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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 0-23006
DSP GROUP, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 94-2683643
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation and organization)
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3120 SCOTT BOULEVARD, SANTA CLARA, CA 95054
(Address of principal executive offices, including zip code)
(408) 986-4300
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PER SHARE
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price of the Common Stock on March 3, 1997, as
reported on the Nasdaq National Market, was approximately $94,771,750. Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded from this computation in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 3, 1997 the Registrant had outstanding 9,560,528 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended December 31, 1996 are incorporated by reference into Part II of
this Form 10-K Report. With the exception of those portions which are
incorporated by reference, the Registrant's 1996 Annual Report is not deemed
filed as part of this Report.
2. Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 20, 1997 are incorporated by reference into
Part III of this Form 10-K Report.
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INDEX
DSP GROUP, INC.
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PART I
Item 1. BUSINESS.................................................... 3
Item 2. PROPERTIES.................................................. 18
Item 3. LEGAL PROCEEDINGS........................................... 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 19
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED 19
STOCKHOLDER MATTERS.........................................
Item 6. SELECTED FINANCIAL DATA..................................... 20
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 20
CONDITIONAL AND RESULTS OF OPERATIONS.......................
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 20
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 20
AND FINANCIAL DISCLOSURE....................................
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 20
Item 11. EXECUTIVE COMPENSATION...................................... 20
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 20
MANAGEMENT..................................................
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 20
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 21
8-K.........................................................
25
SIGNATURES..................................................
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PART I
ITEM 1. BUSINESS.
FOR A DISCUSSION OF VARIOUS RISKS AND UNCERTAINTIES AFFECTING THE COMPANY'S
FUTURE OPERATIONS SEE "FACTORS AFFECTING FUTURE OPERATING RESULTS" BEGINNING ON
PAGE 14 BELOW. THIS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1996 CONTAINS TRADEMARKS OF THE COMPANY.
DSP Group develops and markets digital signal processing integrated circuits
and software for use in digital speech products targeted at the consumer
telephone and computer telephony markets. Digital speech technology provides
several advantages over analog speech technology, including higher attainable
levels of compression, greater ability to process and manipulate data, and
faster development of products through use of a programmable digital signal
processor ("DSP") rather than dedicated analog hardware. As a result, digital
speech technology is incorporated today in the digital telephone answering
device ("TAD") market and enables the implementation of many new applications in
computer telephony such as voice mail messaging, digital simultaneous voice and
data ("DSVD") transmission and video conferencing.
The Company has developed digital signal processing and digital speech
technologies, including proprietary algorithms, software, system designs and
VLSI circuit designs that have enabled the introduction of three synergistic
product families: speech and telephony digital signal processing integrated
circuits, proprietary architectures for digital signal processors ("DSP core
designs") and proprietary TrueSpeech-Registered Trademark- digital speech
compression algorithms.
SPEECH AND TELEPHONY PROCESSORS
The Company has developed two series of speech and telephony processors for
use in the consumer telephone and computer telephony markets. Both series are
based on the Company's DSP core designs, incorporate several of its digital
telephony signal processing algorithms and provide TrueSpeech compression
capabilities. In 1989, the Company introduced the first cost effective speech
processor for use in digital TADs and today the Company is the leading
independent supplier of DSPs to digital TAD suppliers. The Company's TAD speech
processors are incorporated in the products of leading digital TAD suppliers
such as Alcatel, AT&T, British Telecom, L.G. Electronics, Panasonic, Philips,
Sagem, Samsung, Sanyo, Siemens, Sony and Uniden.
DSP Group has also developed a series of speech co-processors for use in
conjunction with microprocessors in personal computers and in many standalone
applications to enhance the microprocessors' speech and telephony capabilities.
The Company's speech co-processors utilize many of the same technologies used in
its TAD speech processors. These speech co-processors provide a variety of
real-time speech applications for personal computers, standalone videophones,
portable dictation devices and Internet telephony applications, such as voice
mail messaging, DSVD transmission and video conferencing.
DSP CORE DESIGNS
DSP Group has also developed proprietary, low power DSP core designs--the
PineDSPCore and OakDSPCore--which represent low cost solutions for current and
emerging digital signal processing applications. The Company's DSP core designs
are incorporated in its own family of speech and telephony processors and are
also licensed to more than twenty entities, including LSI Logic, NEC, Samsung,
Siemens, TEMIC and VLSI Technology. These licensees may use the Company's DSP
core designs to develop their own DSPs for various products, including cellular
telephones, modems, audio boards and cordless telephones. In the fourth quarter
of 1995, the first shipment of products utilizing the Company's PineDSPCore
technology occurred; however, royalties from these shipments have not been
significant to date.
3
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TRUESPEECH
The Company has developed TrueSpeech, a family of proprietary speech
compression algorithms which it incorporates in its TAD speech processors and
personal computer speech co-processors and also licenses to various companies in
the computer telephony and personal computer industries. The Company believes
that TrueSpeech offers several advantages over other currently available speech
compression technologies, including a combination of high compression ratios,
high quality speech playback and cost effectiveness. The proliferation of speech
applications in the computer telephony and personal computer market requires
standardized digital speech compression technologies. The Company seeks to
establish industry standards for its target markets based on TrueSpeech
algorithms. However, the establishment of industry standards depends upon the
acts of third parties, which are not within the control of the Company. The
development of industry standards utilizing TrueSpeech algorithms would create
an opportunity for the Company to develop and market speech co-processors that
provide complete TrueSpeech solutions and enhance the performance and
functionality of products incorporating these speech co-processors. For example,
in the personal computer market, Microsoft has incorporated a TrueSpeech
algorithm in Windows 95. In addition, in the video conferencing market, the
International Telecommunications Union ("ITU") in February 1995 established
G.723, which is predominantly composed of a TrueSpeech algorithm, as the
standard speech compression technology for use in video conferencing over public
telephone lines.
PRODUCT FAMILIES, TECHNOLOGY AND CUSTOMERS
The Company has incorporated its proprietary algorithms and technologies in
three product families--speech and telephony processors, DSP core designs and
TrueSpeech software--for use in the consumer telephone and computer telephony
markets.
SPEECH AND TELEPHONY PROCESSORS
The Company has developed and introduced two series of DSPs speech
processors for digital TADs, telephony applications, modems, disk controllers
and other communication applications, which were first introduced in 1989 for
digital TADs, and personal computer speech co-processors, which were first
introduced in late 1994, to maximize the benefits of TrueSpeech compression in
personal computer applications. Both series are based upon the Company's cost
effective, low power DSP core designs and incorporate its TrueSpeech algorithms.
The Company is currently developing a third generation DSP core design for use
with applications that require faster processing speeds. The following chart
describes some
4
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of the Company's other speech and telephony technologies that may be
incorporated in various combinations in its products.
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TECHNOLOGY DESCRIPTION
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Caller ID and Call Waiting Identifies the telephone number being used by the calling party, when the line
Caller ID is not engaged and when the receiving party is already engaged on another call
Call Progress Tone Detection Detects standard telephony signals during the progress of the telephone call
DTMF Signaling Detects and generates DTMF signals ("touch tones") that comply with telephone
requirements
Full Duplex Speakerphone Allows simultaneous two-way (full-duplex), hands-free operation of the telephone
and incorporates acoustical echo cancellation for suppression of room echoes and
electrical echo cancellation for elimination of electrical echoes
Speech Prompts Provides time-date stamp capabilities and allows the user to access operating
instructions
Variable Speed Playback Permits playback of distortion-free, natural sounding speech at variable speeds
(FlexiSpeech-Registered Trademark-)
Voice Operated Switch ("VOX") Detects human speech and stops recording during periods of silence, thereby
(Smart-Vox-Registered Trademark-) conserving available memory
Voice Recognition Allows voice command operation of functions
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These technologies enable the Company's speech and telephony processors to
provide a variety of speech capabilities for digital TAD, telephony and computer
telephony products.
TAD SPEECH PROCESSORS. DSP Group's TAD speech processors are currently
incorporated in over 80 models of digital TADs from approximately 50 different
companies. These models include standalone digital TADs, integrated digital
TADs, facsimile machines with integrated digital TADs, standalone speaker phones
with integrated digital TADs, hand-held devices and digital cordless telephones
with integrated digital TADs. To date, the Company has shipped approximately 13
million speech processors to digital TAD suppliers, including approximately 5.8
million TAD speech processors in 1996. TAD speech processor product sales
accounted for 73% of the Company's total revenues in 1996.
The Company's TAD speech processors use TrueSpeech to provide high quality
speech recording and playback. All of the Company's TAD speech processors are
based on the Company's PineDSPCore and incorporate certain of the Company's
technologies, including VOX, caller ID, DTMF signaling and call progress tone
detection. Some of the Company's TAD speech processors feature additional
technologies, including speech prompt capabilities, variable speed playback and
full duplex speakerphone. The following
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table sets forth certain characteristics of the primary TAD speech processors
currently offered by the Company:
DSP GROUP'S TAD SPEECH PROCESSORS
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D6305 D6375 D6455 D6371 D6471 D6301
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Process Geometry (microns).................................. 0.8 0.8 0.8 0.6 0.6 0.6
Minutes Record, 4 Mbit Memory............................... 15-17 15-17 25-27 15-17 25-27 15
Memory Type................................................. ARAM ARAM ARAM Flash Flash Flash
Advanced Features:
Speech Prompts............................................ Yes Yes Yes Yes Yes Yes
Variable Speed Playback................................... -- Yes -- -- Yes Yes
Full Duplex Speakerphone.................................. -- Yes Yes -- Yes --
Caller ID and Call Waiting Caller ID...................... -- -- -- Yes Yes Yes
Other Required Components:(1)
Microcontroller........................................... Yes Yes Yes Yes Yes Yes
Codec..................................................... Yes Yes Yes Yes Yes Yes
EPROM..................................................... Yes Yes Yes -- -- --
Battery................................................... Yes Yes Yes -- -- --
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(1) In addition to the Company's speech processors, digital TADs require other
electrical and electronic components as indicated. The approximate digital
subsystem costs include the estimated total cost of the Company's TAD speech
processors and the other associated electrical and electronic components
required for a digital TAD.
DSP Group's D6301 and D6471, its newest TAD speech processors, interface
directly with a new flash memory chip introduced by Samsung and facilitate lower
overall system costs for digital TADs. The new Samsung flash memory chip is
designed for speech recording and is less expensive than other currently
available flash memories. The D6301 and D6471 eliminate the need for audio-grade
random access memories ("ARAMs"), which from time to time have constrained the
growth of the digital TAD market due to supply shortages. By allowing
substitution of a flash memory for an ARAM, the D6301 and D6471 also eliminate
the need for battery circuitry to maintain the data in the ARAM during power
failures and an EPROM to store pre-recorded voice prompts and time-date stamps.
6
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The following is a list of TAD manufacturers and resellers whose products
incorporate the Company's TAD speech processors:
TAD MANUFACTURERS AND RESELLERS
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TAD MANUFACTURERS TAD RESELLERS
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Alcatel Maxon Amstrad
Ascom NEC Bell South
Daewoo Norris Bosch
D&B Electronics Panasonic British Telecom
CCT Telecom Philips Cresta
GE/Thomson Sagem France Telecom
Hanchang Samsung GE
Hanwha Telecom Sanyo German Telecom
HPF Ascom Sharp Loewe-Binatone
Hyundai Siemens Northwestern Bell
I.N.T. Corp. Smoothline Peacock
Interisa Sony Phonemate
Kinpo Uniden Radio Shack
L.G. Electronics Vtech Southwestern Bell
Matra Yupiteru Swiss Telecom
Telyco
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PERSONAL COMPUTER SPEECH CO-PROCESSORS. The Company has developed its
personal computer speech co-processors as complementary application-specific
DSPs to enhance the performance and functionality of personal computer products
using TrueSpeech. While the current generation of microprocessors contained in
personal computers can compress and record speech in real-time, the
microprocessors are not specifically designed to run digital speech processing
algorithms and, therefore, require a substantial amount of the personal
computer's computing power to do so. As a result, the use of speech
co-processors that incorporate TrueSpeech in personal computers provides a more
efficient utilization of the personal computer's computing power. After becoming
familiar with new speech applications, the Company believes many personal
computer users will demand real-time speech compression capability and
manufacturers will begin to provide real-time speech compression by including
application-specific DSPs on personal computer products such as modems, audio
boards, PCMCIA cards and personal computer based videophone and video
conferencing products.
To date, the Company has announced three speech co-processors--the CT8005,
CT8015 and CT8020--for use in personal computers, DSVD modems, video telephones
and video conferencing equipment. These speech co-processors are based on the
Company's DSP core designs, incorporate TrueSpeech and many of its other
proprietary algorithms and technologies, and are fully controlled by the
personal computer's host processor. All of the Company's speech co-processors
contain the TrueSpeech algorithm incorporated in Windows 95. The CT8005 provides
telephone and speech recording and playback functions in personal computers,
while the CT8015 is designed as a low-cost solution for use in DSVD modems and
in Internet telephony products. The CT8020 is designed for use in video
telephones and video conferencing equipment and also implements all the
specifications of the G.723 speech compression standard for video telephony. The
CT8020 may also be utilized in many Internet-based telephone applications as
well.
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The Company has begun shipments of the CT8005 and the CT8015, and expects to
begin volume production of the CT8020 in 1997. The following table sets forth
the features of the personal computer speech co-processors currently offered by
the Company:
DSP GROUP'S PERSONAL COMPUTER SPEECH CO-PROCESSORS
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CT8005 CT8015 CT8020
----------- ----------- ----------
<S> <C> <C> <C>
First Sample Date............................................................... Q2 95 Q2 95 Q1 96
DSP Core Design................................................................. PineDSPCore PineDSPCore OakDSPCore
Process Geometry (microns)...................................................... 0.8 0.8 0.6
TrueSpeech Algorithm Data Rate,
Kilobits Per Second........................................................... 8.5 8.5 8.5, 6.3,
5.3,
4.8 & 4.1
Features:
Voice Mail Messaging.......................................................... Yes -- Yes
Telephone Answering........................................................... Yes -- Yes
Full Duplex Speakerphone...................................................... Yes Yes Yes
Variable Speed Message Playback............................................... Yes -- Yes
Full Duplex DSVD.............................................................. -- Yes Yes
Video Conferencing............................................................ -- -- Yes
Internet Telephony............................................................ Yes (HDX) Yes Yes
</TABLE>
FUTURE SPEECH AND TELEPHONY PROCESSORS. The Company is developing its next
generation of TAD speech processors based on 0.5 micron technology to reduce its
manufacturing costs and increase its competitiveness in the price sensitive TAD
business. In addition, the Company intends to continue to enhance its existing
speech and telephony processors through the addition of advanced capabilities
and to develop new speech and telephony processors for emerging applications.
For example, the Company intends to enhance its TAD speech processors through
the addition of capabilities such as superior quality full duplex speakerphone,
caller ID, call waiting caller ID, integrated facsimile functions and reliable
speech recognition technology that can be used to operate digital TADs with
spoken commands.
The Company believes that emerging applications for its personal computer
speech co-processors may include other personal computer products such as laptop
computers, personal digital assistants ("PDAs"), personal communications systems
and other mobile computing devices. In addition, DSP Group believes that its
digital signal processing and digital speech expertise will also be applicable
to emerging digital speech applications for consumer electronics. For example,
one manufacturer has introduced and is shipping a personal digital voice
recorder with one hour of recording time based on a DSP Group TAD speech
processor. This recorder utilizes the Company's variable speed playback
algorithm and provides the capability of editing a stored speech file. The
recorder also provides memory storage in a detachable module with a PCMCIA
connector, allowing transfer of the recorded speech file to a computer with a
PCMCIA interface for storage, playback or transmittal over a modem. The Company
intends to develop additional speech co-processors for the personal digital
voice recorder market, and intends to pursue the use of its technologies for
other speech applications in the computer telephony, personal consumer and
consumer electronics market.
DSP CORE DESIGNS
The Company's DSP core designs--PineDSPCore and OakDSPCore--are low power,
low voltage and low cost digital signal processing integrated circuit
architectures with associated advanced software development tools. The Company's
DSP cores and associated instruction sets are designed for general purpose
applications including speech processing, speakerphone, telephony algorithms and
cellular, which enables efficient processing for digital speech applications.
The DSP core designs operate at both 3 volts
8
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and 5 volts and incorporate power management features for low power consumption.
As digital signal processing and software migrate into high volume communication
and computing products, the Company believes there will be a significant demand
for low cost, low power DSP platforms. The efficient processing, flexible design
and scaleable memories of the Company's DSP core designs allow the development
of smaller and lower cost DSP solutions and shorten time to market for new
products and product enhancements.
The Company's DSP core designs are small, highly efficient, 16-bit, general
purpose DSPs with adjacent modular RAM and ROM and general I/O blocks for
flexible layout and design. Universal design rules are used in the DSP core
designs to allow easy implementation across multiple semiconductor process
technologies. The DSP cores, initially implemented in 1.0 micron CMOS
technology, were converted into 0.8 micron CMOS technology and then were further
redesigned for 0.6 micron CMOS technology to reduce cost and increase
performance.
The PineDSPCore, first introduced in 1992, was developed by the Company's
VLSI designers and its software developers to efficiently process speech and
telephony algorithms. During 1994, the Company announced its OakDSPCore, an
enhanced version of the PineDSPCore that achieves a higher processing speed
through improved architecture and is specifically suited for use in personal
communication products and higher level processing applications, such as digital
cellular telephones, high bit rate modems, DSVD modems and video telephone
conferencing applications. The OakDSPCore offers significantly improved
processing features compared to the PineDSPCore, including a higher processing
speed of 40 MIPS and an advanced, more efficient instruction set. Algorithms
implemented on the PineDSPCore instruction set may also be run on the
OakDSPCore. The following table shows a comparison of the Company's DSP core
designs:
DSP GROUP'S DSP CORE DESIGNS
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PINEDSPCORE OAKDSPCORE
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Word Length..................................................................... 16 bit 16 bit
Process Geometry (microns)...................................................... 0.8 0.6
Performance..................................................................... 25 MIPS 40 MIPS
Voltage......................................................................... 3.0 to 5.0 V 3.3V
Advanced Instruction Set........................................................ -- Yes
</TABLE>
The Company incorporates its DSP core designs in its speech and telephony
processors and also licenses them to original equipment manufacturers ("OEMs").
