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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended MARCH 31, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission File Number 0-23006
DSP GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2683643
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(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
3120 SCOTT BOULEVARD, SANTA CLARA, CALIFORNIA 95054
---------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (408) 986-4300
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 __
As of April 30, 1997 there were 9,562,528 shares of Common Stock ($.001 par
value per share) outstanding.
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INDEX
DSP GROUP, INC.
PAGE NO.
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--March 31, 1997
and December 31, 1996 ........................................... 3
Condensed consolidated statements of income--Three months
ended March 31, 1997 and 1996 ................................... 4
Condensed consolidated statements of cash flows--Three
months ended March 31, 1997 and 1996 ............................ 5
Notes to condensed consolidated financial statements--
March 31, 1997................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 10
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings ......................................... 17
Item 2. Changes in Securities ...................................... 18
Item 3. Defaults upon Senior Securities............................. 18
Item 4. Submission of Matters to a Vote of Security Holders ........ 18
Item 5. Other Information .......................................... 18
Item 6. Exhibits and Reports on Form 8-K ........................... 18
SIGNATURES............................................................... 19
EXHIBIT INDEX............................................................ 20
2
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PART 1. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
DSP GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
1997 1996
--------- ------------
ASSETS (Unaudited) (Note)
CURRENT ASSETS
Cash and cash equivalents $17,224 $12,172
Marketable securities 27,487 30,762
Accounts receivable, net 6,879 4,861
Inventories 2,634 2,957
Deferred income taxes 500 500
Prepaid expenses and other 1,628 1,357
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Total current assets 56,352 52,609
Property and equipment 7,454 7,324
Accumulated depreciation and amortization (4,110) (4,033)
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3,344 3,291
Investments in unconsolidated subsidiaries,
net 2,211 2,415
Other assets, net 308 388
Deferred income taxes 504 504
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TOTAL ASSETS $62,719 $59,207
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $2,490 $1,428
Other current liabilities 3,642 3,330
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Total current liabilities 6,132 4,758
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock -- --
Common Stock 10 10
Additional paid-in capital 66,903 66,781
Accumulated deficit (10,326) (12,342)
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56,587 54,449
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $62,719 $59,207
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Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date.
See notes to condensed consolidated financial statements.
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DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended
March 31,
----------------------
1997 1996
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Revenues:
Product sales $11,898 $ 7,655
Licensing, royalties and other 2,280 3,542
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Total revenues 14,178 11,197
Cost of revenues:
Cost of product sales 7,530 5,200
Cost of licensing, royalties and other 343 230
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Total cost of revenues 7,873 5,430
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Gross profit 6,305 5,767
Operating expenses:
Research and development 1,941 2,544
Sales and marketing 1,256 1,368
General and administrative 1,079 1,563
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Total operating expenses 4,276 5,475
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Operating income 2,029 292
Other income (expense):
Interest and other income 610 422
Other expenses (63) (43)
Equity in income (loss) of
unconsolidated subsidiaries, net (204) (33)
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Income before income taxes 2,372 638
Provision for income taxes 356 64
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Net income $2,016 $ 574
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Net income per share $ 0.21 $.06
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Number of shares used in
per share computation 9,686 9,535
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See notes to condensed consolidated financial statements.
4
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DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Three Months Ended
March 31,
----------------------
1997 1996
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CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 2,081 $ ( 751)
INVESTING ACTIVITIES:
Purchase of available-for-sale marketable securities (12,766) (3,925)
Sale and maturity of available-for-sale
marketable securities 16,041 4,405
Purchases of equipment (543) (159)
Sale of equipment 118 --
Capitalized software development costs -- (73)
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2,850 248
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FINANCING ACTIVITIES:
Repayment of stockholders' notes receivable -- 313
Sale of common stock for cash upon
exercise of options and warrants 121 161
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121 474
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INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $5,052 $ (29)
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See notes to condensed consolidated financial statements.
