846 $ 687
Accrued liabilities 3,711 3,755
Income taxes payable 623 1,142
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Total current liabilities 5,180 5,584
Deferred income taxes 461 489
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock. Authorized 2,500,000 shares;
none issued -- --
Common stock. 25,000,000 shares authorized;
shares issued and outstanding: 2,279,360 at
April 30 and 2,264,860 at January 31 3,357 3,301
Retained earnings 7,581 7,356
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Total shareholders' equity 10,938 10,657
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$16,579 $16,730
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 680 $ 799
Accrued liabilities 2,631 1,849
Income taxes payable 76 206
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Total current liabilities 3,387 2,854
Deferred income taxes 258 258
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: 2,180,962 at
April 30 and 2,179,962 at January 31 2,990 2,988
Retained earnings 5,737 5,699
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$12,372 $11,799
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The accompanying notes are an integral part of these financial statements.
3
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three months ended
April 30,
------------------
1997 1996
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Net sales $4,467 $3,775
Cost of sales 2,167 1,538
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Gross profit 2,300 2,237
Operating expenses:
Research and development 578 496
Marketing, general and administrative 1,705 1,475
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2,283 1,971
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Operating income 17 266
Interest income 40 42
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Income before income taxes 57 308
Income taxes 22 107
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Net income $ 35 $ 201
Three months ended
April 30, April 30,
1998 1997
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Net sales $5,519 $4,467
Cost of sales 2,541 2,167
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Gross profit 2,978 2,300
Operating expenses:
Research and development 593 578
Marketing, general and administrative 1,955 1,705
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2,548 2,283
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Operating income 430 17
Interest income 56 40
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Income before income taxes 486 57
Income taxes 190 22
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Net income $ 296 $ 35
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Net income per share
Basic $ .13 $ .02
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Diluted $ .12 $ .01
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Weighted average shares used in computing
basic net income per share 2,274 2,180
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Weighted average shares and equivalents
used in computing diluted net income
per share 2,555 2,337
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Net income per common and common
equivalent share $ .02 $ .09
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Weighted average common and common
equivalent shares outstanding 2,305 2,313
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The accompanying notes are an integral part of these financial statements.
4
DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
Three months ended
April 30, ---------------------April 30,
1998 1997
1996
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(Unaudited)
Cash flows from operating activities:
Net income $ 35296 $ 20135
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 220 240 183
Changes in current assets and liabilities:
Accounts receivable (1,008) 28
(154)
Inventories (490) (434) 69
Prepaid expenses and other53 90
(28)
Accounts payablespayable 159 (119) (27)
Accrued liabilities (44) 782 (108)
Income taxes payable (519) (130)
(79)
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Net cash provided by (used in) operating activities (1,333) 492
57
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Cash flows from investing activities:
Purchases of property and equipment (163) (110) (295)
Redemption of certificates of deposit, net -- 100
Investment in software development (159) (170)
(175)
Other (62) 16
(75)
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Net cash provided by (used in)used in investing activities (384) (264)
(445)
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Cash flows from financing activities:
Proceeds from issuance of common stock 56 2
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Net cash provided by financing activities 56 2
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Increase (decrease) in cash (1,661) 230
(382)
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Cash at beginning of period 4,701 1,323
1,816
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Cash at end of period $ 3,040 $1,553
$1,434
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Supplemental disclosure of cash flow information:
Cash paid during period for income taxes $ 690 $ 10
$ 175
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The accompanying notes are an integral part of these financial statements.
5
DSP TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation.
---------------------
The accompanying consolidated financial statements have been prepared,
without audit, in accordance with Securities and Exchange Commission
requirements for interim financial statements. Therefore, they do not
include all the disclosures that would be presented in the Company's Annual
Report on Form 10-K. The financial statements should be read in
conjunction with the Company's January 31, 19971998 financial statements and
accompanying notes thereto.