The Company's licensing program, introduced in 1992, enables OEMs to incorporate
the Company's DSP core designs in the OEMs products. Licensing revenues are
generally recognized on shipment by the Company provided that no significant
vendor or post contract support obligations remain outstanding and that
collection of the resulting receivable is deemed probable. In addition, most
licenses require the licensee to pay the Company ongoing per-unit royalties
based on the unit shipments of the licensee's products and a monthly support
fee. The timing and amount of royalties from licensing of the DSP core designs
will depend on the timing of each licensee's product development and the degree
of market acceptance of such licensee's product, both of which are not within
the Company's control. To date, royalty revenues from the licensing of DSP core
designs have not been significant. The following is a partial list of companies
who have licensed the
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Company' s DSP core designs and representative applications for which they have
the right to use the DSP core designs:
DSP CORE DESIGN LICENSES
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LICENSEES REPRESENTATIVE APPLICATIONS
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Adaptec......................................................................... Disk Drive
Asahi Kasei Microsystems........................................................ Cordless Telephone
Atmel........................................................................... Communications
DSP Communications, Inc......................................................... Digital Cellular Telephone
GEC Plessey..................................................................... Communications
Harris Semiconductor............................................................ Video Conferencing
Hyundai......................................................................... Communications
Integrated Circuit Systems...................................................... Multimedia Boards
Kenwood......................................................................... Audio
NEC............................................................................. Communications & Consumer Products
LSI Logic....................................................................... ASIC Library
Samsung......................................................................... Communications & Multimedia
Siemens......................................................................... Digital Cellular Telephone
Silicon Systems................................................................. Modem
TEMIC (Daimler-Benz)............................................................ Communications
VLSI Technology................................................................. Communications & PCs
Xicor........................................................................... Programmable DSP
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The Alta Group of Cadence, Mentor Graphics and Synopsys have announced the
development of electronic design automation ("EDA") tools, system level design
kits and software co-design and co-simulation products for systems designers
that use the PineDSPCore and OakDSPCore. In addition, a number of independent
software vendors, including QSound and VoCal Technologies, have announced the
development of digital signal processing algorithms that operate on the
PineDSPCore and OakDSPCore for a variety of communications and multimedia
applications. The Company believes that these developments make its DSP core
designs more attractive to potential OEM licensees.
TRUESPEECH PRODUCTS
TrueSpeech is a high-quality, cost effective speech compression technology
based on complex mathematical algorithms that are derived from the way airflow
from the lungs is shaped by the throat, mouth and tongue during speech. This
shaping of bursts of air is what the ear interprets as speech. TrueSpeech
converts this speech into digital data and then selectively eliminates and
enhances certain sound data to replicate human speech. Originally developed for
consumer telephone applications, such as the Company's TAD speech processors,
the Company has since enhanced TrueSpeech for use in the computer telephony and
personal computer markets.
The Company seeks to establish industry standards for digital speech
compression technology based on its TrueSpeech algorithms for emerging speech
applications in the consumer telephone and computer telephony markets. However,
the establishment of industry standards depends upon the acts of third parties,
which are not within the control of the Company. The development of industry
standards utilizing TrueSpeech algorithms would create an opportunity for the
Company to develop and market speech co-processors that would serve as
complementary application-specific DSPs to enhance the performance and
functionality of personal computers using TrueSpeech. In the personal computer
market, Microsoft has incorporated a TrueSpeech algorithm in Windows 95. In the
video telephone market, the ITU in February 1995 established G.723, which is
predominantly composed of a TrueSpeech algorithm, as the standard speech
compression technology for video conferencing over public telephone lines. In
addition to
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the Company's TrueSpeech algorithm, G.723 incorporates elements of algorithms
developed by France Telecom and the University of Sherbrooke. The Company
believes that the ITU's selection positions other TrueSpeech algorithms as
strong candidates for adoption as formal industry standards for other
applications. In addition, although the ITU committee has approved the G.723
standard for analog telephone line, there is no assurance that the video
conference market in analog line will be widely accepted, mainly due to quality
and price issues. Furthermore, in March 1997, the International Multimedia
Teleconferencing Consortium ("IMTC"), a nonprofit industry group, recommended
the use of G.723 as the default audio coder for all voice transmissions over the
Internet or for Internet Protocol ("IP") applications for H.323 conferencing
products. The IMTC will forward its recommendation to its membership for
approval in May 1997.
The Company believes that the principal advantages of TrueSpeech compared
with other currently available digital speech compression technologies are as
follows:
HIGH COMPRESSION RATIO. The three versions of TrueSpeech currently
offered for license by DSP Group compress digital speech at ratios ranging
from 15:1 to 26:1. These compression ratios are between seven and twelve
times greater than the compression provided by Pulse Code Modulation ("PCM")
used in current generation telephone speech transmissions and four to six
times greater than compression using Adaptive Differential PCM ("ADPCM")
currently used in personal computer audio cards. As a result, a standard 1.4
megabyte floppy diskette can hold approximately 37 minutes of speech using
the most advanced version of TrueSpeech commercially available, compared to
approximately three minutes using PCM and six minutes using ADPCM.
Competitors have introduced other advanced speech compression algorithms
that offer compression ratios comparable to the most advanced TrueSpeech
algorithms, including competing algorithms that were submitted by several
companies to the ITU standards committee evaluating speech compression
algorithms for video telephones. The ITU testing showed that TrueSpeech
provides superior quality playback and requires lower computational
complexity than these competing algorithms.
HIGH QUALITY SPEECH. Another advantage of TrueSpeech is that it
reproduces high quality speech playback with minimum distortion by
selectively eliminating nonessential and background sound data without
significant loss of speech quality. TrueSpeech has received high scores for
speech quality from a number of independent evaluators. For example,
TrueSpeech scored the highest on the ITU's intricately structured test used
to numerically rate the quality of the five competing speech compression
algorithms submitted for adoption as the G.723 standard for video
telephones.
COST EFFECTIVENESS. TrueSpeech's ability to achieve high speech
compression with lower computational complexity provides it with a
competitive cost advantage. As an example, competing speech compression
algorithms evaluated by the ITU use 20% to 50% more computing power for the
same compression and transmission rates, and more RAM and ROM for storage
and operation. Consequently, competing speech compression algorithms require
larger, more expensive DSPs and result in higher cost solutions.
The Company incorporates its TrueSpeech technology in its speech and
telephony processors and also licenses TrueSpeech to computer telephony and
personal computer companies for inclusion in their products. The Company's
TrueSpeech licensees include Atmel, Cirrus Logic, Creative Labs, Dialogic, IBM,
Integrated Circuit Systems, Intel, LSI Logic, Lucent, Microsoft, Multi-Tech,
Netspeak, Philips, Phylon, Prodigy, Siemens, Sierra Semiconductor, Silicon
Systems, Smith Micro, Texas Instruments ("TI"), Unisys, US Robotics, VDOnet and
VLSI Technology. In addition, the Company has ported its TrueSpeech algorithms
to certain DSP platforms offered by Analog Devices, Lucent, Motorola and TI,
four leading merchant vendors of programmable DSPs. To date, the Company's
royalties from TrueSpeech licenses have not been significant.
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SALES, MARKETING AND DISTRIBUTION
The Company markets and distributes its products through a direct sales and
marketing organization, consisting of 16 employees, as well as through a network
of distributors and independent manufacturers' representatives. A marketing and
sales team located in the Company's headquarters in Santa Clara, California
pursues business with the Company's customers in North America. In Japan, the
Company operates from a marketing and support office in Tokyo, and through Tomen
Electronics, a local distributor. In the rest of Asia, the Company operates
through RTI, a distributor in Hong Kong, and through manufacturers'
representatives in Hong Kong, Malaysia, Singapore, South Korea and Thailand. To
handle sales and distribution in Europe, the Company operates a marketing and
support office located in France and has manufacturers' representatives located
in Denmark, Germany, Spain and the United Kingdom. The Company's distributors
are not subject to minimum purchase requirements and can cease marketing the
Company's products at any time. The loss of one or more representatives or the
failure of such parties to renew agreements with the Company upon expiration
could have an adverse effect on the Company's business, financial condition and
results of operations.
In 1996, sales to Tomen Electronics and Samsung comprised 17% and 11% of
total revenues, respectively. In 1995, sales to Tomen Electronics comprised 25%
of total revenues. In 1994, sales to Tomen Electronics, RTI Industries and TI
accounted for 22%, 16% and 10% of total revenues.
Export sales accounted for 91%, 81% and 80% of total revenue in 1996, 1995
and 1994, respectively. Due to its export sales, the Company is subject to the
risks of conducting business internationally, including unexpected changes in
regulatory requirements, fluctuations in exchange rates that could increase the
price of the Company's products in foreign markets, delays resulting from
difficulty in obtaining export licenses for certain technology, tariffs, other
barriers and restrictions, and the burden of complying with a variety of foreign
laws. All of the Company's export sales are denominated in United States
dollars. See Note 4 of Notes to Consolidated Financial Statements appearing on
pages 41 and 42 of the Company's Annual Report to Stockholders for the year
ended December 31, 1996, for a summary of the Company's operations within
various geographic areas.
MANUFACTURING AND DESIGN METHODOLOGY
Since the Company's products are based on its proprietary DSP core designs,
which are not dependent upon a particular foundry's library cells, these
products can be manufactured at a number of independent foundries. All of the
Company's manufacturing occurs at independent foundries. The Company contracts
fabrication services for speech and telephony processors from Taiwan
Semiconductor Manufacturing Company ("TSMC"), Tower Semiconductor ("Tower") and
Samsung Semiconductor, Inc. ("Samsung"), to provide such service. Under
non-exclusive agreements, these independent foundries normally provide the
Company with finished, packaged and tested speech processors at variable prices
depending on the volume of units purchased. The Company customarily pays for
fully-tested products meeting predetermined specifications. To ensure the
integrity of quality assurance procedures, the Company develops detailed test
procedures and specifications for each product and requires each foundry to use
such procedures and specifications before shipping finished products.
TI produces and distributes an early generation of the Company's TAD speech
processors, based on a TI DSP platform, to certain European OEM customers, for
which TI pays a royalty to the Company. TI's production of these TAD speech
processors has declined from 27% of the Company's total production of TAD speech
processors in 1994 to 6% for 1995, and to 0.3% in 1996. The decline is due
primarily to these customers converting to newer generations of TAD speech
processors, including those sold directly by the Company.
The Company plans to continue to use independent foundries to manufacture
digital speech processors and other products for the consumer telephone and
computer telephony markets. To obtain an adequate supply of wafers, however, the
Company plans to consider various transactions, including the use
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of contracts that commit the Company to purchase specified quantities of wafers,
equity investments in or loans to independent foundries in exchange for
guaranteed production, and the formation of joint ventures to own foundries. Any
such investment or transaction would require substantial capital investments,
which may require the Company to seek additional equity or debt financing. The
Company's reliance on independent foundries involves a number of risks such as
the foundries achievement of acceptable manufacturing yields and allocation of
capacity to the Company.
In addition to the Company's speech processors, digital TADs include various
other components such as ARAMs, codecs and flash memories that are supplied by
third party manufacturers. Temporary fluctuations in the pricing and
availability of these components could have a material adverse effect on sales
of the Company's speech processors for digital TADs and other computer telephony
products, which could in turn have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION
The markets in which the Company operates are extremely competitive and the
Company expects that competition will increase. In each of the Company's
business activities it faces current and potential competition from competitors
that have significantly greater financial, technical, manufacturing, marketing,
sales and distribution resources and management expertise than the Company. The
Company's future prospects will be highly dependent upon the successful
development and introduction of new products that are responsive to market
needs. There can be no assurance that the Company will be able to successfully
develop or market any such products.
The principal competitive factors in the digital TAD speech processor market
include price, speech quality, compression ratio, value-added features such as
variable speed message playback and speakerphone, customer support and the
timing of product introductions by the Company and its competitors. The Company
believes that it is competitive with respect to each of these factors.
Currently, the key competitive challenge for digital TADs is the relative lower
cost of analog tape-based machines. The Company believes that the continuing
decline in prices of digital speech processors and silicon memory devices will
close the cost gap between the analog and digital solution. The Company's
principal competitors in the TAD speech processor market include AT&T, Lucent
Microelectronics, Macronix, National Semiconductor, TI, Toshiba and Zilog.
The principal competitive factors in the DSP core designs market for high
volume, low cost applications include such features as small size, low power,
flexible I/O blocks and associated development tools. The Company's DSP core
designs compete with companies such as Analog Devices, Clarkspur Designs, TCSI
and Tensleep, which license DSP platforms, and Analog Devices, AT&T, Motorola
and TI, which sell their own complete DSP solutions.
Several digital speech compression technologies exist and are currently
being developed that may be promoted by competitors as industry standards for
the computer telephony and personal computer markets. The Company's TrueSpeech
algorithms compete with ADPCM, and the speech compression technologies used in
GSM and VSELP, each of which is available in the public domain. There are many
versions of these algorithms that have been developed by different parties,
including AT&T (which has been actively involved in the development of GSM) and
Motorola (which developed the original VSELP). Although TrueSpeech has achieved
a degree of acceptance in the computer telephony and personal computer markets,
ADPCM and the speech compression technologies for GSM and VSELP are widely used
in the development and implementation of new products in the telephony industry.
In addition, other advanced speech compression algorithms have been introduced
by competitors which offer compression ratios comparable to the TrueSpeech
algorithms, including a competing algorithm sponsored by the University of
Sherbrooke that the ITU standards committee has adopted as the speech
compression standard for DSVD modems. Large companies, such as AT&T, Creative
Labs, Motorola and Rockwell,
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have speech processing technologies that can be applied to speech compression
for use in the markets for which the Company's products are targeted.
Price competition in the markets in which the Company currently competes and
proposes to compete is intense and may increase, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company has experienced and expects to continue to experience
increased competitive pricing pressures for its TAD speech processors. The
Company earned higher gross margins in the fourth quarter of 1996 due primarily
to lower product cost. There can be no assurance that the Company will be able
to further reduce product costs or be able to compete successfully as to price
or any other of the key competitive factors.
RESEARCH AND DEVELOPMENT
The Company believes that continued timely development and introduction of
new products are essential to maintaining its competitive position. The Company
currently conducts most of its product development effort in-house and at
December 31, 1996 had a staff of 51 research and development personnel, 43 of
which are located in Israel. The Company also employs independent contractors to
assist with certain product development and testing activities. During the years
1996, 1995 and 1994, the Company spent approximately $8.5 million, $8.4 million
and $4.4 million, respectively, on research and development activities.
RELATIONSHIPS WITH AFFILIATED COMPANIES
The Company has a $2.0 million equity investment in, and has entered into
technology arrangements with, AudioCodes Ltd. ("AudioCodes"), an Israeli
corporation primarily engaged in DSP-related contract engineering in connection
with speech and speech algorithm technologies. The Company owns 35% of the
capital stock of AudioCodes, a company formed in April 1993 by two former
employees of DSP Group. Pursuant to an agreement between the Company and
AudioCodes, the Company and AudioCodes have joint ownership of any speech
compression technology developed by AudioCodes. The Company has established this
relationship to complement its in-house product development efforts.
In July 1996, the Company invested $2.0 million of cash for approximately
40% of the equity interests in Aptel Ltd. ("Aptel"), an emerging company in its
product development stage located in Israel. 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.
Expenses related to the acquisition were $158,000. The total cost of the
acquisition was allocated to the estimated fair value of the assets acquired. As
a result, the Company incurred a one-time write-off of acquired in-process
technology of $1.5 million based on an independent estimate of value. As of
December 31, 1996, the Company's equity in Aptel had a book value of $0.4
million. The Company has a two-year option to purchase additional stock from
Aptel at the same valuation to enable the Company to increase its ownership
interest in Aptel to 51%, and an additional option to acquire the then remaining
outstanding stock of Aptel from its current shareholders payable at the seller's
option in either cash or stock of the Company.
LICENSES, PATENTS AND TRADEMARKS
The Company has been granted six United States patents and has five patents
pending in the United States. The Company actively pursues foreign patent
protection in other countries of interest to the Company. The policy of the
Company is to apply for patents or for other appropriate statutory protection
when it develops valuable new or improved technology. The status of patents
involves complex legal and factual questions and the breadth of claims allowed
is uncertain. Accordingly, there can be no assurance that any patent application
filed by the Company will result in patents being issued, or that its patents,
and any patents that may be issued in the future, will afford protection against
competitors with similar technology; nor can there be any assurance that patents
issued to the Company will not be infringed or designed around by others. In
addition, the laws of certain countries in which the Company's products are
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or may be developed, manufactured or sold, including Hong Kong, Japan and
Taiwan, may not protect the Company's products and intellectual property rights
to the same extent as the laws of the United States.
The Company attempts to protect its trade secrets and other proprietary
information through agreements with its customers, suppliers, employees and
consultants, and through other security measures. Although the Company intends
to protect its rights vigorously, there can be no assurance that these measures
will be successful.