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DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three months ended March 31,
1997, are not necessarily indicative of the results that may be expected for the
year ended December 31, 1997. For further information, reference is made to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
NOTE B - INVENTORIES
Inventory is valued at the lower of cost (first-in, first-out method) or
market. The components of inventory consist of the following (in thousands):
March 31, December 31,
1997 1996
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Work-in-process $ 76 $ 217
Finished goods 2,558 2,740
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$2,634 $2,957
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NOTE C - NET INCOME PER SHARE
Net income per share is computed using the weighted average number of shares of
Common Stock and dilutive common equivalent shares from stock options and
warrants (using the treasury stock method). Dual presentation of primary and
fully diluted net income per share is not shown on the face of the income
statement because the differences are not significant.
6
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DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In February 1997, the financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per Share,"
which is required to be adopted on December 31, 1997. At that time, the Company
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options
will be excluded. The impact of SFAS No. 128 on the calculations of primary
earnings per share and fully diluted earnings per share for the quarters ended
March 31, 1997 and March 31, 1996 is not expected to be material.
NOTE D - INVESTMENTS
The following is a summary of the cost of available-for-sale securities (in
thousands):
March 31, December 31,
1997 1996
----------- ----------
Corporate obligations $22,147 $19,301
Obligations of states and
political subdivisions 16,718 16,891
Municipal auction rate preferred
stock -- 2,200
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$38,865 $38,392
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Amounts included in
marketable securities $27,487 $30,762
Amounts included in cash
and cash equivalents 11,378 7,630
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$38,865 $38,392
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At March 31, 1997 and at December 31,1996, the carrying amount of securities
approximated their fair market value and the amount of unrealized gain or
loss was not significant. Gross realized gains or losses for the three months
ended March 31, 1997 and 1996, were not significant. The amortized cost of
available-for-sale debt securities at March 31, 1997, by contractual
maturities, are shown below (in thousands):
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DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amortized cost
----------------
Due in one year or less $31,875
Due after one year to eighteen months 6,990
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$38,865
----------
----------
NOTE E - INCOME TAXES
The effective tax rate used in computing the provision for income taxes is based
on projected fiscal year income before taxes, including estimated income by tax
jurisdiction. The difference between the effective tax rate and the statutory
rate is due primarily to the utilization of tax loss carryforwards, tax exempt
income in Israel and tax exempt interest income.
NOTE F - SIGNIFICANT CUSTOMERS
Product sales to one distributor accounted for 21% of total revenues for the
three months ended March 31, 1997. License fees from one customer accounted for
14% of total revenues for the three months ended March 31, 1996. The loss of one
or more major distributors could have an adverse effect on the Company's
business, financial condition and results of operations.
NOTE G - EQUITY INVESTMENT
The Company has investments in two companies which are accounted for under the
equity method.
AudioCodes, Ltd.: The Company owns 35% of the capital stock of AudioCodes, Ltd.
AudioCodes, Ltd., an Israeli corporation, is primarily engaged in DSP-related
contract engineering in connection with speech and algorithm technologies.
Aptel Ltd.: The Company made an initial investment in Aptel Ltd. ("Aptel")
during the third quarter of 1996 and currently owns 40% of Aptel. Aptel,
which is located in Netanya, Israel, is an emerging company in its product
development stage. Aptel has expertise in spread spectrum direct sequence
modulation technology, which is applicable to the development of products for
two-way paging systems and telemetry applications. The condensed consolidated
statements of income for the quarter ended March 31, 1997, include a $183,000
equity loss of the Company's proportionate share of Aptel's net loss in the
same period.
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DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE H - CONTINGENCIES
The Company is involved in certain claims arising in the normal course of
business, including claims that it may be infringing patent rights owned by
third parties. The Company is unable to foresee the extent to which these
matters will be pursued by the claimants or to predict with certainty the
eventual outcome. However, the Company believes that the ultimate resolution
of these matters will not have a material adverse effect on its financial
position, results of operations or cash flows.
The estimate of the potential impact on the Company's financial position or
overall results of operations or cash flows for the above matter could
change in the future.
In November 1995, after the Company's stock price declined, several lawsuits
were filed in the United States District Court for the Northern District of
California accusing the Company, its former Chief Executive Officer, and its
former Chief Financial Officer of issuing materially false and misleading
statements in violation of the federal securities laws. These lawsuits were
consolidated into a single amended complaint in February 1996. In the amended
complaint, plaintiffs sought unspecified damages on behalf of all persons who
purchased shares of the Company's Common Stock during the period June 6, 1995
through November 10, 1995. On June 11, 1996, the Court granted the Company's
motion to dismiss the lawsuit, with leave to amend. The plaintiffs filed an
amended complaint on July 11, 1996. On March 7, 1997, the Court issued an order
dismissing with prejudice all claims based on statements issued by the Company.