The information furnished reflects all adjustments (consisting only of
normal recurring adjustments) that are, in the opinion of management,
necessary for a fair presentation of financial position, results of
operations and cash flows for the interim period. The results of
operations for the periods presented are not necessarily indicative of
results to be expected for the full year.
For accounting purposes, the Company changed to a 52/53 week convention
with the fiscal year ending on the Sunday nearest the end of January.
However, for financial reporting purposes, each fiscal quarter or year is
presented as if it ended on the last day of such period. The first quarter
fiscal 1999 ended May 3, 1998.
2. Inventories. Inventories are stated at the lower of cost (first-in, first-
-----------
out) or market. Inventories consist of:
April 30, January 31,
1997 1997
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(thousands)
Raw materials $1,300 $1,221
Work in process 794 476
Finished goods 355 318
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$2,449 $2,015
Apr 30, January 31,
1998 1998
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(thousands)
Raw materials $1,579 $1,695
Work in process 1,004 637
Finished goods 589 350
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$3,172 $2,682
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6
ITEMItem 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSManagement's Discussion and Analysis of Financial Condition and Results
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OF OPERATIONS- --------------------------------------------------------------------------------
of Operations
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This section of the report contains forward-looking statements regarding
the Company's expected growth and enhanced future performance. All forward-
looking statements are subject to risk and actual results could differ
materially from those projected in the forward-looking statements as a result of
many factors which are set forth below.
Results of Operations
- - ---------------------
Net sales for the first quarter of fiscal 1998 (three months ended May 4,
1997)1999 increased by 18%$1,052,000 or
24% to $4,467,000$5,519,000 from $3,775,000$4,467,000 in the first quarter of fiscal 1997 (three months ended April 30, 1996).1998. The
increase in net sales was due to the continuing growth instrong shipments across all product lines
including the Company's RedLine products sales, which
remain the Company's largest product line, led the increase incustom service operation.
This year's first quarter sales this year compared to last year's first quarter.
Costcost of sales as a percentage of net sales
increaseddecreased to 46% from 49% in the same period last year. Cost of sales was
favorably affected by increased revenues of higher margin products across all
product lines. The Company also experienced significantly improved margins this
year's
first quarter in its growing custom service operations compared to 41% in the first quarter
of last year. The increaseIts overall gross margin is subject to change due to various
factors, including variation in costproduct mix and component costs and timing of
sales is a result of service-related costs exceeding service-related
revenues in the first quarter this year.custom service revenues.
Research and development ("R&D") expenses increased by $82,000 or 17%$15,000 to $593,000
in the first quarter this year compared to $578,000 compared toin the same period last
year. As a year ago.percent of net sales R&D declined to 11% in this years first quarter
versus 13% for the comparable period last year. The Company anticipates that
R&D expenses will continue to increase in total dollars this year as personnel
and programs are added to develop new products with higher levels of capability
and integration. However, it is expected that R&D expenses is primarily due towill remain at the
continued ramp upfirst quarter level of joint new
product development with FEV, the Company's strategic ally in Germany and offset
by higher capitalizationabout 11% as a percentage of software development costs in this year's first
quarter.net sales.
Marketing, general and administrative expenses infor the first quarter of
fiscal 1998this
year increased by $230,000 or 16% to $1,705,000$1,955,000 from $1,475,000$1,705,000 in the same quarter last year. As
a percentage of sales, however, expenses remaineddecreased to 35% from 38% last year.
The increase in actual spending was a result of higher trade show related
expenses to introduce several new products at the 38-39%SAE show (February 98) and
increased sales and administrative expenses to support continued growth. The
Company anticipates that MG&A dollar expenses will increase in fiscal 1999 but
should be below the 35% first quarter level as a percentage of sales.
Other income, net of interest expense, increased 40% to $56,000 in both quarters. The increase primarily reflected additional
sales, marketing and information systems personnel, and higher sales commissionsfiscal
1999's first quarter compared to the same period last year due to interest
earnings on a higher saleslevel of invested cash and bookings.
Net interest income was $40,000 this year compared to $42,000 in the first
quarter last year.full utilization of vendor early
payment discounts.