The semiconductor and software industries are subject to frequent litigation
regarding patent and other intellectual property rights. While the Company has
not been involved in any material patent or other intellectual property rights
litigation to date, there can be no assurance that third parties will not assert
claims against the Company with respect to existing or future products or that
the Company will not need to assert claims against third parties to protect its
proprietary technology. For example, AT&T has 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 this technology from AT&T. In the event of litigation to
determine the validity of any third party claims or to protect its proprietary
technology, such litigation could result in significant expense to the Company
and could divert the efforts of the Company's technical and management
personnel, whether or not such litigation is determined in favor of the Company.
In the event of an adverse result in any such litigation, the Company could be
required to expend significant resources to develop non-infringing technology or
to obtain licenses to the technology that is the subject of the litigation.
There can be no assurance that the Company would be successful in such
development or that any such licenses would be available on commercially
reasonable terms.
The Company has been issued registered trademarks for the use of the
PineDSPCore, OakDSPCore and TrueSpeech trademarks.
While the Company's ability to compete may be affected by its ability to
protect its intellectual property, the Company believes that, because of the
rapid pace of technological change in the industry, its technical expertise and
ability to innovate on a timely basis will be more important in maintaining its
competitive position than protection of its intellectual property. The Company
believes that, because of the rapid pace of technological change in the consumer
telephone, computer telephony and personal computer industries, patents and
trade secret protection are important but must be supported by other factors
such as the expanding knowledge, ability and experience of the Company's
personnel, new product introductions and frequent product enhancements. Although
the Company continues to implement protective measures and intends to defend its
intellectual property rights, there can be no assurance that these measures will
be successful.
BACKLOG
At December 31, 1996, the Company's backlog was approximately $15.1 million
compared with approximately $14.7 million at December 31, 1995. The Company
includes in its backlog all accepted product purchase orders with respect to
which a delivery schedule has been specified for product shipment within one
year and fees specified in executed licensing contracts. The Company's business
in TAD speech processors is characterized by short-term order and shipment
schedules. Product orders in the Company's current backlog are subject to
changes in delivery schedules or to cancellation at the option of the purchaser
without significant penalty. Accordingly, although useful for scheduling
production, backlog as of any particular date may not be a reliable measure of
sales for any future period.
EMPLOYEES
As of December 31, 1996, the Company had 91 employees, including 51 in
research and development, 16 in marketing and sales, and 24 in corporate and
administration and manufacturing coordination. Competition for personnel in the
semiconductor, software and personal computer industries in general is
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intense. The Company believes that its future prospects will depend, in part, on
its ability to continue to attract and retain highly skilled technical,
marketing and management personnel, who are in great demand. In particular,
there is a limited supply of highly qualified engineers with digital signal
processing experience. None of the Company's employees is represented by a
collective bargaining agreement, nor has the Company ever experienced any work
stoppage. The Company believes that its employee relations are good.
FACTORS AFFECTING FUTURE OPERATING RESULTS
THIS FORM 10-K 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 totally 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, 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 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.
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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 December 31, 1996, 59 of the Company's 91 employees were
located in Israel, including 84% 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 that country 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.
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, 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
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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 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.
POSSIBLE VOLATILITY OF STOCK PRICE. 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.
ITEM 2. PROPERTIES.
The Company's operations in the United States are located in an
approximately 14,300 square foot leased facility in Santa Clara, California.
This facility houses the Company's marketing and support, North American sales,
operations, manufacturing coordination and administrative personnel. This
facility is
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leased through December 1999. The Company's subsidiary, DSP Semiconductors
(Israel), Ltd. leases a facility in Givat Shmuel, Israel with approximately
22,000 square feet under a lease ending in May 2000.
ITEM 3. 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.
On October 22, 1996, a lawsuit between the Company and Rockwell
International Corporation was settled and Rockwell purchased a license for three
versions of the Company's TrueSpeech speech technology. The litigation had been
pending since February 1995 in Superior Court of Santa Clara County, California.
The Company had alleged unfair competition, violations of state law and an
attempt by Rockwell to unfairly influence the DSVD Consortium, a group of
companies formed to select a speech compression technology that enables modems
to transmit computer data and digital voice simultaneously, in the selection of
speech compression technology. A preliminary injunction was issued by the Court
in March 1995 enjoining Rockwell from granting royalty-free licenses of its
speech compression product during the pendency of the action or until further
order of the Court. Rockwell had appealed from the issuance of the preliminary
injunction and such appeal had remained pending.
In February 1997, a lawsuit between the Company and Elk Industries, Inc.
("Elk") was settled. The litigation had been pending since April 1996 in the
United States District Court for the Southern District of Florida. Elk had
alleged patent infringement by the Company in connection with the Company's
making, selling and using an audio storage and distribution system allegedly
covered under a patent held by Elk.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The section labeled "Price Range of Common Stock" appearing on page 18 of
the Registrant's Annual Report to Stockholders for the year ended December 31,
1996 is incorporated herein by reference.
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ITEM 6. SELECTED FINANCIAL DATA.
The section labeled "Selected Consolidated Financial Data" appearing on page
17 of the Registrant's Annual Report to Stockholders for the year ended December
31, 1996 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The section labeled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing on pages 19 through 25 of the
Registrant's Annual Report to Stockholders for the year ended December 31, 1996
is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and related notes and independent
auditors report appearing on pages 26 through 47 of the Registrant's Annual
Report to Stockholders for the year ended December 31, 1996 are incorporated
herein by reference.
The section labeled "Quarterly Data" appearing on page 17 of the
Registrant's Annual Report to Stockholders for the years ended December 31, 1995
and 1996 is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The section labeled "Directors, Executive Officers and Key Personnel" of the
Registrant's definitive Proxy Statement to be filed shortly hereafter for the
annual meeting of stockholders to be held on May 20, 1997 is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The section labeled "Executive Compensation and Other Information" of the
Registrant's definitive Proxy Statement to be filed shortly hereafter for the
annual meeting of stockholders to be held on May 20, 1997 is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The section labeled "Security Ownership of Certain Beneficial Owners and
Management" of the Registrant's definitive Proxy Statement to be filed shortly
hereafter for the annual meeting of stockholders to be held on May 20, 1997 is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section labeled "Certain Relationships and Related Transactions" of the
Registrant's definitive Proxy Statement to be filed shortly hereafter for the
annual meeting of stockholders to be held on May 20, 1997 is incorporated herein
by reference.
20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents have been filed as a part of this Annual Report
on Form 10-K.
1. Index to Financial Statements.
The following financial statements and related notes and auditor's report
are included in the Registrant's Annual Report to Stockholders for the year
ended December 31, 1996 and are incorporated herein by reference pursuant to
Item 8.
<TABLE>
<CAPTION>
PAGE IN 1996
ANNUAL REPORT
DESCRIPTION TO STOCKHOLDERS
- ------------------------------------------------------------ ---------------
<S> <C>
Consolidated Balance Sheets as of December 31, 1996 and
1995...................................................... 28-29
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994.......................... 27
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1996, 1995 and 1994...... 30-31
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994.......................... 32-33
Notes to Consolidated Financial Statements.................. 34-47
Report of Ernst & Young LLP, Independent Auditors........... 26
</TABLE>
2. Index to Financial Statement Schedules.
The following financial statement schedules and related auditor's report are
filed as part of this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
PAGE IN THIS
ANNUAL REPORT
DESCRIPTION ON FORM 10-K
- ------------------------------------------------------------ ---------------
<S> <C>
Schedule II: Valuation and Qualifying Accounts.............. (included at
page 29)
Consent of Ernst & Young LLP, Independent Auditors.......... Exhibit 23
(included at
page 28)
</TABLE>
All other schedules are omitted because they are not applicable or not
required or because the required information is included in the Consolidated
Financial Statements or the Notes thereto.
3. List of Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation (filed as
Exhibit 3.1B to the Registrant's Registration Statement on
Form S-1, file no. 33-73482, as declared effective on
February 11, 1994 and incorporated herein by reference).
3.2 Bylaws (filed as Exhibit 3.2B to the Registrant's
Registration Statement on Form S-1, file no. 33-73482, as
declared effective on February 11, 1994 and incorporated
herein by reference).
3.3 Amended Bylaws (filed as Exhibit 3.2.c to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1995, and incorporated herein by reference).
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<C> <S>
10.1 1991 Employee and Consultant Stock Plan and forms of option
agreements thereunder (filed as Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1, file no.
33-73482, as declared effective on February 11, 1994 and
incorporated herein by reference).
10.2 Israeli Stock Option Plan and form of option agreement
thereunder (filed as Exhibit 10.3 to the Registrant's
Registration Statement on Form S-1, file no. 33-73482, as
declared effective on February 11, 1994 and incorporated
herein by reference).
10.3 1993 Directors Stock Option Plan (filed as Exhibit 10.4 to
the Registrant's Registration Statement on Form S-1, file
no. 33-73482, as declared effective on February 11, 1994
and incorporated herein by reference).
10.4 1993 Employee Stock Purchase Plan and form of subscription
agreement thereunder (filed as Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1, file no.
33-73482, as declared effective on February 11, 1994 and
incorporated herein by reference).
10.5 Registration Rights Agreement, dated August 30, 1993, by and
among the Registrant and certain shareholders of the
Registrant (filed as Exhibit 10.9 to the Registrant's
Registration Statement on Form S-1, file no. 33-73482, as
declared effective on February 11, 1994 and incorporated
herein by reference).
10.6 Technology Assignment and License Agreement, dated January
7, 1994, by and between the Registrant and DSP
Telecommunications, Ltd. (filed as Exhibit 10.24 to the
Registrant's Registration Statement on Form S-1, file no.
33-73482, as declared effective on February 11, 1994 and
incorporated herein by reference).
10.7 ACL Technology License Agreement, dated June 24, 1994, by
and between the Registrant and AudioCodes, Ltd. (filed as
Exhibit 10.12 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994, and incorporated
herein by reference).
10.8 Investment Agreement, dated June 16, 1994, by and between
the Registrant and AudioCodes Ltd. (see Exhibit 10.30 for
Appendix B to Investment Agreement) (filed as Exhibit 10.39
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994, and incorporated herein by
reference).
10.9 Form of Indemnification Agreement for directors and
executive officers (filed as Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1, file no.
33-73482, as declared effective on February 11, 1994, and
incorporated herein by reference).
10.10 Technology Retransfer Agreement, dated as of June 29, 1995,
by and among the Registrant, Nogatech, Inc. and Nogatech
Ltd. (filed as Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995,
and incorporated herein by reference).
10.11 Stock Purchase Agreement, dated as of June 30, 1995, by and
among the Registrant, Kenwood Corporation, Tomen
Electronics Corp. and Nogatech, Inc. (filed as Exhibit 10.2
to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995, and incorporated herein by
reference).
10.12 Promissory Note, dated August 11, 1995, made in favor of the
Registrant by Nogatech, Inc. (filed as Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, and incorporated herein by reference).
10.13 Davidi Gilo Severance Agreement, dated April 7, 1995 (filed
as Exhibit 10.4 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995, and incorpo-
rated herein by reference).
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<C> <S>
10.14 Amendment No. 1 to the Stock Option Agreement, effective
April 7, 1995, by and between the Registrant and Davidi
Gilo (filed as Exhibit 10.5 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995,
and incorporated herein by reference).
10.15 Promissory Note, dated July 3, 1995, made in favor of the
Registrant by Davidi Gilo (filed as Exhibit 10.6 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995, and incorporated herein by reference).
10.16 Employment Termination and Consulting Agreement and Mutual
Release, dated October 1, 1995, by and between Registrant
and F. Judson Mitchell (filed as Exhibit 10.34 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference).
10.17 Employment Agreement, dated November 1, 1995, by and between
Registrant and Igal Kohavi (filed as Exhibit 10.35 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference).
10.18 Severance and Consulting Agreement, dated as of May 6, 1996,
by and between the Registrant and Eli Porat (filed as
Exhibit 10.36 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1996, and incorporated
herein by reference).
10.19 Severance Agreement, dated June 8, 1996, by and between the
Registrant and Karin Pitcock (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996, and incorporated herein by reference).
10.20 Share Purchase and Shareholders Agreement, dated July 4,
1996, by and among Aptel Ltd., the shareholders named
therein, and DSP Semiconductors Ltd. (filed as Exhibit 10.2
to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, and incorporated herein by
reference).
10.21 Employment Agreement, dated April 22, 1996, by and between
the Registrant and Eli Ayalon (filed as Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996, and incorporated herein by reference).
10.22 Severance and Consulting Agreement, dated as of October 25,
1996, by and between the Registrant and John Goldsberry
(filed as Exhibit 10.1 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996, and
incorporated herein by reference).
10.23 Employment Severance and Consulting Agreement, dated as of
December 2, 1996, by and between the Registrant and Mike
Hoberg.
10.24 Assignment and Assumption Agreement, dated October 9, 1996,
by and between the Registrant and Dialogic Corporation,
relating to the Registrant's facility located at 3120 Scott
Boulevard in Santa Clara, California.
10.25 Sublease, dated October 18, 1996, as amended on December 4,
1996, by and between Dialogic Corporation and the
Registrant, relating to the Registrant's facility located
at 3120 Scott Boulevard in Santa Clara, California.
10.26 Employment Agreement, dated February 24, 1997, by and
between the Registrant and Avi Basher.
10.27 Employment Agreement, dated June 1, 1996, by and between the
Registrant and Moshe Shahaf.
10.28 Rescission Agreement, dated as of August 15, 1996, by and
between the Registrant and Igal Kohavi.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<C> <S>
10.29 Service Agreement, dated as of August 15, 1996, by and
between DSP Semiconductors, Ltd. and Niko Consulting and
Management (1995) Ltd.
11 Statements regarding computation of per share earnings
(included at page 26).
13 Portions of the Annual Report to Stockholders for the year
ended December 31, 1996.
21 Subsidiaries of the Registrant (included at page 27).
23 Consent of Ernst & Young LLP, Independent Auditors (included
at page 28).
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated October 22, 1996,
relating to the settlement of the Rockwell litigation.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DSP GROUP, INC.
By: /s/ ELIYAHU AYALON
-----------------------------------------
Eliyahu Ayalon
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------ ------------------------------ ----------------
/s/ IGAL KOHAVI
- ------------------------------ Chairman of the Board March 31, 1997
Igal Kohavi
President, Chief Executive
/s/ ELIYAHU AYALON Officer and Director
- ------------------------------ (Principal Executive March 31, 1997
Eliyahu Ayalon Officer)
Vice President of Finance,
Chief Financial Officer and
/s/ AVI BASHER Secretary (Principal
- ------------------------------ Financial Officer and March 31, 1997
Avi Basher Principal Accounting
Officer)
/s/ NATHANIEL DE ROTHSCHILD
- ------------------------------ Director March 31, 1997
Nathaniel de Rothschild
/s/ SAMUEL L. KAPLAN
- ------------------------------ Director March 31, 1997
Samuel L. Kaplan
/s/ MILLARD PHELPS
- ------------------------------ Director March 31, 1997
Millard Phelps
/s/ YAIR SHAMIR
- ------------------------------ Director March 31, 1997
Yair Shamir
25
<PAGE>
EXHIBIT 11
DSP GROUP, INC.
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net Income.................................................. $5,979 $7,211 $4,032
------ ------ ------
------ ------ ------
PRIMARY:
Computation of weighted average common and common equivalent
shares outstanding:
Weighted average common shares outstanding................ 9,510 9,352 8,111
Common equivalent shares attributable to Convertible
Preferred Stock......................................... -- -- 394
Common equivalent shares from stock options and
warrants................................................ 71 306 630
------ ------ ------
Shares used in per share computation........................ 9,581 9,658 9,135
------ ------ ------
------ ------ ------
Net income per share........................................ $ 0.62 $ 0.75 $ 0.44
------ ------ ------
------ ------ ------
FULLY DILUTED:
Computation of weighted average common and common equivalent
shares outstanding:
Weighted average common shares outstanding................ 9,510 9,352 8,111
Common equivalent shares attributable to Convertible
Preferred Stock......................................... -- -- 394
Common equivalent shares from stock options and
warrants................................................ 71 312 700
------ ------ ------
Shares used in per share computation........................ 9,581 9,664 9,205
------ ------ ------
------ ------ ------
Net income per share........................................ $ 0.62 $ 0.75 $ 0.44
------ ------ ------
------ ------ ------
</TABLE>
26
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
- ------------------------- -----------------------------
<S> <C>
1. Nihon DSP K.K. Japan
2. DSP Semiconductors
Ltd. Israel
3. DSP Group Europe SARL France
</TABLE>
27
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of DSP Group, Inc. of our report dated January 26, 1997 (except for
Stockholders' Litigation under Note 5, as to which the date is March 7, 1997),
included in the 1996 Annual Report to Stockholders of DSP Group, Inc.
Our audits also included the consolidated financial statement schedule of
DSP Group, Inc. listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the consolidated financial statement schedule referred
to above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 33-83456 and 33-87390) pertaining to the 1991 Employee
and Consultant Stock Plan, the 1991 DSP Group, Inc. Israeli Stock Option Plan,
the 1993 Director Stock Option Plan, and the 1993 Employee Stock Purchase Plan
of our report dated January 26, 1997 (except for Stockholders' Litigation under
Note 5, as to which the date is March 7, 1997), with respect to the consolidated
financial statements and schedules incorporated herein by reference or included
in this Annual Report (Form 10-K) for the year ended December 31, 1996.
/s/ Ernst & Young LLP
San Jose, California
March 27, 1997
28
<PAGE>
SCHEDULE II
DSP GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
DESCRIPTION PERIOD EXPENSES DEDUCTION END OF PERIOD
- ------------------------------------------------------------ ------------ ---------- --------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1994:
Allowance for doubtful accounts........................... $ 50 $100 $-- $150
Sales returns reserve..................................... 50 204 -- 254
Year ended December 31, 1995:
Allowance for doubtful accounts........................... 150 15 3 162
Sales returns reserve..................................... 254 296 269 281
Year ended December 31, 1996:
Allowance for doubtful accounts........................... 162 60 151 71
Sales returns reserve..................................... 281 245 149 377
</TABLE>
29
<PAGE>
EXHIBIT 10.23
-------------
EMPLOYMENT SEVERANCE AND CONSULTING AGREEMENT
This Employment Severance and Consulting Agreement is entered into
effective as of this 2nd day of December, 1996 (the "Execution Date") by and
between Mike Hoberg ("Hoberg") and DSP Group, Inc., a Delaware corporation
("DSPG").