The Court is permitting plaintiffs to proceed with their claims regarding
statements the Company allegedly made to securities analysts, and is also
permitting plaintiffs to amend their complaint as to their claim that the
Company is responsible for the statements contained in analysts' reports. The
Company believes the ultimate resolution of this matter will not have a material
adverse effect on the Company's financial position, results of operations, or
cash flows. The Company believes the lawsuit to be without merit and intends to
defend itself vigorously.
The estimate of the potential impact on the Company's financial position or
overall results of operations or cash flows for the above matter could change in
the future.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
TOTAL REVENUES. Total revenues increased to $14.2 million in the first quarter
of 1997 from $11.2 million in the first quarter of 1996 due primarily to
increased quantities of the Company's TAD speech processors, especially those
utilizing flash memory.
Export sales, primarily consisting of TAD speech processors shipped to
manufacturers in Europe and Asia as well as license fees on DSP cores design
products, represented 88% and 89% of total revenues for the Company in the first
quarter of 1997 and 1996, respectively. All export sales are denominated in
U.S. dollars.
Revenues from Tomen Electronics (a distributor), accounted for 21% of total
revenues in the first quarter of 1997. NEC (a core licensor), accounted for
14% of total revenues in the first quarter of 1996.
GROSS PROFIT. Gross profit as a percentage of total revenues declined to 44% in
the first quarter of 1997 from 52% in the first quarter of 1996. The decrease
in gross margins is primarily due to the decrease in licensing revenues, which
have a higher gross margin, than product sales. Product gross profit as a
percentage of product sales increased to 37% in the first quarter of 1997
compared to 32% in the first quarter of 1996 due to lower costs of manufactured
products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased
to $1.9 million in the first quarter of 1997 from $2.5 million in the first
quarter of 1996 due primarily to a decrease in the cost of materials associated
with the Company's development of new speech processors for TAD products and
personal computer telephony applications, as well as reductions in engineering
personnel as a result of the consolidation of research and development
activities in Israel.
SALES AND MARKETING EXPENSES. Sales and marketing expenses slightly decreased
to $1.3 in the first quarter of 1997 from $1.4 million in the first quarter of
1996. Sales and marketing expenses as a percentage of total revenues decreased
to 9% in the first quarter of 1997, compared to 12% in the first quarter of
1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased to $1.1 million in the first quarter of 1997 from $1.6 in the first
quarter of 1996. General and administrative expenses as a percentage of total
revenues were 8% in the first quarter of 1997 and 14% in the first quarter of
1996. The expense decline is due primarily to the relocation of certain general
and administrative functions to Israel where salary and related costs are lower.
OTHER INCOME (EXPENSE) - NET. Interest and other income (expense) - net was
$547,000 in the first quarter of 1997, compared to $379,000 in the first quarter
of 1996. The increase was
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primarily the result of higher average cash equivalent and marketable
securities in 1997 as compared with 1996.
EQUITY IN INCOME (LOSS) OF INVESTEES. Equity in Income (loss) of investees
was a $204,000 loss for the first quarter of fiscal 1997 as compared to a
$33,000 loss in the first quarter of fiscal 1996. The condensed consolidated
statements of income for the first quarter of fiscal 1997 include a $183,000
equity loss for the Company's proportionate share of the results of
operations of Aptel for the first quarter of 1997 and a loss of $21,000 on
the Company's equity basis in AudioCodes, Ltd. The Company's initial
investment in Aptel was in the third quarter of fiscal 1996, and accordingly
the Company's results of operations for the first quarter of 1996 do not
include any amounts pertaining to Aptel. For the first quarter of 1996,
equity loss in AudioCodes, Ltd. was $33,000.