The effective tax rate computed was 39% for the first quarter this yearwhich was
38%
comparedidentical to 35% in last year'sfiscal 1998's first quarter. The Companytax rates computed depend
primarily on the profit contribution mix between the Company's U.S. operations
and U.K. subsidiary. Domestic tax rates tend to be higher than the foreign
subsidiary's tax rate. Other factors that may affect tax rates include R&D tax
credits, state tax jurisdictions, and software capitalization levels. The
company reviews the tax rate quarterly and could make minor adjustments to
reflect changing estimates.
7
Liquidity and Capital Resources
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Working capital at May 3, 1998 improved to $8,361,000 compared to
$8,173,000 at the beginning of the fiscal year, while the current ratio stood at
2.6 to 1.0 at May 3, 1998 versus 2.5 to 1.0 at January 31, 1998. Cash decreased
by $1,661,000 during the first quarter of fiscal 1999. Accounts receivable
increased by $1,008,000 due to high shipments in the last month of the period
and granting of extended payment terms on certain long-term projects. The
primary use of the Company's cash in the first quarter of fiscal 1999 was: the
purchase of capital equipment used to equip additional personnel, investment in
software development, federal income tax payments, and additional inventory
purchases and growth in accounts receivable. The Company has a $1,000,000
secured bank line of credit available which was unused at the end of the
quarter. The Company believes that internally generated funds and bank
borrowings will be sufficient to satisfy its anticipated operating and capital
needs over the foreseeable future.
At May 3, 1998, the Company had no material outstanding commitments to
purchase capital equipment. However, the Company believes that it will need
approximately 10,000 square feet of additional manufacturing space to
accommodate anticipated growth during the current fiscal year. New space may be
at a higher cost than existing space and will add to the Company's expense base.
Although the Company expects revenue growth to cover this additional cost, there
can be no assurance that this growth will materialize.
Factors thatThat 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
future operating results may be affectedproducts are characterized by a number of
factors, including: its ability to introduce new products, services and
enhancements for its customers ascontinued demands for increasingly sophisticated
measurement and control systems continue; timing of receipt of major system
orders; timing of service revenues; product mix; uncertainties relative to
global economic conditions;and turnkey solutions. The Company's success
depends upon its ability to compete for qualified
7
personnelintroduce 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 various technical positions;developing product enhancements or new
products that respond to technological change, evolving industry standards and
changing customer requirements.
Development and Management of Systems Integration Services. At the
Company's abilitybeginning of fiscal 1997, management began to withstand
competition particularly from several companies that are much larger in size
than the Company; natural disasters, particularly earthquakes which may strike
the California area where the Company's headquarters and manufacturing facility
are located; and availability and cost of components for its products.
Management expandedexpand the services side of the
Company'scompany's transportation market business. These services include systems
integration, project management, commissioning and installation. These services are usuallyinstallation and, coupled
with the sale of ourcompany's RedLine products, and has allowedmanagement believes these capabilities will
allow us to pursue further the company's growth in the transportation market by
providing "one-stop" shoppingfull-service to ourthe company's customers. ThisThese services businessprovide us
the capability to provide turnkey systems where they are required. Hence, the
Company has invested in project management, custom manufacturing, system
integration, installation and commissioning staff during the past two years.
The Company believes that the successful marketing and expansion of its
transportation products will be increasingly dependent on its ability to offer
these services. However, the introduction of these services raises several
risk factors.risks for the Company. Specifically,
the success depends on the time it takes for
services8
these personnel and future staff to come up to speed on ourthe company's products,
customers and the services they will provide; ability to compete for qualified
personnel in various technical positions; market acceptance of the services;
timing of service revenues; and the ability to manage customer projects
profitably. The successful management of these projects depends on the timely
availability and quality of key products, the availability of key personnel, the
ability to integrate different products from a variety of vendors effectively
and the management of difficult scheduling and delivery problems. Most of the
Company's systems integration projects use fixed price contracts. The pricing
of fixed price contracts requires accurate cost estimation in order to be
profitable.