RECITALS
A. Hoberg has served as DSPG's Controller and Chief Accounting
Officer.
B. Hoberg has resigned as DSPG's Controller and Chief Accounting
Officer as of October 31, 1996, on the terms set forth below.
AGREEMENT
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Eight (8) days after DSPG receives satisfactory evidence of the
fully executed original of this Agreement (assuming that Hoberg has executed
this Agreement and has not revoked acceptance within the seven (7) day period
as set forth in Section 2 (below), DSPG will cause to be delivered to Hoberg
$250.
2. Provided that Hoberg does not revoke this Agreement prior to
the eighth day after the date that this Agreement was executed by Hoberg, and
so long as Hoberg is not in breach of this Agreement or any Confidentiality
Agreement with DSPG, DSPG shall agree (a) to pay to Hoberg a salary of
$9,533.34 per month through January 31, 1997 (the "Salary"), subject to
applicable withholding taxes, deductions, etc., in exchange for Hoberg's
continued full-time employment with DSPG reporting directly to the Chief
Financial Officer of DSPG and to not compete, in any way directly or
indirectly, with DSPG through January 31, 1997, (b) thereafter if Hoberg has
remained a full time employee of DSPG through January 31, 1997, to pay to
Hoberg an additional amount equal to $9,533.34 per month through April 30,
1997 (the "Consulting Fee"), subject to applicable withholding taxes,
deductions, etc. in exchange for Hoberg's agreement to consult with the Chief
Financial Officer of DSPG and (c) provide a mutually acceptable letter of
reference. The Salary and Consulting Fee shall be paid bi-monthly, in
arrears. Hoberg's stock options in DSPG shall continue to vest up to and
through April 30, 1997. Thereafter, Hoberg shall have through June 14, 1997,
to exercise his stock options vested as of April 30, 1997 in accordance with
the terms of such stock options and thereafter all unexercised stock options
shall be null and void. Up to and through April 30, 1997, so long as Hoberg
has remained a full time employee of DSPG through January 31, 1997, DSPG
shall also continue to provide to Hoberg at its cost the employment benefits
which Hoberg is currently receiving to the extent it may lawfully and
contractually provide such benefits to him. Upon Hoberg's termination of
full time employment, Hoberg shall be paid immediately for all accrued
vacation and unreimbursed travel expenses.
1
<PAGE>
3. Upon execution of this Agreement, Hoberg shall submit to DSPG a
written report describing in detail all on-going contacts and activities made
or performed by Hoberg on DSPG's behalf in order to provide a smooth
transition. On, or before January 31, 1997, Hoberg shall return to DSPG all
DSPG property in Hoberg's possession and control, including, but not limited
to, all keys to DSPG offices and facilities, equipment, and all DSPG credit
cards owned by DSPG. Until the earlier to occur of (i) Hoberg's full time
employment with another business and (ii) December 31, 1997, DSPG shall (a)
agree to maintain and allow Hoberg access and use of the (408) 986-4445
voicemail so long as DSPG maintains its current voicemail system and (b)
allow Hoberg the reasonable use and access during DSPG's regular business
hours to DSPG's computer and Internet network, printers, fax machines and
copiers.
4. Upon execution of this Agreement, Hoberg acknowledges that he
has resigned as the Controller and Chief Accounting Officer of DSPG effective
as of October 31, 1996, and confirms that he has resigned as the Controller
and Chief Accounting Officer of DSPG, notwithstanding any right to revoke
other terms of this Agreement concerning his employment as set forth herein.
5. Subject to the terms and conditions of this Agreement, Hoberg
hereby agrees that he is entitled to no further severance or bonus from DSPG
and agrees that the compensation to be paid hereunder is greater than the
compensation and/or severance, if any, to which Hoberg was entitled.
Notwithstanding the foregoing, on, or before, January 31, 1997, DSPG shall
pay to Hoberg his annual bonus of $22,800, subject to applicable withholding
taxes, deductions, etc., as contemplated in Hoberg's offer of employment from
DSPG dated December 10, 1993. Such bonus shall be paid to Hoberg even if
Hoberg shall terminate employment with DSPG prior to January 31, 1997.
6. Hoberg represents that Hoberg has had the opportunity to
thoroughly discuss all aspects of this Agreement, including the general
release provisions, with his advisors; has carefully read and understood all
of the provisions of this Agreement; and, that Hoberg has voluntarily entered
into this Agreement.
7. Hoberg acknowledges that this Agreement was delivered to Hoberg
on the Execution Date, and DSPG agreed that Hoberg had until the close of
business on December 23, 1996 (21 days later), to consider the Agreement.
Hoberg elected to execute this Agreement on the Execution Date as a matter of
Hoberg's choice and acknowledges that he has been afforded sufficient time to
consider the Agreement and has obtained legal advice. DSPG acknowledges that
Hoberg may revoke this Agreement for a period of seven (7) days following the
date this Agreement is executed by Hoberg, but such revocation shall not
effect the termination of Hoberg's employment status as the Controller and
Chief Accounting Officer of DSPG.
8. As a material inducement to execute this Agreement, and except
for the provisions herein and except for claims, if any, that arise under
Hoberg's Indemnification Agreement with DSPG dated July 22, 1994 (the
"Indemnification Agreement") for
2
<PAGE>
Hoberg's actions as an officer or employee of DSPG through the date of
termination of his employment with DSPG, Hoberg hereby irrevocably and
unconditionally releases, acquits, and forever discharges DSPG (for purposes
of this Section and Sections 9, 10 and 11 (below), DSPG shall include DSPG's
predecessors, successors, assigns, agents, subsidiaries, former subsidiaries,
directors, former directors, officers, former officers, employees,
representatives, attorneys, affiliates (and agents, directors, officers,
employees, representatives, and attorneys of such affiliates and former
officers, directors, and agents thereof)), and all persons acting by,
through, under, or in concert with any of them (collectively "Releasees"), or
any of them, from any and all charges, complaints, claims, liabilities,
obligations, promises, agreements, controversies, damages, actions, causes of
actions, suits, rights, demands, costs, losses, debts, and expenses
(including attorneys' fees and costs actually incurred), of any nature
whatsoever, known or unknown ("Claim" or "Claims") which Hoberg now has,
owns, or holds, or claims to have, owns, or holds, or which Hoberg at any
time heretofore had, owned, or held, or claimed to have, owns, or holds,
against DSPG or any of DSPG's Releasees.
9. Except for the provisions of this Agreement and except for any
claims, causes of action or any other rights of DSPG against Hoberg,
including but not limited to any DSPG Claim (as defined below), for which
Hoberg is NOT entitled to indemnification under the Indemnification
Agreement, DSPG hereby irrevocably and unconditionally releases, acquits, and
forever discharges Hoberg from any and all charges, complaints, claims,
liabilities, obligations, promises, agreements, controversies, damages,
actions, causes of actions, suits, rights, demands, costs, losses, debts, and
expenses (including attorneys' fees and costs actually incurred), of any
nature whatsoever, known or unknown (a "DSPG Claim") which DSPG now has,
owns, or holds, or claims to have, owns, or holds, or which DSPG at any time
heretofore had, owned, or held, or claimed to have, owns, or holds, against
Hoberg.
10. Hoberg and DSPG each expressly waives and relinquishes all
rights and benefits afforded by Section 1542 of the Civil Code of the State
of California and does so understanding and acknowledging the significance
and consequence of such specific waiver of Section 1542. Section 1542 of the
Civil Code of the State of California states as follows:
"A general release does not extend to claims which
the creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him must
have materially affected his settlement with the debtor."
Thus, notwithstanding the provisions of Section 1542, and for the
purpose of implementing a full and complete release and discharge of the
Releasees, DSPG and Hoberg expressly acknowledge that this Agreement is
intended to include in its effect, without limitation except as expressly
set forth in Sections 8 and 9, all Claims which DSPG or Hoberg may have
against the other, up to and through the last date of execution of
this document, including but not limited to those under the Age
Discrimination and
3
<PAGE>
Employment Act, even though one or the other is not currently aware of or
suspects such claim to exist in his favor at the time of execution hereof,
and that this Agreement contemplates the extinguishment of any such Claim or
Claims.
11. Without limiting the generality of the foregoing, DSPG and
Hoberg, each hereby agree that in the event that any party hereto should
bring any action, suit, or other proceedings against any other party hereto,
concerning a breach of this Agreement, the claims released by this Agreement,
or contesting the validity of this Agreement, or attempting to rescind,
negate, modify or reform this Agreement or any of its terms or provisions, or
to remedy, prevent or obtain relief from a breach of this Agreement, the
prevailing party to such an action, suit or proceeding, shall be entitled to
the attorneys' fees reasonably incurred in each and every such action, suit,
or other proceeding, including any and all appeals or petitions therefrom.
12. Hoberg represents and acknowledges that in executing this
Agreement he has not relied upon any representation or statement made by any
of the Releasees or by any of the Releasees' agents, representatives, or
attorneys with regard to the subject matter, basis, or effect of this
Agreement, or otherwise.
13. This Agreement shall be binding upon the parties hereto and
their heirs, administrators, representatives, executors, successors and
assigns (collectively, the "Interested Parties"), and shall inure to the
benefit of DSPG and Hoberg, their respective Interested Parties and each of
them, and to their heirs, administrators, representatives, executors,
successors, and assigns.
14. This Agreement is made and entered into in the State of
California, and shall in all respects be interpreted, enforced, and governed
under the laws of said State.
15. This Agreement constitutes the entire agreement and
understanding between the parties with respect to the subject matter herein,
and supersedes and replaces any prior agreements and understandings, whether
oral or written between them with respect to such matters. The provisions of
this Agreement may be waived, altered, amended or repealed in whole or in
part only upon the written consent of both parties to this Agreement.
DSP GROUP, INC.
By /s/ Eli Ayalon /s/ Michael Hoberg
___________________________________ ______________________________
Eli Ayalon, Mike Hoberg
Chief Executive Officer
4
<PAGE>
EXHIBIT 10.24
-------------
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT, dated the 9th day of October,
1996,
BETWEEN DSP GROUP, INC., a Delaware corporation having a place of business at
3120 Scott Boulevard, Santa Clara, California 95054 ("ASSIGNOR");
AND DIALOGIC CORPORATION, a New Jersey corporation having a place of
business at 1515 Route 10, Parsippany, New Jersey 07054 ("ASSIGNEE");
RECITALS
A. MASTER SUBLEASE. Assignor is the sublessee under a written sublease
("MASTER SUBLEASE"), wherein Amdahl Corporation ("MASTER TENANT") leased to
Assignor the real property located in the City of Santa Clara, County of Santa
Clara, State of California, described as approximately 73,075 square feet of
office, research, and development space with an address of 3120 Scott Boulevard
("PREMISES").
B. MASTER LEASE. Master Tenant is the lessee under a written lease dated
November 21, 1983, between Carl E. Berg and Mary Ann Berg, Trustees of the Berg
Living Trust UTA, dated May 1, 1981, as to an undivided 81.01% interest, Clyde
Berg and Nancy Berg, Trustees of the Clyde Berg Living Trust UTA, dated
December 17, 1981, as to an undivided 11.83% interest, and Clyde Berg, Trustee
of Clyde Berg's Child Trust UTA, dated June 2, 1978, as to an undivided 7.16%
interest (collectively, "MASTER LANDLORD"), as amended by an Amendment to Lease
dated May 17, 1989, wherein Master Landlord leased to Master Tenant the Premises
(the lease and amendment are herein collectively referred to as the "MASTER
LEASE").
C. SUBLEASES. Assignor is the sublessor under written subleases with
respectively, Netro Corporation dated July _, 1995 ("NETRO SUBLEASE"), CompCore
Multimedia, Inc. dated August 4, 1995 ("COMPCORE SUBLEASE") and B&W Project,
Inc. dated March 1, 1996 ("B&W SUBLEASE;" collectively, the "SUBLEASES").
D. TRANSACTIONS. Assignee wishes to take an assignment of Assignor's
interests under the Master Sublease and the Subleases, and Assignor desires to
assign to Assignee its interests under the Master Sublease and the Subleases.
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TERMS
NOW, THEREFORE, for and in consideration of the foregoing premises and the
mutual covenants contained herein, the parties agree as follows:
1. ASSIGNMENT AND ASSUMPTION; EFFECTIVE DATE. Assignor hereby assigns
all of its right, title and interest as sublessee under the Master Sublease and
its right, title and its interest as sublessor under the Subleases to Assignee
as of January 1, 1997 ("EFFECTIVE DATE"). This Assignment includes all of
Assignor's right, title and interest in and to the security deposit thereunder,
the improvements at the Premises and any warranties relating to the Premises.
Assignee hereby agrees to assume all obligations of the sublessee under the
Master Sublease and of the sublessor under the Subleases which arise on and
after the Effective Date. The parties shall adjust for any rent and other
payments due to Master Tenant under the Master Sublease attributable to periods
prior to and following the Effective Date. The obligations of the Assignee
under this agreement are subject to the continued accuracy of the Assignor's
representations and warranties set forth in section 4(a) hereof and the
satisfaction of the conditions to this Assignment set forth in sections 4(b) and
(c) hereof ("CONDITIONS"). If the Condition relating to the obtaining of
consents has not been satisfied or waived on or before October 31. 1996, either
party may terminate this agreement by giving notice to the other party,
whereupon this agreement shall be NULL and VOID AB INITIO; if any other
Condition has not been satisfied or waived by the Assignee on or before
October 31, 1996, without limiting its right to the remedies of specific
performance or damages for any default or breach of warranty or
misrepresentation by Assignor under this agreement, Assignee may terminate this
agreement by giving notice to the Assignor, prior to the Effective Date
whereupon this agreement shall be NULL and VOID AB INITIO.
2. AGREEMENT; PAYMENTS.
(a) MONTHLY INSTALLMENTS. Assignee agrees to pay to Assignor
and to Master Tenant the amounts set forth in Schedule 2(a). Each installment
due shall be payable on the first day of each month starting on January 1, 1997
at the following address:
If to DSP Group, Inc. (:"Assignor"): If to Amdahl Corporation ("Master
To be advised Tenant"):
1250 East Arques Avenue
P.O. Box 3470
Sunnyvale, CA 94088-3470
(i) Such payments to Master Tenant shall be treated in the same
manner, including (such term when used in this agreement shall mean
"including without limitation") notice, grace periods, default and
remedy provisions, as if they were all monthly "Base Rent" under the
Master Sublease.
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(ii) If Assignee shall fail to pay any installment to Assignor on
its due date and the failure continues for 10 days after Assignor
gives Assignee written notice thereof, then Assignor shall have the
right to collect a one time late charge equal to 4% of the amount not
paid. If the failure continues for 10 days after such notice, then
Assignor may elect that all installments due to it under Schedule 2(a)
be immediately payable.
(iii) Notwithstanding the foregoing, if the Assignee is not
in default and has not voluntarily terminated the Master Sublease,
under the Master Sublease beyond applicable notice and cure periods
and (A) if Master Tenant rejects the Master Lease or (B) if either
Master Landlord or Master Tenant otherwise fails to provide Assignee
with quiet enjoyment of the Premises, no further payments shall be
required under Schedule 2(a) hereto.
(b) NEW SUBLEASE: PURCHASE OF FURNITURE, FIXTURES AND EQUIPMENT
("FF&E"). Assignee may enter into a sublease of space at the Premises to
Assignor and Assignor may convey to Assignee FF&E at the Premises, but any such
transactions shall be under separate, independent contracts to be negotiated.
(c) ACCESS TO PREMISES. Assignor shall provide access to the
Premises to Assignee, its employees, agents, contractors and suppliers, on and
after December 1, 1996 for the purpose of installing fixtures, cabling, testing
phone lines and performing assorted other work as described in Exhibit 2(c)
hereto in order to prepare for Assignee's occupancy. Such access will be on
reasonable advance notice to Assignor and Assignee's activities at the Premises
shall be conducted in such a manner as will not unreasonably interfere with
Assignor's use and occupancy of the Premises.
(d) SECURITY DEPOSIT. LETTER OF CREDIT. On or prior to the
Effective Date, Assignee shall reimburse Assignor for the security deposit under
the Master Sublease in the amount of $32,883.75 and shall substitute Assignee's
letter of credit in the amount of $290,000.00 in the form of Exhibit 2(d) hereto
for Assignor's letter of credit held by Master Tenant pursuant to section 6 of
the Master Sublease.
(e) NO TRANSFER OF MAINTENANCE CONTRACTS. Assignor shall be
responsible for the cancellation and/or termination of all service, maintenance
and similar agreements for the providing of goods or services with respect to
the Premises as of the Effective Date unless instructed to do so in writing by
Assignee. Assignee shall make independent arrangements for the providing of
maintenance, services and its other operating requirements as of such date.
Assignee will not assume or have any obligation with respect to Assignor's long
term volume arrangement with MCI.