PROVISION FOR INCOME TAXES. In 1997 and 1996 the Company benefited for federal
and state tax purposes from the utilization of its net operating loss
carryforwards, foreign tax holiday and tax exempt interest income, as well as
the recognition of certain other deferred tax assets in 1996.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the three months ended March 31, 1997, net cash
provided by operations was $2.1 million, primarily due to (i) $2.0 million of
net income, (ii) $367,000 of depreciation and amortization, (iii) a $323,000
decrease in inventories, (iv) and a $974,000 increase in accounts payable,
income taxes payable and accrued expenses. These were offset by a $2.0 million
increase in accounts receivable and a $271,000 increase in prepaid expenses and
other current assets.
INVESTING ACTIVITIES. The Company purchased $12.8 million and sold or had
maturities of $16.0 million of investments classified as marketable securities
in the first three months of 1997. Capital equipment additions in the first
three months of 1997 totaled $543,000, primarily for leasehold improvements for
the Santa Clara facility.
FINANCING ACTIVITIES. During the first three months of 1997, the Company
received $121,000 upon the exercise of employee stock options.
At March 31, 1997, the Company's principal source of liquidity consisted of
cash and cash equivalents totaling $17.2 million, marketable securities of
$27.5 million and amounts available under a domestic bank line of credit of
$2.0 million. The Company's working capital at March 31, 1997 was $50.2
million.
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The Company believes that its current cash and its available line of credit will
be sufficient to meet its cash requirements through at least the next twelve
months. As part of its business strategy, the Company occasionally evaluates
potential acquisitions of businesses, products and technologies. Accordingly, a
portion of its available cash may be used for the acquisition of complementary
products or businesses. Such potential transactions may require substantial
capital resources, which may require the Company to seek additional debt or
equity financing. There can be no assurance that the Company will consummate
any such transactions. See "Factors Affecting Future Operating Results --
Acquisition Strategy."
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FACTORS AFFECTING FUTURE OPERATING RESULTS.
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING THE COMPANY'S
FUTURE PRODUCTS, EXPENSES, REVENUE, LIQUIDITY AND CASH NEEDS AS WELL AS THE
COMPANY'S PLANS AND STRATEGIES. THESE FORWARD-LOOKING STATEMENTS ARE BASED
ON CURRENT EXPECTATIONS AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THIS
INFORMATION. NUMEROUS FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER
SIGNIFICANTLY FROM THE RESULTS DESCRIBED IN THESE FORWARD-LOOKING
STATEMENTS, INCLUDING THE FOLLOWING RISK FACTORS.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's revenues
are derived predominately from product sales and accordingly vary significantly
depending on the volume and timing of product orders. The Company's quarterly
operating results also depend on the timing of recognition of license fees and
the level of per unit royalties. Through 1997, the Company expects that revenues
from its DSP core designs and TrueSpeech will be derived primarily from license
fees rather than per unit royalties. The uncertain timing of these license fees
has caused, and may continue to cause, quarterly fluctuations in the Company's
operating results. The Company's per unit royalties from licenses are entirely
dependent upon the success of its OEM licensees in introducing products
utilizing the Company's technology and the success of those OEM products in the
marketplace. Royalties from the Company's DSP core designs and TrueSpeech have
not been significant to date.
The Company's quarterly operating results may also fluctuate significantly as
demand for TADs varies during the year due to seasonal customer buying patterns,
and as a result of other factors such as the timing of new product introductions
by the Company or its customers, licensees or competitors; market acceptance of
new products and technologies; the mix of products sold; fluctuations in the
level of sales by OEMs and other vendors of products incorporating the Company's
products; and changes in general economic conditions.
DECLINING AVERAGE SELLING PRICES AND GROSS MARGINS; DEPENDENCE ON DIGITAL TAD
MARKET. The Company has experienced a decrease in the average selling prices
of its TAD speech processors, but has to date been able to offset this
decrease on an annual basis through manufacturing cost reductions and the
introduction of new products with higher performance. The Company
experienced a significant decline in the gross margin on TADs in the second
and third quarters of 1996 due to competitive market pricing pressures and
delays in ongoing cost reduction efforts. Although significant cost
reductions were achieved in the fourth quarter of 1996 and first quarter of
1997, there is no guarantee that such on-going efforts will be successful or
that they will keep pace with the anticipated, continuing decline in average
selling prices. The markets for the Company's products are extremely
competitive, and the Company expects that competition will increase. The
Company's existing and potential competitors in each of its markets include
large and emerging domestic and foreign companies, many of which have
significantly greater financial, technical, manufacturing, marketing, sale
and distribution resources and management expertise than the Company.