Potential Fluctuations in Quarterly Results. The Company's quarterly
operating results may vary significantly, depending on a number of factors, some
of which could adversely affect the Company's operating results and the trading
price of the Company's Common Stock. These factors include timing of receipt of
system orders from and shipments to major customers; variation in the Company's
product mix and component costs; economic conditions prevailing within the
Company's geographic markets and in the world-wide automotive industry; market
acceptance of new products and services; the timing and levels of operating
expenditures; and exchange rate fluctuations. Any unfavorable change in these
or other factors could have a material adverse effect on the Company's operating
results for a particular quarter.
Quarterly sales depend in part on the volume and timing of orders received
during a quarter, which are difficult to forecast. Moreover, a disproportionate
percentage of the Company's net sales in any quarter are typically generated in
the last month of a quarter. As a result, a shortfall in net sales in any
quarter as compared to expectations may not be identifiable until the end of the
quarter. In addition, a significant portion of the Company's sales are derived
from a few customers. Hence, a decrease in the purchasing levels from one or
more of these customers could adversely impact operating results.
Dependence on International Sales. Part of the Company's revenue growth in
the past few years was due to increases in the Company's international sales,
particularly in Western Europe and Asia. International sales accounted for
approximately 35%, 32%, and 18% of net sales in fiscals 1998, 1997 and 1996.
The Company's international sales are subject to the risks inherent in
international sales, including political and economic changes and disruptions,
various regulatory requirements, and tariffs or other barriers. In addition,
fluctuations in exchange rates may render the Company's products less
competitive relative to local product offerings or may cause foreign customers
to delay or decrease potential orders. One or more of these factors may have a
material effect on the Company's future international sales and, consequently,
on the Company's operating results.
Competition. The markets for the Company's products are intensely
competitive and subject to rapid technological change. Some of the Company's
competitors have significantly greater financial, technical, product
development, manufacturing or marketing resources than the Company. In
addition, some of these competitors have a larger installed base than the
Company, particularly outside the United States. The Company believes that its
ability to compete depends on a number of factors, including price, product
functionality, product quality and reliability, system integration capabilities,
and post-sale service and support. There can be no assurance that the Company
will be able to continue to compete successfully with respect to these factors.
Competitors could introduce additional products or add features to their
existing
9
products that are superior to the Company's products or that achieve greater
market acceptance.
Because of the foregoing factors, as well as other factors affecting the
Company's operating results, past financial performance should not be considered
to be a reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods.
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents increased by $230,000 during the quarter ended
April 30, 1997, to $1,553,000. The increase was due primarily to cash provided
by operating activities. Cash was used in the quarter to: a) purchase equipment
for additional personnel, and b) investment in software development. The
Company's working capital remained level at approximately $5.7 million compared
to January 31, 1997. Current ratio remained strong at 2.7 to 1 at April 30,
1997 from 3.0 to 1.0 at January 31, 1997. At April 30, 1997, the Company has
$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 April 30, 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 and financial condition.
PARTPart II. OTHER INFORMATION
ITEMItem 4. Submission of Matters to a Vote of Security Holders
- - ------------------------------------------------------------
There were no matters submitted to a vote of security holders during the
period for
which this report is filed.
Item 6. EXHIBITS AND REPORTS ON FORMExhibits and Reports on Form 8-K
- - -----------------------------------------
A. Exhibits:
Exhibit 27-FinancialThe following exhibits are filed or incorporated by reference as part of
this Report:
Ex. No. Description
- - ------- -----------
27 Financial Data Schedule.Schedule
B. Reports on Form 8-K:
None.
8
There were no Reports on Form 8-K filed during the period for which this
report is filed.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DSP TECHNOLOGY INC.
------------------------------------------
(Registrant)
By: /s/ Jose M. Millares
-----------------------------------------
Jose M. Millares
Chief Financial Officer
Date: June 6, 1997
9DATE: JUNE 16, 1998
10