3. CONTINUING LIABILITY OF ASSIGNOR; ASSUMPTION OF LIABILITIES BY
ASSIGNEE; CROSS-INDEMNITY. The Assignor shall remain liable for and shall
discharge on a current basis all obligations of the "Sublessee" (as defined in
the Master Sublease) under the
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Master Sublease arising on or prior to the Effective Date, while the Assignee
shall become responsible for and shall discharge on a current basis all
obligations of the "Sublessee" under the Master Sublease arising after the
Effective Date. The parties will adjust and apportion any such charges as of
the Effective Date. Assignor hereby agrees to save, defend with counsel
reasonably satisfactory to Assignee, indemnify and hold harmless Assignee from
and against any and all claims, losses, liabilities, damages and expenses
(including reasonable attorney's fees) which may arise from the breach of any
representation, warranty or agreement of Assignor hereunder or any act or
omission or liability of Assignor or any subtenant of Assignor arising prior to
or on the Effective Date. Assignee hereby agrees to save, defend with counsel
reasonably satisfactory to Assignor, indemnify and hold harmless Assignor from
and against any and all claims, losses, liabilities, damages and expenses
(including reasonable attorneys fees) which may arise from any act or omission
or liability of Assignee or any subtenant of Assignee arising after the
Effective Date. It is the intent of the parties that Assignor shall retain the
Sublessee's responsibility and liability under the Master Sublease or under law
for any environmental conditions of the Premises existing as of the Effective
Date and that Assignee shall have the Subtenant's responsibility and liability
under the Master Sublease or under law for any environmental conditions of the
Premises arising thereafter. If any action or proceeding is brought against
either indemnified party by reason of any such claim, upon written notice from
the indemnified party, the other party shall at its expense resist or defend
such action or proceeding by counsel approved by the indemnified party in
writing, which approval the indemnified party shall not unreasonably withhold.
4. STATUS OF MASTER SUBLEASE AND SUBLEASES; CONSENT OF MASTER LANDLORD,
MASTER TENANT; OTHER CONDITIONS TO CLOSING.
(a) REPRESENTATIONS, WARRANTIES AND COVENANTS OF ASSIGNOR. Assignor
hereby represents, warrants and covenants to Assignee as follows:
(i) The Master Lease. To the best knowledge of the Assignor,
the "Master Lease is in full force and effect, there is no default (or
any claim of default) by Master Landlord or Master Tenant under the
Master Lease, and no event has occurred which, with the giving of
notice or the lapse of time would become a default thereunder, and no
such notice has been given by either party to the other during the
term of the Master Lease. True and complete copies of the Master
Lease, including all amendments, are attached hereto as
Exhibit 4(a)(i).
(ii) The Master Sublease. The Master Sublease is in full force
and effect. There is no default (or any claim of default) by Master
Tenant or Assignor under the Master Sublease, and no event has
occurred which, with the giving of notice or the lapse of time would
become a default thereunder, and no such notice has been given by
either party to the other, under section 3(a) thereof or otherwise,
during the term of the Master Sublease. Assignor is not aware of any
basis for the giving of any such
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notice. True and complete copies of the Master Sublease, including
all amendments, are attached hereto as Exhibit 4(a)(ii). Base Rent
under the Master Sublease has been paid through October 1996 and any
other amounts due thereunder have been paid in full through September
30, 1996 and both Base Rent and such other amounts due under the
Master Sublease will be paid in full through the Effective Date. The
Master Tenant is holding a security deposit in the amount of
$32,883.75, together with the letter of credit contemplated by the
Master Sublease in the current amount of $290,000. There have not
been any claims asserted against the security deposit or letter of
credit. The expiration date of the Master Sublease is April 30, 2004.
(iii) The Subleases. Each Sublease is in full force and
effect. There is no default (or any claim of default) by any
subtenant or by Assignor under any Sublease, and no event has occurred
which, with the giving of notice or the lapse of time would become a
default thereunder, and no such notice has been given by either party
to the other. Assignor is not aware of any basis for the giving of
any such notice. True and complete copies of each Sublease, including
all amendments, are attached hereto as Exhibit 4(a)(iii). Rent under
each Sublease has been paid in full through October 1996 (September in
the case of Netro) and any other amounts due thereunder have been paid
in full through September 30, 1996 and both rent and such other
amounts due under the Subleases will be paid in full through the
Effective Date. The Assignor is holding and on the Effective Date
will transfer to Assignee security deposits as set forth on
Schedule 4(a)(iii) hereto. There have not been any claims asserted
against the security deposits. The expiration date of each Sublease
is set forth on such Schedule.
(iv) The Premises. On the date hereof and as of the Effective
Date the Premises, including without limitation all building systems,
are and will be in good working order, are, to the knowledge of
Assignor, in compliance with all applicable laws, including the
Americans with Disabilities Act of 1990 and all environmental laws,
and are in compliance with the requirements contained in the Master
Lease, the Master Sublease and the Subleases. Assignor has received
no formal or informal notice of any building or other violation with
respect to the Premises, and is aware of no threat thereof or any
basis therefore. Except for work in the space leased to Subtenants
and work done after the Effective Date (or by Assignee after receiving
access to the Premises, at the end of the term of the Master Sublease
their is no substantial restoration required of any tenant work or
improvements presently located at the Premises.
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(v) No Modification, Default. Assignor shall remain current and
be fully in compliance with its obligations under the Master Sublease
and the Subleases through the Effective Date . Neither the Master
Sublease nor any Sublease will be amended or modified.
(b) CONSENTS: ESTOPPEL CERTIFICATES; OTHER DELIVERIES. Assignee's
obligations under this agreement are contingent upon (i) Assignor obtaining the
consents and estoppel certificates of the Master Landlord and the Master Tenant,
and the estoppel certificates of the subtenants under the Subleases (the forms
of consents and estoppel certificates are attached hereto as Exhibit 4(b)), and
(ii) Assignee's satisfaction, in its sole discretion, with its physical
inspection of the Premises by a qualified engineer, its review of the income and
expense records relating to the operation of the Premises and its title search
confirming that the Master Lease and the Master Sublease are the senior, duly
perfected encumbrances on the Premises. Assignor shall use its best and
diligent efforts to request and obtain such consents and estoppels and Assignee
shall provide its reasonable cooperation. On or prior to October 31, 1996, each
party shall deliver to the other certified copies of corporate resolutions
authorizing this agreement and ratifying all actions taken or to be taken by
such party hereunder, or a certificate of an executive officer of the
corporation to such effect, together with such other assurances of corporate
power and authority and other matters as may be reasonably requested by either
party.
(c) EFFECTIVE DATE: CLOSING DELIVERIES; BRING-DOWN. As of the
Effective Date, Assignor shall provide to Assignee a recertification of
Assignor's representations, warranties and covenants set forth in this
section 4, a recordable memorandum of this Assignment of the Master Lease and
shall deliver the Premises in good condition (and in any event substantially the
same condition as on the date hereof), broom clean, and in full compliance with
the Master Lease, the Master Sublease and the Subleases, and shall deliver
originally executed copies of Master Sublease and the Subleases, along with
original consents, estoppels and certificates and any other items contemplated
by this agreement.
5. NOTICES. All notices from one party to the other shall be sent to the
addresses first set forth above. Either party may designate in writing to the
other party a substitute address for notices, and thereafter notices shall be
directed to the substitute address. Every notice shall be deemed to have been
given or served at the time that the same shall be hand-delivered, deposited
with a nation-wide overnight courier service or deposited in the United States
mails, by registered or certified mail, postage prepaid, return receipt
requested, in the manner aforesaid.
6. BROKER. Assignee and Assignor respectively represent and warrant to
each other that no brokers other than Grubb & Ellis, Brown, Stevens, Elmore &
Sparre and CPS Brokerage (collectively, the "BROKERS") has been involved in
connection with the consummation of this Assignment and Assumption. Each party
agrees to indemnify the other from and against any loss, damage or expenses
(including litigation costs and reasonable attorneys' fees) by reason of any
claim for compensation or commission by
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any person other than the Brokers based upon an allegation of relations or
negotiations between the claimant and the indemnitor inconsistent with the
representations herein made. This representation, warranty and covenant shall
survive the Closing. Assignor shall be responsible for the compensation of the
Brokers.
7. FURTHER ASSURANCES; SURVIVAL. Each party hereto agrees to execute
such further documents or take such other actions as the other may reasonably
request to effectuate the purposes of this agreement, provided that no such
document or action shall be requested if it increases the other party's actual
or potential liabilities or obligations hereunder or decreases the requesting
party's obligations or liabilities hereunder. Any errors, omissions or
estimations in computing adjustments shall be corrected as soon as practicable
thereafter. The representations, warranties and obligations of the parties
shall survive the Effective Date for a period of four (4) years.
8. COUNTERPARTS. This agreement may be executed in any number of
counterparts (and by facsimile signature pages), all of which taken together
shall constitute the original hereof. When counterparts have been executed by
and delivered to all parties hereto, or their counsel, they shall have the same
effect and if the signatures were all on the same copy hereof.
9. ARBITRATION. Any dispute between the parties arising out of this
Agreement shall be submitted to final and binding arbitration in the City of
Santa Clara, County of Santa Clara, State of California, under the Commercial
Arbitration Rules of the American Arbitration Association then in effect, upon
written notification and demand of either party therefor. In the event either
party demands such arbitration, the American Arbitration Association shall be
requested to submit a list of prospective arbitrators consisting of persons
experienced in matters involving business disputes. The provisions of
California Code of Civil Procedure Section 1283.05, and the laws of the State of
California, are incorporated herein and shall be applicable to the arbitration.
In making the award, the arbitrator shall award recovery of costs and expenses
of the arbitration and reasonable attorneys' fees to the prevailing party. Any
award may be entered as a judgment in any court of competent jurisdiction.
Should judicial proceedings be commenced to enforce or carry out this provision
or any arbitration award, the prevailing party in such proceedings shall be
entitled to reasonable attorneys' fees and costs, in addition to other relief.
Either party shall have the right, prior to receiving an arbitration award, to
obtain preliminary relief from a court of competent jurisdiction to: (i) avoid
injury or prejudice to that party; (ii) to protect the rights of any party;
(iii) to maintain the status quo as it existed immediately prior to the dispute;
or (iv) to obtain possession of property in order to avoid a material risk of
damage to, or loss of, that property.
10. APPLICABLE LAW. This agreement shall be governed by and construed in
accordance with the laws of the State of California applicable to contracts
between California residents entered into and to be performed entirely within
the State of California.
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IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment and
Assumption Agreement as of the date first written above.
WITNESS OR ATTEST: DSP GROUP, INC., Assignor
/s/ By: /s/ John P. Goldsberry
- --------------------------------- ----------------------------------
Secretary Name: John P. Goldsberry III
Title: Chief Financial Officer
WITNESS OR ATTEST: DIALOGIC CORPORATION, Assignor
/s/ By: /s/ Edward B. Jordan
- --------------------------------- ----------------------------------
Secretary Name: Edward B. Jordan
Title: Chief Financial Officer
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EXHIBIT 10.25
-------------
SUBLEASE
1. PARTIES. This Sublease, dated October 18, 1996, is made between
Dialogic Corporation, a New Jersey corporation ("Sublessor"), and DSP Group,
Inc., a Delaware corporation ("Sublessee").
2. MASTER SUBLEASE. Sublessor is the sublessee under a written sublease
("Master Sublease"), wherein Amdahl Corporation ("Master Tenant") leased to
Sublessor the real property located in the City of Santa Clara, County of Santa
Clara, State of California, described as approximately 73,075 square feet of
office, research, and development space with an address of 3120 Scott Boulevard
("Master Premises"). Effective January 1, 1997 Sublessor is the successor by
assignment of the Sublessee's interest in the Master Sublease.
3. MASTER LEASE. Master Tenant is the lessee under a written lease dated
November 21, 1983, between Carl E. Berg and Mary Ann Berg, Trustees of the Berg
Living Trust UTA, dated May 1, 1981, as to an undivided 81.01% interest, Clyde
Berg and Nancy Berg, Trustees of the Clyde Berg Living Trust UTA, dated
December 17, 1981, as to an undivided 11.83% interest, and Clyde Berg, Trustee
of Clyde Berg's Child Trust UTA, dated June 2, 1978, as to an undivided 7.16%
interest (collectively, "Master Landlord"), as amended by an Amendment to Lease
dated May 17, 1989, wherein Master Landlord leased to Master Tenant the Master
Premises. Said lease and amendments are herein collectively referred to as the
"Master Lease".
4. PREMISES. Sublessor hereby subleases to Sublessee on the terms and
conditions set forth in this Sublease the following portion of the Master
Premises ("Premises"): 14,334 square feet, including the optional area and
shipping/receiving, on the first floor as set forth on Exhibit A attached
hereto. The square footage area figures presented in this agreement will be
verified, by a qualified firm and at the Sublessor's expense, according to the
BOMA Standard Method of Floor Measurement (ANSI Z65.1-1980 Reaffirmed, 1989) for
rentable area. The
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measured square footage amounts will be incorporated into this lease by an
attachment and the monthly rent expense adjusted. If Sublessee desires to
vacate the 813 square feet of optional space it shall give Sublessor at least
ten (10) days prior written notice. Sublessee shall also have the right to use
the common areas (restrooms, elevator to garage, hallways thereto) of the Master
Premises, but not those areas used by Sublessor or its personnel or invitees,
and to use the docking area for shipping and receiving. Additionally,
Sublessee's employees shall be permitted to use the exercise facilities at the
Master Premises, if such facilities are present, at their own cost provided any
employee desiring to use such facilities has been evaluated and trained before
using the facilities in the same manner as Sublessor's employees and signed a
release form in favor of Sublessor. Sublessor shall be able to increase the
amount of rent retroactively to any period of time that it can show that
Sublessee used, for any purpose including storage of materials, more space than
it notified Sublessor that it was using ("Unauthorized Usage"). Rent for the
Unauthorized Usage shall be twice the rental per foot set forth herein.
5. PARKING. Sublessee shall be entitled to that number of parking spaces
according to the following formula rounded down to the nearest whole number:
Square footage leased by Sublessee x 278 = Number of parking spaces
----------------------------------
72,000
For example, in the first month of this Sublease, Sublessee shall be entitled to
a total of 55 parking spaces calculated as follows:
14,334 x 278 = 55
------
72,000
Sublessee shall be entitled to have one underground parking space per thousand
square feet of their rented premises, rounded down to the nearest whole number.
Initially this shall be equal to fourteen (14) underground parking spaces.
6. WARRANTY BY SUBLESSOR. Sublessor warrants and represents to Sublessee
that the Master Sublease has not been amended or modified except as expressly
set forth herein, that
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Sublessor is not now, and as of the commencement of the term hereof will not be,
in default or breach of any of the provisions of the Master Sublease, and that
Sublessor has no knowledge of any claim by the Master Tenant that Sublessor is
in default or breach of any of the provisions of the Master Sublease. Further,
Sublessor represents that it has no knowledge of any claim by Master Landlord
that Master Tenant is in default or breach of any provisions of the Master
Lease.
7. TERM. The term of this Sublease shall commence on January 1, 1997
("Commencement Date") and end of December 31, 1999 ("Termination Date"), unless
otherwise sooner terminated in accordance with the provisions of this Sublease.
In the event the term commences on a date other than the Commencement Date,
Sublessor and Sublessee shall execute a memorandum setting forth the actual date
of commencement of the term. Possession of the Premises shall be delivered to
Sublessee on the commencement of the term. If for any reason Sublessor does not
deliver possession to Sublessee on the commencement of the term due solely to
Sublessor's fault, Sublessor shall not be subject to any liability for such
failure, the Termination Date shall not be extended by the delay, and the
validity of this Sublease shall not be impaired, but rent shall abate until
delivery of possession. Notwithstanding the foregoing, if Sublessor has not
delivered Possession to Sublessee within thirty (30) days after the Commencement
Date due solely to Sublessor's fault, then at any time thereafter and before
delivery of possession, Sublessee may give written notice to Sublessor of
Sublessee's intention to cancel this Sublease. Said notice shall set forth an
effective date for such cancellation which shall be at least ten (10) days after
delivery of said notice to Sublessor. If Sublessor delivers possession to
Sublessee on or before such effective date, this Sublease shall remain in full
force and effect. If Sublessor fails to deliver possession to Sublessee on or
before such effective date, this Sublease shall be canceled, in which case all
consideration previously paid by Sublessee to Sublessor on account of this
Sublease shall be returned to Sublessee, this Sublease shall thereafter be of no
further force and effect, and Sublessor shall have no further liability to
Sublessee on account of such delay or cancellation. If Sublessor permits
Sublessee to take
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possession prior to the commencement of the term, such early possession shall
not advance the Termination Date and shall be subject to the provisions of this
Sublease, including without limitation the payment of rent.
Sublessor agrees to let Sublessee utilize its presently occupied space on the
third floor of the Premises for a period of forty days after allowing Sublessee
occupancy of the leased Premises on the first floor following Netro's vacating
of said space. The payment made by Sublessee in accordance with section 9.1 of
this agreement shall represent full consideration for the use of this third
floor space for the forty day period. In the event that Sublessee is not able
to completely vacate the third floor Premises within forty days after occupancy
of the first floor Premises, Sublessee agrees to pay to the Sublessor of record,
a penalty fee equal to $750 per day in addition to its rent obligation under the
Sublease. This penalty fee shall be increased to $1,500 per day for each day
Sublessee has not vacated the third floor Premises after sixty days after
initial occupancy of the first floor Premises.
8. OPTIONS TO EXTEND TERM. Sublessee has not been granted any option to
extend the term of this sublease.
9. RENT.
9.1 RENT. Sublessee shall pay to Sublessor as rent hereunder,
without deduction, setoff, notice, or demand, at 3120 Scott Boulevard, Santa
Clara, California, 95054 or at such other place as Sublessor shall designate
from time to time by notice to Sublessee, the sum of $1.50 per square foot of
leased space per month, in advance on the first day of each month of the term.