Any inability of the Company to respond to increased price competition for
its TAD speech processors or its other products through the continuing and
frequent introduction of new
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products or reductions of manufacturing costs, or any significant delays by
the Company in developing, manufacturing or shipping new or enhanced products
would have a material adverse effect on the Company's business, financial
condition and results of operations. Sales of TAD products comprise a
substantial portion of the Company's product sales. Any adverse change in
the digital TAD market or the Company's ability to compete and maintain its
position in that market would have a material adverse effect on the Company's
business, financial condition and results of operations.
RELIANCE ON INDEPENDENT FOUNDRIES. All of the Company's integrated circuit
products are manufactured by independent foundries. While these foundries
have been able to adequately meet the demands of the Company's increasing
business, the Company is and will continue to be dependent upon these
foundries to achieve acceptable manufacturing yields and quality levels, and
to allocate to the Company a sufficient portion of foundry capacity to meet
the Company's needs in a timely manner. To meet its increased wafer
requirements, the Company has added additional independent foundries to
manufacture its TAD speech processors. Revenues could be materially and
adversely affected should any of these foundries fail to meet the Company's
request for products due to a shortage of production capacity, process
difficulties or low yield rates.
RELIANCE ON INTERNATIONAL OPERATIONS; RISK OF OPERATIONS IN ISRAEL. The
Company is subject to the risks of doing business internationally, including
unexpected changes in regulatory requirements; fluctuations in the exchange
rate for the United States dollar; imposition of tariffs and other barriers
and restrictions; and the burdens of complying with a variety of foreign
laws. The Company is also subject to general geopolitical risks, such as
political and economic instability and changes in diplomatic and trade
relationships, in connection with its international operations. In
particular, the Company's principal research and development facilities are
located in the State of Israel and, as a result, at March 31, 1997, 63 of the
Company's 92 employees were located in Israel, including 90% of the Company's
research and development personnel. In addition, although the Company is
incorporated in Delaware, approximately half of the Company's directors and
executive officers are non-residents of the United States. Therefore, the
Company is directly affected by the political, economic and military
conditions to which Israel is subject. In addition, many of the Company's
expenses in Israel are paid in Israeli currency, thereby also subjecting the
Company to foreign currency fluctuations and to economic pressures resulting
from Israel's generally high rate of inflation. The rate of inflation in
Israel for 1995 and 1996 was 8.1% and 10.6%, respectively. While
substantially all of the Company's sales and expenses are denominated in
United States dollars, a portion of the Company's expenses are denominated in
Israeli shekels. The Company's primary expenses paid in Israeli currency are
employee salaries and lease payments on the Israeli facility. As a result,
an increase in the value of Israeli currency in comparison to the United
States dollar could increase the cost of technology development, research and
development expenses and general and administrative expenses.
There can be no assurance that currency fluctuations, changes in the rate of
inflation in Israel or any of the other aforementioned factors will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
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ACQUISITION STRATEGY. The Company has pursued, and will continue to pursue,
growth opportunities through internal development and acquisition of
complementary businesses, products and technologies. The Company is unable
to predict whether or when any prospective acquisition will be completed. The
process of integrating an acquired business may be prolonged due to
unforeseen difficulties and may require a disproportionate amount of
resources and management's attention. There can be no assurance that the
Company will be able to successfully identify suitable acquisition
candidates, complete acquisitions, integrate acquired businesses into its
operations, or expand into new markets. Once integrated, acquisitions may not
achieve comparable levels of revenues, profitability or productivity as the
existing business of the Company or otherwise perform as expected. The
occurrence of any of these events could have a material adverse effect on the
Company's business, financial condition or results of operations. Future
acquisitions may require substantial capital resources, which may require the
Company to seek additional debt or equity financing.
RELIANCE ON OEMs TO OBTAIN REQUIRED COMPLEMENTARY COMPONENTS. Certain of the
raw materials, components and subassemblies included in the products
manufactured by the Company's OEM customers, which also incorporate the
Company's products, are obtained from a limited group of suppliers.