This monthly rental amount will increase to $1.52 per square foot for the
calendar year commencing January 1, 1998 and to $1.55 per square foot for the
calendar year commencing January 1, 1999. This monthly rental amount is
inclusive of the following Premises and common area expenses: property taxes,
lighting replacement, cleaning and maintenance of common area restrooms,
landscape maintenance, trash disposal, exterior building security
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services, water services, gas services, sewer services, HVAC and air
conditioning services, and plumbing services in the common areas. All other
services and expenses shall be the responsibility of Sublessee, including,
without limitation, janitorial and electrical services for the leased Premises.
Sublessee shall prepay to Sublessor upon execution of this Sublease the sum of
Twenty-one Thousand, Five Hundred One and No/100 Dollars ($21,501.00) as rent
(or partial rent if the actual rent is higher) for the last month of the initial
term of this Sublease. If the term begins or ends on a day other than the first
or last day of a month, the rent for the partial months shall be prorated on a
per diem basis.
9.2 EARLY TERMINATION. If Sublessee terminates this Sublease at any
time prior to the initial term, Sublessee shall pay an early termination fee in
the amount of three (3) months average rent based on the period of time
Sublessee leased the Premises.
9.3 USE OF RECEPTIONIST. Sublessee shall be entitled to utilize the
services of Sublessor's receptionist on a nonexclusive basis for a period of
forty (40) hours per week (Monday through Friday from 8 AM to 5 PM, Holidays and
days off taken by Sublessor excepted) in exchange for payment to Sublessor in
addition to all costs, rents, or payments set forth in this Sublease of an
amount equal to Eighty Dollars ($80) per week.
9.4 USE OF SHIPPING/RECEIVING. Sublessor shall be entitled to
utilize the services of Sublessee's shipping clerk on a nonexclusive basis for a
period of forty (40) hours per week (Monday through Friday from 8 am to 5 pm,
Holidays and days taken off by Sublessee excepted) in exchange for payment to
Sublessee of an amount equal to Twenty ($20.00) per day. This amount will be
reviewed no later than March 31, 1997 and renegotiated in good faith by the
parties. The shipping clerk shall not act as agent of Sublessor, but merely log
in receipt of material and make available outgoing material to shipper for
pick-up.
10. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon
execution of this Sublease the sum of Twenty-one Thousand, Five Hundred One and
No/100 Dollars ($21,501.00)
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as security for Sublessee's faithful performance of Sublessee's obligation
hereunder ("Security Deposit"). If Sublessee fails to pay rent or other charges
(including any payments for Improvements) when due under this Sublease, or fails
to perform any of its other obligations hereunder, Sublessor may use or apply
all or any portion of the Security Deposit for the payment of an rent or other
amount then due hereunder and unpaid, for the payment of any other sum for which
Sublessor may become obligated by reason of Sublessee's default or breach, or
for any loss or damage sustained by Sublessor as a result of Sublessee's default
or breach. If Sublessor so uses any portion of the Security Deposit, Sublessee
shall within ten (10) days after written demand by Sublessor, restore the
Security Deposit to the full amount originally deposited, and Sublessee's
failure to do so shall constitute a default under this Sublease. Sublessor
shall not be required to keep the Security Deposit separate from its general
accounts, and shall have no obligation or liability for payment of interest on
the Security Deposit. In the event Sublessor assigns its interest in this
Sublease, Sublessor shall deliver to its assignee so much of the Security
Deposit as is then held by Sublessor. Within ten (10) days after the term has
expired, or Sublessee has vacated the Premises, whichever shall last occur, and
provided Sublessee is not then in default of any of its obligations hereunder,
the Security Deposit, or so much thereof as had not theretofore been applied by
Sublessor, shall be returned to Sublessee or to the last assignee, if any, of
Sublessee's interest hereunder.
11. USE OF PREMISES. The Premises shall be used and occupied only for
office use, research and development, assembly and testing, marketing and
distribution of telecommunications products and shall not be used in violation
of the Master Lease or local, federal, or state law.
12. IMPROVEMENTS. Sublessee shall not make any improvements or
alterations (collectively, "Improvements") to the leased Premises without the
prior written consent of Sublessor (including Sublessor's consent and approval
of all contractors used on the Improvements) during the terms of this Sublease,
and such approval is not to be unreasonably
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withheld. Sublessee shall be responsible for compliance with all state and
local laws regarding such Improvements. Any Improvements initiated by Sublessee
that may result in an inspection of the Premises by a governmental authority,
will require Sublessee to notify Sublessor at least ten (10) days in advance of
such inspection.
13. ASSIGNMENT AND SUBLETTING. Sublessee shall not assign this Sublease
or further sublet all or any part of the Premises without the prior written
consent of Sublessor (and the consents of Master Landlord and Master Tenant, if
such consents are required under the terms of the Master Lease and Master
Sublease, respectively), and such approval is not to be unreasonably withheld.
14. INSURANCE POLICIES. All insurance policies required to be maintained
by Sublessee pursuant to the Master Lease shall name Sublessor, Master Tenant
and Master Landlord as additional insureds.
15. MAINTENANCE, REPAIRS AND ALTERATIONS.
15.1 MAINTENANCE. Throughout the Term, Sublessor, at its cost, shall
maintain, in good and sanitary condition, all portions of the Premises,
including, without limitation, all structural components of the Premises,
including, without limitation, the electrical and plumbing systems, in good
order and condition, except that damage occasioned by Sublessee's acts shall be
repaired by Sublessee at its expense. Sublessee agrees to keep the Premises
clean and neat in appearance and to remove all trash and debris which may be
found in or around the Premises. Sublessee waives the provisions of California
Civil Code Sections 1941 and 1942 with respect to Sublessor's obligations for
tenantability of the Premises and Sublessee's right to make repairs and deduct
the expenses of such repairs from rent.
15.2 OBLIGATIONS. If Sublessee fails to perform Sublessee's
obligations under this Section or under any other Section of this Lease,
Sublessor may, at Sublessor's option, enter
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upon the Premises after two (2) days prior written notice to Sublessee (except
in the case of emergency, in which case no notice shall be required), perform
such obligations on Sublessee's behalf and put the Premises in good order,
condition and repair. The cost thereof together with interest thereon at the
maximum rate then allowable by law shall be due and payable as additional rent
to Sublessor on the first (1st) day of the month immediately following that
month during which Sublessor performs such obligation.
15.3 REPAIR. On the last day of the Term or on any sooner
termination, Sublessee shall surrender the Premises to Sublessor in the same
condition as received, ordinary wear and tear excepted, clean and free of debris
and broom clean. Sublessee shall repair any damage to the Premises occasioned
by the installation or removal of its trade fixtures, furnishings and equipment
and reinstall carpet (the same quality as that was taken out) or other items
taken out of the Premises.
15.4 SURRENDER. All alterations, improvements and additions (whether
or not they constitute trade fixtures of Sublessee), which may be made on the
Premises, shall become Sublessor's property and remain upon and be surrendered
with the Premises at the expiration of the Term.
15.5 SECURITY. Not Applicable.
16. OTHER PROVISIONS OF SUBLEASE. All applicable terms and conditions of
the Master Lease and the Master Sublease are incorporated into and made a part
of this Sublease (including, without limitation, the default provisions set
forth in Section 10 of the Master Lease) as if Sublessor were the lessor
thereunder, Sublessee the lessee thereunder, and the Premises the Master
Premises, EXCEPT for the following:
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(a) MASTER LEASE: The first four (4) paragraphs of the untitled
section of the Master Lease before Section 1 and found on pages 1 through 5 of
the Master Lease, Sections 2, 4, 5, 7, 13, 15, 21, 22, 33, 34, 35, and
Exhibit B.
(b) MASTER SUBLEASE: Article I, Recitals contained in Article II,
Sections 1, 3, 4, 5(a), 6, 7, 9, 13, 17, and Exhibit C.
(c) CONFLICTS: If any terms of the Master Lease or the Master
Sublease conflict with the terms of this Sublease, the terms of this Sublease
shall control.
17. ATTORNEYS' FEES. If Sublessor or Sublessee shall commence an action
against the other arising out of or in connection with this Sublease, the
prevailing party shall be entitled to recover its costs of suit and reasonable
attorneys' fees.
18. AGENCY DISCLOSURE. Sublessor and Sublessee each warrant that they
have not dealt with any real estate brokers in connection with this transaction
and that no real estate broker fees or commissions are due.
19. NOTICES. All notices and demands may or are to be required or
permitted to be given by either party on the other hereunder shall be in
writing. All notices and demands by the Sublessor to Sublessee shall be sent by
United States Mail, postage prepaid, addressed to the Sublessee at the Premises,
and to the address herein below, or to such other place as Sublessee may from
time to time designate in a notice to the Sublessor. All notices and demands by
the Sublessee to Sublessor shall be sent by United States Mail, postage prepaid,
addressed to the Sublessor at the address set forth herein, and to such other
person or place as the Sublessor may from time to time designate in a notice to
the Sublessee.
To Sublessor: Dialogic Corporation
1515 Route 10
Parsippany, NJ 07054
Attention: Chief Financial Officer
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To Sublessee: DSP Group, Inc.
3120 Scott Boulevard
Santa Clara, CA 95054
Attention: Senior Officer
20. CONSENT BY LESSOR. THIS SUBLEASE SHALL BE OF NO FORCE OR EFFECT
UNLESS CONSENTED TO BY MASTER LANDLORD AND MASTER TENANT WITHIN 10 DAYS AFTER
EXECUTION HEREOF, IF SUCH CONSENT IS REQUIRED UNDER THE TERMS OF THE MASTER
LEASE OR THE MASTER SUBLEASE.
21. COMPLIANCE. The parties hereto agree to comply with all applicable
federal, state, and local laws, regulations, codes, ordinances and
administrative orders having jurisdiction over the parties, property or the
subject matter of this Agreement.
22. ARBITRATION. Any dispute between the parties arising out of this
Agreement shall be submitted to final and binding arbitration in the City of
Santa Clara, County of Santa Clara, State of California, under the Commercial
Arbitration Rules of the American Arbitration then in effect, upon written
notification and demand of either party therefore. In the event either party
demands such arbitration, the American Arbitration Association shall be
requested to submit a list of prospective arbitrators consisting of persons
experienced in matters involving business disputes. The provisions of
California Code of Civil Procedure Section 1283.05, and the laws of the State of
California, are incorporated herein and shall be applicable to the arbitration.
In making the award, the arbitrator shall award recovery of costs and expenses
of the arbitration and reasonable attorneys' fees to the prevailing party. Any
award may be entered as a judgment in any court of competent jurisdiction.
Should judicial proceedings be commenced to enforce or carry out this provision
or any arbitration award, the prevailing party in such proceedings shall be
entitled to reasonable attorneys' fees and costs, in addition to other relief.
Either party shall have the right, prior to receiving an arbitration award, to
obtain preliminary relief from a court of competent jurisdiction to: (i) avoid
injury or prejudice to that party; (ii) to protect the rights of
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any party; (iii) to maintain the status quo as it existed immediately prior to
the dispute; or (iv) to obtain possession of property in order to avoid a
material risk of damage to, or loss of, that property.
23. SEVERABILITY. Sublessor and Sublessee hereby agree and acknowledge
that should any condition, provision, covenant contained in this Sublease and
any and all addenda, modifications, or changes thereof, be found to be in
violation of any federal, state, county or local statute, law, order, rule or
regulation, said condition, provision or covenant shall be eliminated or severed
from said Sublease Agreement and any addenda thereto, and said condition,
provision, or covenant shall not invalidate, eliminate, or alter the terms of
all other conditions, provisions, and covenants contained in the Sublease or
addenda thereto.
24. MODIFICATION. This Sublease shall not be amended, modified, appended
or altered unless said amendment, modification, appendage, or alteration is made
in writing and duly executed and signed by a Sublessor and Sublessee.
25. ENTIRE AGREEMENT. This Agreement and the exhibits attached hereto and
the other documents delivered pursuant hereto constitute the full and entire
understanding and agreement between and among the parties with regard to the
subjects hereof and thereof and shall supersede any and all oral or written
communications, correspondence, agreements, understandings, promises, or
representations.
26. INDEMNIFICATION. Sublessee shall defend, indemnify and hold harmless
Sublessor, Master Tenant, Master Landlord and their respective partners,
directors, officers, employees, agents and representatives from any and all
claims, liabilities, causes of action, liens, judgments, awards, damages,
losses, fines, penalties, sanctions, costs, and expenses that arise from, or are
related to either (i) Sublessee's breach of any duties, obligations,
liabilities, or covenants that arise from said Sublease or any modification
addenda, or alteration of this Sublease, or (ii) any and all claims of third
parties made against the Sublessor, Master Tenant, or Master Landlord
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that arise from the conduct, actions, representations, agreements, warranties,
guarantees, or promises of Sublessee and any partners, directors, officers,
employees, agents, licensees, invitees and representatives of Sublessee.
27. SIGNAGE. Subject to the limitations of local signage regulations,
Sublessor agrees to let Sublessee install one wall mounted sign on the right
hand side of the concrete exterior facade of the building above the first floor
windows in front of the area to be leased by Sublessee. The parties have agreed
that Sublessee's sign may consist of the white lettered portion (which spells
"DSP GROUP") of one of its current signs, and that the sign may be illuminated
so as to visible and readible from Scott Boulevard, provided that the sign's
brightness is reduced to be significantly less bright that Sublessor's signs.
All costs including, but not limited to, the construction, installation,
removal, and necessary permits for this sign will be the responsibility of the
Sublessee.
Sublessor: DIALOGIC CORPORATION Sublessee: DSP GROUP, INC.
By: /s/ EDWARD B. JORDAN By: /s/ MARTIN M. SKOWRON
-------------------------------- ---------------------------------
Title: Chief Financial Officer and Title: Senior Vice President
Vice President
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MASTER LANDLORD'S CONSENT TO SUBLEASE
The undersigned Master Landlord under the Master Lease, hereby consents to
the foregoing Sublease without waiver of any restriction in the Master Lease
concerning further assignment or subletting. Master Landlord certifies that as
of the date Master Landlord's execution hereof, neither Master Tenant nor Master
Landlord is in default or breach of any of the provisions of the Master Lease,
and that the Master Lease has not been amended or modified except as expressly
set forth in the foregoing Sublease.
Master Landlord: /s/
----------------------------------------
By:
----------------------------------------------------
Title:
--------------------------------------------------
MASTER TENANT'S CONSENT TO SUBLEASE
The undersigned Master Tenant under the Master Sublease, hereby consents to
the foregoing Sublease without waiver of any restriction in the Master Sublease
concerning further assignment or subletting.
Master Tenant: AMDAHL CORPORATION
By: /s/ Jonathon C. Andersen
-----------------------------------
Title: Director, Corporate Real Estate
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CONSENTS OF MASTER LANDLORD AND MASTER TENANT
Notwithstanding any of the provisions in the attached sublease, each of Master
Landlord and Master Tenant hereby consents to the attached sublease with a term
commencing January 1, 1997, between Dialogic Corporation ("Sublessor"), a New
Jersey corporation, and DSP Group, Inc. ("Sublessee"), a Delaware corporation,
on the following conditions:
1. Nothing contained in said sublease or this consent shall create any
obligations or duties on the part of the Master Landlord beyond those in
the Master Lease;
2. Nothing contained in said sublease or this consent shall release,
excuse, or waive performance of any obligation of Master Tenant under the
Master Lease;
3. Nothing in said sublease or this consent shall amend or modify any
provision of the Master Lease or otherwise affect Master Landlord's or
Master Tenant's rights and remedies under the Master Lease;
4. This consent applies only to the attached sublease and shall not
authorize any further sublease or assignment during the term of the Master
Lease or during any option period of the Master Lease; and
5. The Sublessee acknowledges that the rent it is paying is less than the
rent required pursuant to the terms of the Master Lease.
There exists no event of default, breach, failure of condition or event of
default under the Master Lease to the best of Master Landlord's knowledge, but
Master Landlord has made no independent investigation.
Landlord has been advised that Sublessor and Sublessee may agree to perform
tenant improvements to the subject property. Landlord reserves the right,
pursuant to the terms of the Master Lease, to require Master Tenant to return
the premises to the condition contemplated under the Master Lease.
MASTER LANDLORD MASTER TENANT
Amdahl Corporation
/s/ Carl E. Berg By: /s/ Jonathon C. Andersen
- ----------------------------------- ----------------------------------
By: Carl E. Berg Name: Jonathon C. Andersen
For Berg Family Trusts Title: Director, Corporate Real Estate
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FIRST AMENDMENT TO SUBLEASE
This amendment dated December 4, 1996, for reference purposes only, is made
and entered into by and between Dialogic Corporation ("Sublessor") and DSP
Group, Inc. ("Sublessee").
RECITALS:
A. The parties have previously entered into a Sublease dated October 18,
1996, for reference purposes only.
B. The premises defined in the Sublease as specified in paragraph 4 states
the following:
The square footage area figures presented in this
agreement will be verified, by a qualified firm and
at the Sublessor's expense, according to the BOMA
Standard Method of Floor Measurement (ANSI Z65.1-1980
Reaffirmed, 1989) for rentable area.
C. Sublessor has engaged a qualified architectural firm to measure the
square footage pursuant to paragraph 4 of the Sublease.
NOW THEREFORE, the parties agree as follows:
1. To amend the square footage as defined in paragraph 4 to be 15,645.
2. To increase the monthly rent as defined in paragraph 9 to be $23,467.
3. To increase the total number of parking spaces as defined in
paragraph 5 to be 60.
4. To increase the security deposit as defined in paragraph 10 to be $23,467.
5. Except as specifically amended or modified by this First Amendment to
Sublease, all other terms and provisions of the Sublease shall remain
unmodified and in full force and effect.
Sublessor: DIALOGIC CORPORATION Sublessee: DSP GROUP, INC.