Disruptions, shortages or termination of certain of these sources of supply
could occur. For example, the Company's customers for TAD speech processors
have in the past experienced difficulties obtaining sufficient timely
supplies of ARAMs which are included in certain digital TADs. These
shortages are due to the increasing demand for ARAMs for TAD products, and
fluctuations in ARAM production as ARAMs are a by-product in the fabrication
of dynamic random access memories ("DRAMs") with ARAM yields varying
inversely with the DRAM yield. Although such shortages were alleviated during
most of 1996 and the first quarter of 1997, there is no guarantee that such
favorable circumstances will continue. In addition, there is a trend in the
industry toward the production of 16 Mbit DRAMs, rather than 4 Mbit DRAMs,
which may increase the cost of TAD systems because such systems mainly use 4
Mbit ARAMs. Supply disruptions, shortages or termination could have an
adverse effect on the Company's business and results of operations due to its
customers delay or discontinuance of orders for the Company's products until
such components are available.
DEPENDENCE UPON ADOPTION OF INDUSTRY STANDARDS BASED ON TRUESPEECH. The
Company's prospects are partially dependent upon the establishment of
industry standards for digital speech compression based on TrueSpeech
algorithms in the computer telephony and personal computer markets. The
development of industry standards utilizing TrueSpeech algorithms would
create an opportunity for the Company to develop and market speech
co-processors that provide TrueSpeech solutions and enhance the performance
and functionality of products incorporating these co-processors. In February
1995, the ITU established G.723, which is predominately composed of a
TrueSpeech algorithm, as the standard speech compression technology for use
in video conferencing over public telephone lines. However, the ITU failed
to select TrueSpeech as the speech compression technology for DSVD
applications and discussed adopting a proposed audio standard based on an
existing standard (G.729) sponsored by the University of Sherbrooke. The
Company intends to license the compression standard selected by the ITU for
inclusion in the Company's DSVD co-processors. The failure to establish
industry standards based on TrueSpeech algorithms or
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to develop and market competitive speech co-processors would have a material
adverse effect on the Company's business, financial condition and results of
operations.
INTELLECTUAL PROPERTY. As is typical in the semiconductor and software
industries, the Company has been and may from time to time be notified of
claims that it may be infringing patents or intellectual property rights
owned by third parties. For example, AT&T has recently asserted that G.723,
which is primarily composed of a TrueSpeech algorithm, includes certain
elements covered by patents held by AT&T and has requested that video
conferencing equipment manufacturers license such technology from AT&T. If
it appears necessary or desirable, the Company may seek licenses under such
patents or intellectual property rights that it is allegedly infringing.
Although holders of such intellectual property rights commonly offer such
licenses, no assurances can be given that licenses will be offered or that
the terms of any offered licenses will be acceptable to the Company. The
failure to obtain a license for key intellectual property rights from a third
party for technology used by the Company could cause the Company to incur
substantial liabilities and to suspend the manufacture of products utilizing
the technology. The Company believes that the ultimate resolution of these
matters will not have a material adverse effect on the Company's business,
financial position or results of operations.
ONGOING LITIGATION. In November 1995, after the Company's stock price
declined, several lawsuits were filed in the United States District Court for
the Northern District of California accusing the Company, its former Chief
Executive Officer, and its former Chief Financial Officer of issuing
materially false and misleading statements in violation of the federal
securities laws. These lawsuits were consolidated into a single amended
complaint in February 1996. In the amended complaint, plaintiffs sought
unspecified damages on behalf of all persons who purchased shares of the
Company's Common Stock during the period June 6, 1995 through November 10,
1995. On June 11, 1996, the Court granted the Company's motion to dismiss
the lawsuit, with leave to amend. The plaintiffs filed an amended complaint
on July 11, 1996. On March 7, 1997, the Court issued an order dismissing
with prejudice all claims based on statements issued by the Company. The
Court is permitting plaintiffs to proceed with their claims regarding
statements the Company allegedly made to securities analysts, and is also
permitting plaintiffs to amend their complaint as to their claim that the
Company is responsible for the statements contained in analysts' reports.