By: /s/ Edward B. Johns By: /s/ Martin M. Skowron
____________________________ ____________________________
Title: Chief Financial Officer Title: Senior Vice President
and Vice President
<PAGE>
EXHIBIT 10.26
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into this 24th day of February, 1997 by and
between DSP Semiconductors Ltd., of Givat Shmuel, a company existing under the
laws of the State of Israel (hereinafter the "Company"), and Avi Basher of 10/51
Ino-shaki Street, Jerusalem, Israel (hereinafter "Basher"), effective as of the
15th day of October, 1996 (the "Effective Date").
RECITAL
The Company desires to employ Basher and to avail itself of Basher's talents
and abilities, and Basher desires to be employed by the Company, subject to the
terms of and conditions set forth herein.
AGREEMENT
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. EMPLOYMENT DUTIES
1.1 BASHER'S DUTIES
1.1.1. Basher shall perform the responsibilities of the Vice President of
Finance and Chief Financial Officer of the Company and its US
parent, DSP Group, Inc., and any responsibilities incidental
thereto, all such, as stated, to be commensurate with his
background, education, experience and professional standing. Basher
shall devote his full productive time, attention, energy, and skill
to the business of the Company during the Employment Term set forth
below. Basher shall not become engaged in any other occupation
whether for compensation or not while employed hereunder, without
the express written consent of the Company's Board of Directors.
1.1.2. Basher acknowledges that his employment with the Company will
require frequent travel spanning extended periods outside Israel.
Furthermore, Basher agrees to extensive world-wide travel under his
employment with the Company.
1.1.3. Basher understands and acknowledges that as his position is a
senior managerial position in substance, as defined in the Work and
Rest Hours Law, 1951, and requires a high level of trust, the
provisions of said law shall not apply to Basher and Basher agrees
that he may be required to work beyond the regular working hours of
the Company, for no additional compensation other than as specified
in this Agreement.
1.1.4. Basher agrees and undertakes throughout the Employment Term not to
receive any payment, compensation or any other benefit from any
third party directly related to his employment hereunder or to the
Company or its parent company, DSP Group, Inc.
1.1.5. Basher agrees and undertakes not to perform any act or to omit to
perform any act which may breach his fiduciary duty to the Company
or its parent company, DSP Group, Inc. or which may place him in a
position of conflict of interest with the objectives of the Company
or its parent company, as the case may be. In addition, Basher
agrees and undertakes to promptly inform the Company and its parent
company, DSP Group, Inc., of any such matter which may place him in
such a situation of potential conflict of interest.
2. TERM
This Employment Agreement commenced as of the Effective Date and shall
continue indefinitely, unless sooner terminated under the terms of this
Agreement. As used herein, the term "Employment
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Term" refers to the entire period of employment of Basher under this
Agreement, beginning October 15, 1996.
3. COMPENSATION
Basher shall be compensated as follows:
3.1. FIXED SALARY
3.1.1. Basher shall receive a fixed monthly Gross Salary of NIS 31,970
(the "Gross Salary"), payable on a monthly basis. The Gross Salary
shall be adjusted monthly to the Consumer Price Index (the "Index").
The Gross Salary shall be adjusted to the monthly increase of the
last published Index (September 1996 Index-140.0), in comparison to
the last published Index known at the time of execution of this
Agreement.
3.1.2. It is hereby agreed by the parties that the Gross Salary
adjustments according to the Index, shall be deemed to include any
adjustments for Cost of Living Increase ("Tosefet Yoker") that apply
to Basher as an employee, unless such adjustment to the Cost of
Living Increase shall be higher than the adjustment to the last
published Index in any given month, in which case the Index
adjustments shall be in respect of the Tosefet Yoker alone.
3.2. BONUS
During the Employment Term, the Board of Directors shall consider
granting Basher an annual bonus.
3.3. VACATION
Basher shall accrue paid vacation at the rate of 22 business days for
each twelve (12) months of employment. Basher may not accumulate his
vacation days for more than twenty-four (24) months of employment.
3.4. SICK LEAVE
Basher shall accrue sick leave at the same rate generally available to
the Company's employees according to the provisions of the Sick Pay
Law-1976 and subject to Basher producing the required medical
certificates.
3.5. BENEFITS
3.5.1. During the term of Basher's employment, Basher shall be entitled
to Manager's Insurance (Bituach Minhalim) in an amount equal to
15.83% of the Gross Salary, which shall be paid monthly to said
Manager's Insurance Plan directly by the Company. The insurance
shall be allocated as follows: (i) 8.33% in respect of severance
compensation, (ii) 5% in respect of pension and (iii) 2.5% of the
Gross Salary in respect of disability. An additional 5% of the Gross
Salary shall be deducted by the Company from the monthly payment of
Basher's salary as Basher's contribution to said Manager's
Insurance.
3.5.2. The Manager's Insurance policy provided for Basher's benefit shall
be registered in the Company's name. The contributions to the
Manager's Insurance Policy shall be paid by the Company in lieu of
any other legal obligation to make payments on account of severance
or pension in respect of Basher's employment during the Employment
Term. Should the provisions made for severance pay not cover the
amount owed by the Company to Basher by law, then the Company shall
pay Basher the difference, all in accordance with Israeli law.
Basher's agreement to the last two sentences shall exempt the
Company from the requirement to apply to the Minister of Labor and
Welfare for an approval under Section 14 of the Severance Pay Law;
however, should such application be deemed necessary,
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Basher's signature hereupon shall be deemed his consent to the
Company's application in Basher's name in such matter.
3.5.3. The sums accumulated in the Manager's Insurance policy shall be
transferred to Basher upon termination of his employment hereunder,
unless Basher has committed an act in breach of Basher's fiduciary
duty towards the Company or its parent company, DSP Group, Inc., as
determined solely by the Company.
3.5.4. The Company shall provide and pay Basher Recreation Funds (Dmai
Havra'ah) at the rate required by law and regulations.
3.5.5. The Company shall contribute to a Continuing Education Fund chosen
by it for the benefit of Basher in an amount equal to 7.5% of his
Gross Salary per month subject to Basher's contribution of an
additional 2.5% of his Gross Salary per month.
3.5.6. The Company shall provide Basher with a car for use in connection
with his employment and for personal reasonable use. The Company
shall bear all expenses due to use and maintenance of the car, in
the same fashion as is customary with the Company.
3.5.7. The Company shall provide Basher with a telephone in his private
residence solely for use in connection with his employment with the
Company, and shall bear the expense of the telephone bills, subject
to timely presentation of such bills by Basher to the Company.
3.5.8. Within sixty (60) days of the date hereof, the Company shall
provide Basher with directors and officers' liability insurance as
is customary at the Company.
4. EXPENSES
The Company shall reimburse Basher for his normal and reasonable expenses
incurred for travel, entertainment and similar items in promoting and
carrying out the business of the Company in accordance with the Company's
general policy, in effect from time to time. As a condition of
reimbursement, Basher agrees to provide the Company with copies of all
available invoices and receipts, and otherwise account to the Company in
sufficient detail to allow the Company to claim an income tax deduction for
such paid item, if item is deductible. Reimbursement shall be made on a
monthly, or more frequent, basis.
5. COVENANT NOT TO COMPETE
Basher agrees that during the Employment Term as Vice President of Finance
and Chief Financial Officer of the Company, he is and shall be in a position
of special trust and confidence and will have access to confidential and
proprietary information about the Company's business and plans. Basher
agrees that he will not directly or indirectly, either as an employee,
employer, consultant, agent, principal, partner, stockholder, corporate
officer, director, or in any similar individual or representative capacity,
engage or participate in any business and any future Company's business
during the term of employment, including projects under consideration by the
Company at the time of termination during the term of his employment, or in
the event of a Termination For Cause (as defined below) of employment for a
period of two (2) years thereafter, or in the event of a termination not for
cause for a period of twelve (12) months.
For the purposes of this Section 5, the term "Company" shall mean any
subsidiaries, any other affiliates and its parent company.
6. CONFIDENTIALITY AND TRADE SECRETS
6.1. KNOW-HOW AND INTELLECTUAL PROPERTY
It is understood that the Company has developed or acquired and will
continue to develop or acquire certain products, technology, unique or
special methods, manufacturing and assembly
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processes and techniques, trade secrets, written marketing plans and
customer arrangements, and other proprietary rights and confidential
information which are not in the public domain, and shall during the
Employment Term continue to develop, compile and acquire said items (all
hereinafter collectively referred to as the "Company's Property"). It is
expected that Basher will gain knowledge of and utilize the Company's
Property during the course and scope of his employment with the Company,
and will be in a position of trust with respect to the Company's
Property.
6.2 COMPANY'S PROPERTY
It is hereby stipulated and agreed that the Company's Property shall
remain the Company's sole property. It is further stipulated and agreed
by the parties, as a material inducement for the Company having entered
into this Agreement and remaining a party hereto (subject to any early
termination hereof by the Company), that Basher shall be bound by the
Confidential Disclosure and Non-Use Agreement appended hereto as APPENDIX
A.
In the event that Basher's employment is terminated, for whatever
reason, Basher agrees not to copy, make known, disclose or use, any of
the Company's Property. Without derogating from the Company's rights
under the law of torts, Basher further agrees not to endeavor or attempt
in any way to interfere with or induce a breach of any prior contractual
relationship that the Company may have with any employee, customer,
contractor, supplier, representative, or distributor for a period of two
(2) years from the date of any termination of Basher's employment with
the Company for any reason whatsoever. Basher agrees, upon termination of
employment, to deliver to the Company all confidential papers, documents,
records, lists and notes (whether prepared by Basher or others)
comprising or containing the Company's Property, without retaining any
copies thereof, and any other property of the Company.
It is hereby agreed that a breach of Sections 5 and 6 including Appendix
A hereto shall be considered as a material breach of this Agreement.
For the purposes of this Section 6, the term "Company" shall also mean
any subsidiaries, any other affiliates and its parent company.
7. TERMINATION
7.1 GENERAL
Either party may terminate this Agreement, without cause, upon ninety
(90) days advance written notice to the other party.
7.2 TERMINATION FOR CAUSE
The Company may immediately terminate Basher's employment at any time
for Cause. Termination for Cause shall be effective from the receipt of
written notice thereof to Basher. "Cause" means: (i) material neglect of
his duties or a material violation of any of the provisions of this
Agreement, which continues after written notice and a reasonable
opportunity (not to exceed seven (7) days) in which to cure; (ii)
conviction of any felonious offense; or (iii) intentionally imparting
confidential information relating to the Company or its business to third
parties, other than in the course of carrying out his duties hereunder.
The Company's exercise of its rights to terminate with Cause shall be
without prejudice to any other remedy it may be entitled at law, in
equity, or under this Agreement.
8. CORPORATE OPPORTUNITIES
In the event that during the Employment Term, any business opportunity
related to the Company's business shall come to Basher's knowledge, Basher
shall promptly notify the Company's Board of Directors of such opportunity.
Basher shall not appropriate for himself or for any other person other
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than the Company, any such opportunity, except with the express written
consent of the Board of Directors, in advance. Basher's duty to notify the
Company and to refrain from appropriating all such opportunities shall
neither be limited by, nor shall such duty limit, the application of the
general law of Israel relating to the fiduciary duties of an agent or
employee.
9. RESERVE DUTY
Immediately upon receipt of a notice of reserve duty, Basher shall report
such notice to the Company's Board of Directors. Upon Basher's return from
reserve duty, Basher shall deliver to the Company appropriate confirmation
of reserve duty served from his military unit, against which the Company
shall pay Basher his regular compensation package with respect to the period
served.
10. MISCELLANEOUS
10.1. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement and understanding
between the parties with respect to the subject matters herein, and
supersedes and replaces any prior agreements and understandings,
whether oral or written between them with respect to such matters. The
provisions of this Agreement may be waived, altered, amended or
repealed in whole or in part only upon the written consent of both
parties to this Agreement.
10.2. NO IMPLIED WAIVERS
The failure of either party at any time to require performance by the
other party of any provision hereof shall not affect in any way the
right to require such performance at any time thereafter, nor shall
the waiver by either party of a breach of any provision hereof be
taken or held to be a waiver of any subsequent breach of the same
provision or any other provision.
10.3. Personal Services
It is understood that the services to be performed by Basher hereunder
are personal in nature and the obligations to perform such services
and the conditions and covenants of this Agreement cannot be assigned
by Basher. Subject to the foregoing, and except as otherwise provided
herein, this Agreement shall inure to the benefit of and bind the
successors and assigns of the Company.
10.4. SEVERABILITY
If for any reason any provision of this Agreement shall be determined
to be invalid or inoperative, the validity and effect of the other
provisions hereof shall not be affected thereby, provided that no such
severability shall be effective if it causes a material detriment to
any party.
10.5. APPLICABLE LAW
This Agreement shall be governed by and construed in accordance with
the law of the State of Israel.
10.6. NOTICES
All notices, requests, demands, instructions or other communications
required or permitted to be given under this Agreement or related to
it shall be in writing and shall be deemed to have been duly given
upon delivery, if delivered personally, or if given by prepaid
telegram, or mailed first-class postage prepaid, registered or
certified mail, return receipt requested, shall be deemed to have been
given five (5) days after such delivery, if addressed to the other
party at the addresses as set forth on the signature page below.
Either party hereto may change the address to which such
communications are to be directed by giving written notice to the
other party hereto of such change in the manner above provided.
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10.7. MERGER, TRANSFER OF ASSETS, OR DISSOLUTION OF THE COMPANY
This Agreement shall not be terminated by any dissolution of the
Company resulting from either merger or consolidation in which the
Company is not the consolidated or surviving Company or a transfer of
all or substantially all of the assets of the Company. In such event,
the rights, benefits and obligations herein shall automatically be
assigned to the surviving or resulting company or to the transferee of
the assets.
10.8. NO CONFLICTING AGREEMENTS
Basher declares that he is not bound by any agreement, understanding
or arrangement according to which the execution of and compliance with
this Agreement may constitute a breach or default.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
<TABLE>
<S> <C> <C>
DSP Semiconductors Ltd.
By: /s/ ELI AYALON /s/ AVI BASHER
------------------------- -------------------------
Eli Ayalon Avi Basher
Title: PRESIDENT & CEO
</TABLE>
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EXHIBIT 10.27
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into this 1st day of June, 1996 by and
between DSP Semiconductors Ltd., of Givat Shmuel , a company existing under the
laws of the State of Israel (hereinafter the "Company"), and Moshe Shahaf of 17
Beresheet Street, Givatayim, Israel (hereinafter "Shahaf"), effective as of the
1st day of June, 1996 (the "Effective Date").
RECITAL
The Company desires to employ Shahaf and to avail itself of Shahaf's talents
and abilities, and Shahaf desires to be employed by the Company, subject to the
terms of and conditions set forth herein.
AGREEMENT
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. EMPLOYMENT DUTIES
1.1. SHAHAF'S DUTIES
1.1.1. Shahaf shall perform the responsibilities of the Vice President of
R & D and Chief Technology Officer of the Company, and any
responsibilities incidental thereto, all such, as stated, to be
commensurate with his background, education, experience and
professional standing. Shahaf shall devote his full productive time,
attention, energy, and skill to the business of the Company during
the Employment Term set forth below. Shahaf shall not become engaged
in any other occupation whether for compensation or not while
employed hereunder, without the express written consent of the
Company's Board of Directors.
1.1.2. Shahaf acknowledges that his employment with the Company will
require frequent travel spanning extended periods outside Israel.
Furthermore, Shahaf agrees to extensive world-wide travel under his
employment with the company.
1.1.3. Shahaf understands and acknowledges that as his position is a
senior managerial position in substance, as defined in the Work and
Rest Hours Law, 1951, and requires a high level of trust, the
provisions of said law shall not apply to Shahaf and Shahaf agrees
that he may be required to work beyond the regular working hours of
the Company, for no additional compensation other than as specified
in this Agreement.
1.1.4. Shahaf agrees and undertakes throughout the Employment Term not to
receive any payment, compensation or any other benefit from any
third party directly related to his employment hereunder or to the
Company or its parent company, DSP Group, Inc.
1.1.5. Shahaf agrees and undertakes not to perform any act or to omit to
perform any act which may breach his fiduciary duty to the Company
or its parent company, DSP Group, Inc. or which may place him in a
position of conflict of interest with the objectives of the Company
or its parent company, as the case may be. In addition, Shahaf
agrees and undertakes to promptly inform the Company and its parent
company, DSP Group, Inc., of any such matter which may place him in
such a situation of potential conflict of interest.
2. TERM
This Employment Agreement commenced as of the Effective Date and shall
continue indefinitely, unless sooner terminated under the terms of the
Agreement. As used herein, the term "Employment Term" refers to the entire
period of employment of Shahaf under this Agreement, beginning June 1, 1996.
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3. COMPENSATION
Shahaf shall be compensated as follows:
3.1. FIXED SALARY
3.1.1. Shahaf shall receive a fixed monthly Gross Salary of NIS 31,000
(the "Gross Salary"), payable on a monthly basis. The Gross Salary
shall be adjusted monthly to the Consumer Price Index (the "Index").
The Gross Salary shall be adjusted to the monthly increase of the
last published Index, in comparison to the last published Index
known at the time of execution of this Agreement.
3.1.2. It is hereby agreed by the parties that the Gross Salary
adjustments according to the Index, shall be deemed to include any
adjustments for Cost of Living Increase ("Tosefet Yoker") that apply
to Shahaf as an employee, unless such adjustment to the Cost of
Living Increase shall be higher than the adjustment to the last
published Index in any given month, in which case the Index
adjustments shall be in respect of the Tosefet Yoker alone.
3.2. BONUS
During the Employment Term, the Board of Directors shall consider
granting Shahaf an annual bonus.
3.3. VACATION
Shahaf shall accrue paid vacation at the rate of 22 business days for
each twelve (12) months of employment. Shahaf may not accumulate his
vacation days for more than twenty-four (24) months of employment.