The Company believes the lawsuit to be without merit and intends to defend
itself vigorously. The Company believes the ultimate resolution of this
matter will not have a material adverse effect on the Company's financial
position, results of operations, or cash flows. However, the Company
anticipates that in the near term it may incur significant legal expense to
defend itself.
The variety and uncertainty of the factors affecting the Company's operating
results, and the fact that the Company participates in a highly dynamic
industry, may result in significant volatility in the Company's Common Stock
price.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 1995, after the Company's stock price declined, several lawsuits
were filed in the United States District Court for the Northern District of
California accusing the Company, its former Chief Executive Officer, and its
former Chief Financial Officer of issuing materially false and misleading
statements in violation of the federal securities laws. These lawsuits were
consolidated into a single amended complaint in February 1996. In the
amended complaint, plaintiffs sought unspecified damages on behalf of all
persons who purchased shares of the Company's Common Stock during the period
June 6, 1995 through November 10, 1995. On June 11, 1996, the Court granted
the Company's motion to dismiss the lawsuit, with leave to amend. The
plaintiffs filed an amended complaint on July 11, 1996. On March 7, 1997,
the Court issued an order dismissing with prejudice all claims based on
statements issued by the Company. The Court is permitting plaintiffs to
proceed with their claims regarding statements the Company allegedly made to
securities analysts, and is also permitting plaintiffs to amend their
complaint as to their claim that the Company is responsible for the
statements contained in analysts' reports. The Company believes the lawsuit
to be without merit and intends to defend itself vigorously.
On February 12, 1997, BEKA Electronic GmbH ("BEKA") commenced an action in
the United States District Court for the Northern District of California
against the Company. The action alleges breach of contract, breach of
implied covenant of good faith and fair dealing and requests an accounting by
the Company in connection with the Company's termination of the Sales
Representative Agreement between BEKA and the Company. The complaint seeks
an unspecified amount of damages. The Company believes the lawsuit to be
without merit and intends to defend itself vigorously.
17
<PAGE>
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement re: Computation of Per Share Earnings
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended March 31, 1997.
18
<PAGE>
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 GROUP, INC.
(Registrant)
By /S/ AVI BASHER
-------------------------------------------
Avi Basher, Vice President of Finance and Chief Financial Officer
and Secretary (Principal Financial Officer and Principal Accounting Officer)
Date MAY 13, 1997
---------------
19
<PAGE>
EXHIBIT INDEX
Exhibit 11.1 Statement re: Computation of Per Share Earnings
Exhibit 27.1 Financial Data Schedule
20
<PAGE>
Exhibit 11.1
DSP GROUP, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share data)
Three Months
Ended March 31,
---------------------------
1997 1996
------- -------
Net income $2,016 $ 574
------- -------
------- -------
PRIMARY:
Computation of weighted average
common and common equivalent
shares outstanding:
Weighted average common shares
outstanding 9,559 9,459
Common equivalent shares from
stock options and warrants 127 76
------- -------
Shares used in per share computation 9,686 9,535
------- -------
------- -------
Net income per share $.21 $.06
------- -------
------- -------
FULLY DILUTED:
Computation of weighted average
common and common equivalent
shares outstanding:
Weighted average common shares
outstanding 9,559 9,459
Common equivalent shares from
stock options and warrants 127 113
------- -------
Shares used in per share computation 9,686 9,572
------- -------
------- -------
Net income per share $.21 $.06
------- -------
------- -------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q OF DSP GROUP,
INC. FOR THE QUARTER ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 17,224
<SECURITIES> 27,487
<RECEIVABLES> 7,254
<ALLOWANCES> 375
<INVENTORY> 2,634
<CURRENT-ASSETS> 56,352
<PP&E> 7,454
<DEPRECIATION> 4,110
<TOTAL-ASSETS> 62,719
<CURRENT-LIABILITIES> 6,132
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 56,577
<TOTAL-LIABILITY-AND-EQUITY> 62,719
<SALES> 11,898
<TOTAL-REVENUES> 14,178
<CGS> 7,530
<TOTAL-COSTS> 7,873
<OTHER-EXPENSES> 1,941
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> 2,372
<INCOME-TAX> 356
<INCOME-CONTINUING> 2,016
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,016
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