3.4. SICK LEAVE
Shahaf shall accrue sick leave at the same rate generally available to
the Company's employees according to the provisions of the Sick Pay
Law-1976 and subject to Shahaf producing the required medical
certificates.
3.5. BENEFITS
3.5.1. During the term of Shahaf's employment, Shahaf shall be entitled
to Manager's Insurance (Bituach Minhalim) in an amount equal to
15.83% of the Gross Salary, which shall be paid monthly to said
Manager's Insurance Plan directly by the Company. The insurance
shall be allocated as follows: (i) 8.33% in respect of severance
compensation, (ii) 5% in respect of pension and (iii) 2.5% of the
Gross Salary in respect of disability. An additional 5% of the Gross
Salary shall be deducted by the Company from the monthly payment of
Shahaf's salary as Shahaf's contribution to said Manager's
Insurance.
3.5.2. The Manager's Insurance policy provided for Shahaf's benefit shall
be registered in the Company's name. The contributions to the
Manager's Insurance Policy shall be paid by the Company in lieu of
any other legal obligation to make payments on account of severance
or pension in respect of Shahaf's employment during the Employment
Term. Should the provisions made for severance pay not cover the
amount owed by the Company to Shahaf by law, then the Company shall
pay Shahaf the difference, all in accordance with Israeli law.
Shahaf's agreement to the last two sentences shall exempt the
Company from the requirement to apply to the Minister of Labor and
Welfare for an approval under Section 14 of the Severance Pay Law;
however, should such application be deemed necessary, Shahaf's
signature hereupon shall be deemed his consent to the Company's
application in Shahaf's name in such matter.
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3.5.3. The sums accumulated in the Manager's Insurance policy shall be
transferred to Shahaf upon termination of his employment hereunder,
unless Shahaf has committed an act in breach of Shahaf's fiduciary
duty towards the Company or its parent company, DSP Group, Inc., as
determined solely by the Company.
3.5.4. The Company shall provide and pay Shahaf Recreation Funds (Dmai
Havra'ah) at the rate required by law and regulations.
3.5.5. The Company shall contribute to a Continuing Education Fund chosen
by it for the benefit of Shahaf in an amount equal to 7.5% of his
Gross Salary per month subject to Shahaf's contribution of an
additional 2.5% of his Gross Salary per month.
3.5.6. The Company shall provide Shahaf with a car for use in connection
with his employment and for personal reasonable use. The Company
shall bear all expenses due to use and maintenance of the car, in
the same fashion as is customary with the Company.
3.5.7. The Company shall provide Shahaf with a telephone in his private
residence solely for use in connection with his employment with the
Company, and shall bear the expense of the telephone bills, subject
to timely presentation of such bills by Shahaf to the Company.
3.5.8. Within sixty (60) days of the date hereof, the Company shall
provide Shahaf with directors and officers' liability insurance as
is customary at the Company.
4. EXPENSES
The Company shall reimburse Shahaf for his normal and reasonable expenses
incurred for travel, entertainment and similar items in promoting and
carrying out the business of the Company in accordance with the Company's
general policy, in effect from time to time. As a condition of
reimbursement, Shahaf agrees to provide the Company with copies of all
available invoices and receipts, and otherwise account to the Company in
sufficient detail to allow the Company to claim an income tax deduction for
such paid item, if item is deductible. Reimbursement shall be made on a
monthly, or more frequent, basis.
5. COVENANT NOT TO COMPETE
Shahaf agrees that during the Employment Term as Vice President of R & D and
Chief Technology Officer of the Company, he is and shall be in a position of
special trust and confidence and will have access to confidential and
proprietary information about the Company's business and plans. Shahaf
agrees that he will not directly or indirectly, either as an employee,
employer, consultant, agent, principal, partner, stockholder, corporate
officer, director, or in any similar individual or representative capacity,
engage or participate in any business and any future Company's business
during the term of employment, including projects under consideration by the
Company at the time of termination during the term of his employment, or in
the event of a Termination For Cause (as defined below) of employment for a
period of two (2) years thereafter, or in the event of a termination not for
cause for a period of twelve (12) months.
For the purposes of this Section 5, the term "Company" shall mean any
subsidiaries, any other affiliates and its parent company.
6. CONFIDENTIALITY AND TRADE SECRETS
6.1. KNOW-HOW AND INTELLECTUAL PROPERTY
It is understood that the Company has developed or acquired and will
continue to develop or acquire certain products, technology, unique or
special methods, manufacturing and assembly processes and techniques,
trade secrets, written marketing plans and customer arrangements, and
other proprietary rights and confidential information which are not in
the public domain, and
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shall during the Employment Term continue to develop, compile and acquire
said items (all hereinafter collectively referred to as the "Company's
Property"). It is expected that Shahaf will gain knowledge of and utilize
the Company's Property during the course and scope of his employment with
the Company, and will be in a position of trust with respect to the
Company's Property.
6.2. COMPANY'S PROPERTY
It is hereby stipulated and agreed that the Company's Property shall
remain the Company's sole property. It is further stipulated and agreed
by the parties, as a material inducement for the Company having entered
into this Agreement and remaining a party hereto (subject to any early
termination hereof by the Company), that Shahaf shall be bound by the
Confidential Disclosure and Non-Use Agreement appended hereto as APPENDIX
A.
In the event that Shahaf's employment is terminated, for whatever
reason, Shahaf agrees not to copy, make known, disclose or use, any of
the Company's Property. Without derogating from the Company's rights
under the law of torts, Shahaf further agrees not to endeavor or attempt
in any way to interfere with or induce a breach of any prior contractual
relationship that the Company may have with any employee, customer,
contractor, supplier, representative, or distributor for a period of two
(2) years from the date of any termination of Shahaf's employment with
the Company for any reason whatsoever. Shahaf agrees, upon termination of
employment, to deliver to the Company all confidential papers, documents,
records, lists and notes (whether prepared by Shahaf or others)
comprising or containing the Company's Property, without retaining any
copies thereof, and any other property of the Company.
It is hereby agreed that a breach of Sections 5 and 6 including Appendix
A hereto shall be considered as a material breach of this Agreement.
For the purposes of this Section 6, the term "Company" shall also mean
any subsidiaries, any other affiliates and its parent company.
7. TERMINATION
7.1. GENERAL
Either party may terminate this Agreement, without cause, upon ninety
(90) days advance written notice to the other party.
7.2. TERMINATION FOR CAUSE
The Company may immediately terminate Shahaf's employment at any time
for Cause. Termination for Cause shall be effective from the receipt of
written notice thereof to Shahaf. "Cause" means: (i) material neglect of
his duties or a material violation of any of the provisions of this
Agreement, which continues after written notice and a reasonable
opportunity (not to exceed seven (7) days) in which to cure; (ii)
conviction of any felonious offense; or (iii) intentionally imparting
confidential information relating to the Company or its business to third
parties, other than in the course of carrying out his duties hereunder.
The Company's exercise of its rights to terminate with Cause shall be
without prejudice to any other remedy it may be entitled at law, in
equity, or under this Agreement.
8. EMPLOYEE OPTION PLAN
Subject to the approval of the Board of Directors of DSP Group, Inc. and
subject to the terms and conditions to the DSP Group Inc.'s Employee Option
Plan for employees of the Company, Shahaf shall be entitled to receive up to
70,000 shares of the Common Stock of DSP Group, Inc. The vesting schedule of
said options shall be as follows: 25% of the shares will vest at the end of
the 1st year from the date of grant of said options and the number of shares
equal to 6.25% shares will vest at the end of
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each 3 month period thereafter. The exercise price shall be decided by the
Company's Board of Directors on the date of the grant of said options.
9. CORPORATE OPPORTUNITIES
In the event that during the Employment Term, any business opportunity
related to the Company's business shall come to Shahaf's knowledge, Shahaf
shall promptly notify the Company's Board of Directors of such opportunity.
Shahaf shall not appropriate for himself or for any other person other than
the Company, any such opportunity, except with the express written consent
of the Board of Directors, in advance. Shahaf's duty to notify the Company
and to refrain from appropriating all such opportunities shall neither be
limited by, nor shall duty limit, the application of the general law of
Israel relating to the fiduciary duties of an agent or employee.
10. RESERVE DUTY
Immediately upon receipt of a notice of reserve duty, Shahaf shall report
such notice to the Company's Board of Directors. Upon Shahaf's return from
reserve duty, Shahaf shall deliver to the Company appropriate confirmation
of reserve duty served from his military unit, against which the Company
shall pay Shahaf his regular compensation package with respect to the period
served.
11. MISCELLANEOUS
11.1. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement and understanding
between the parties with respect to the subject matters herein, and
supersedes and replaces any prior agreements and understandings,
whether oral or written between them with respect to such matters. The
provisions of this Agreement may be waived, altered, amended or
repealed in whole or in part only upon the written consent of both
parties to this Agreement.
11.2. NO IMPLIED WAIVERS
The failure of either party at any time to require performance by the
other party of any provision hereof shall not affect in any way the
right to require such performance at any time thereafter, nor shall
the waiver by either party of a breach of any provision hereof be
taken or held to be a waiver of any subsequent breach of the same
provision or any other provision.
11.3. PERSONAL SERVICES
It is understood that the services to be performed by Shahaf hereunder
are personal in nature and the obligations to perform such services
and the conditions and covenants of this Agreement cannot be assigned
by Shahaf. Subject to the foregoing, and except as otherwise provided
herein, this Agreement shall inure to the benefit of and bind the
successors and assigns of the Company.
11.4. SEVERABILITY
If for any reason any provision of this Agreement shall be determined
to be invalid or inoperative, the validity and effect of the other
provisions hereof shall not be affected thereby, provided that no such
severability shall be effective if it causes a material detriment to
any party.
11.5. APPLICABLE LAW
This Agreement shall be governed by and construed in accordance with
the laws of the State of Israel.
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11.6. NOTICES
All notices, requests, demands, instructions or other communications
required or permitted to be given under this Agreement or related to
it shall be in writing and shall be deemed to have been duly given
upon delivery, if delivered personally, or if given by prepaid
telegram, or mailed first-class postage prepaid, registered or
certified mail, return receipt requested, shall be deemed to have been
given five (5) days after such delivery, if addressed to the other
party at the addresses as set forth on the signature page below.
Either party hereto may change the address to which such
communications are to be directed by giving written notice to the
other party hereto of such change in the manner above provided.
11.7. MERGER, TRANSFER OF ASSETS, OR DISSOLUTION OF THE COMPANY
This Agreement shall not be terminated by any dissolution of the
Company resulting from either merger or consolidation in which the
Company is not the consolidated or surviving Company or a transfer of
all or substantially all of the assets of the Company. In such event,
the rights, benefits and obligations herein shall automatically be
assigned to the surviving or resulting company or to the transferee of
the assets.
11.8. NO CONFLICTING AGREEMENTS
Shahaf declares that he is not bound by any agreement, understanding
or arrangement according to which the execution of and compliance with
this Agreement may constitute a breach or default.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
DSP Semiconductors Ltd.
<TABLE>
<S> <C> <C>
By: /s/ ELI AYALON /s/ MOSHE SHAHAF
------------------------- -------------------------
Eli Ayalon Moshe Shahaf
Title: CEO AND PRESIDENT
</TABLE>
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EXHIBIT 10.28
RESCISSION AGREEMENT
BETWEEN IGAL KOHAVI AND DSP GROUP, INC.
THIS RESCISSION AGREEMENT (this "Agreement") made and entered into this 15th
day of August, 1996, by and between Mr. Igal Kohavi and DSP Group, Inc., a
Delaware corporation ("DSPG").
Whereas Mr. Kohavi and DSP Group, Inc. ("DSPG") made and entered into an
employment agreement effective as of November 1, 1995, by which DSPG wished
to hire Mr. Kohavi as the Chairman of its Board of Directors (the "Employment
Agreement"); and
Whereas Niko Consulting and Management (1995) Ltd. ("Niko"), a company held
in equal parts by Igal Kohavi and Nitza Kohavi, and DSP Semiconductors Ltd.
("DSPS"), a wholly-owned subsidiary of DSPG, wish to enter into a services
agreement simultaneously with the execution hereof, which agreement provides
that Niko will provide through its employee, Igal Kohavi, the management
services requisite to chair the Board of Directors of each DSPS and DSPG;
IT IS THEREFORE HEREIN AGREED that the Employment Agreement is hereby
rescinded by Mr. Kohavi and DSPG, having no effect whatsoever.
DSP Group, Inc.
a Delaware Corporation
/s/ ELI AYALON /s/ IGAL KOHAVI
- ------------------------------- -------------------------------
Name: Eli Ayalon Igal Kohavi
Title: Chief Executive Officer
<PAGE>
SERVICE AGREEMENT
BETWEEN NIKO CONSULTING AND MANAGEMENT (1995) LTD.
AND DSP SEMICONDUCTORS LTD.
THIS SERVICE AGREEMENT is made and entered into this 15th day of August, 1996,
by and between DSP Semiconductors Ltd., an Israeli company (the "Corporation"),
and Niko Consulting and Management (1995) Ltd., an Israeli company (the
"Contractor").
RECITAL
The Corporation desires to engage the services of Igal Kohavi ("Kohavi") as the
Chairman of the Board of Directors of the Corporation and of the Board of
Directors of its parent company, DSP Group, Inc., and the Contractor is willing
to make available those services, on the terms and subject to the conditions set
forth herein.
AGREEMENT
NOW THEREFORE, the parties hereto hereby agree as follows:
1. DUTIES OF THE PARTIES
a. General. The Corporation hereby contracts with the contractor to
hire the services of Kohavi, and the Contractor hereby agrees to
provide those services to the Corporation, on the terms and
conditions hereinafter set forth.
It is clearly understood that the services of Kohavi are provided by
the Contractor on an independent contractor basis, and that no
employer-employee relationship will exist between the Corporation and
Kohavi.
b. Corporation's Duties. The Corporation shall allow Kohavi to, and
Kohavi shall, perform responsibilities normally incident to his
position as Chairman, commensurate with his background, education,
experience and professional standing. The Corporation shall provide
Kohavi with the use of a private office, stenographic help, office
equipment, supplies, customary services and cooperation suitable for
the performance of his duties.
c. Kohavi's Duties. Unless otherwise agreed to by the parties, Kohavi
shall serve as the Corporation's Chairman as well as the Chairman of
the Board of Directors of its parent company, DSP Group, Inc. Kohavi
shall devote on average thirty (30) hours per week of his productive
time, attention, energy, and skill to the business of the Corporation
during the service period set forth below. Kohavi shall report
directly to the Corporation's Board of Directors. Kohavi is expected
to work approximately one hundred twenty (120) days per annum for the
Corporation.
<PAGE>
2. TERM.
This Agreement shall commence as of October 1, 1995, and shall continue
for a period of three (3) years, unless sooner terminated under the terms
of this Agreement. Thereafter, this Agreement may be renewed by the
Contractor and the Board of Directors of the Corporation and the Board of
Directors of its parent company, DSP Group, Inc. (as the case may be) on
such terms as the parties may agree to in writing. Absent written notice
to the contrary thirty (30) days prior to the end of the service period,
this Agreement will be renewed for consecutive one (1) year extensions.
As used herein, the term "service period" refers to the entire period of
service hereunder, including any agreed-to extension.
3. COMPENSATION
As compensation for the services provided under this agreement, the
Corporation shall pay the Contractor sums as follows:
a. Fixed Payment. A fixed annual sum of Two Hundred and Fifty Thousand
Dollars ($250,000), plus VAT. The Corporation agrees to review the
fixed sum following the end of each twelve (12) month period during
the service period based upon Kohavi's services and the Corporation's
financial results during the calendar year, and to make such increase
as may be determined appropriate in the discretion of the
Corporation's Board of Directors.
b. Payment. The above sum shall be payable on a monthly basis.
c. Bonus Compensation. During the service period, the Corporation shall
pay the Contractor a bonus or bonuses at the discretion of the Board
of Directors, based on the performance of Kohavi.
d. The Corporation shall provide Kohavi with Director and Officer
Insurance, if reasonably available to the Corporation, similar in
coverage and effect to that covering its other officers and
directors. Kohavi shall in no event receive less insurance coverage
than that available to any other officer or director. The
Corporation shall, at a minimum, keep in full force and effect its
indemnification agreement previously entered into with Kohavi.
4. EXPENSES.
The Corporation shall reimburse the contractor for Kohavi's normal and
reasonable expenses incurred for travel, entertainment and similar items
in promoting and carrying out the business of the Corporation in
accordance with the Corporation's general policy as adopted by the
Corporation's management from time to time. As a condition of
reimbursement, the Contractor agrees to provide the Corporation with
copies of all available invoices and receipts, and otherwise account to
the Corporation
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in sufficient detail to allow the Corporation to claim an income tax
deduction for such paid item, if such item is deductible. Reimbursements
shall be made on a monthly, or more frequent basis. The Corporation
shall also reimburse the Contractor for all professional membership dues
incurred by Kohavi, if any; all technical books purchased by Kohavi; and
all moving and relocation expenses, incurred by Kohavi at the
Corporation's request.
5. CONFIDENTIALITY AND COMPETITIVE ACTIVITIES
The Contractor agrees that during the service period, Kohavi will be in a
position of special trust and confidence and have access to confidential
and proprietary information about the Corporation's business and plans.
The Contractor undertakes that Kohavi will not directly or indirectly,
either as an employee, employer, consultant, agent, principal, partner,
stock-holder, corporate officer, director, or in any similar individual
or representative capacity, engage or participate in any business that is
in competition with the Corporation. Notwithstanding anything in the
foregoing to the contrary, Kohavi shall be allowed to invest as a
shareholder in publicly-traded companies, or through a venture capital
firm or an investment pool in which he has no active role. As a
precondition of his engagement, the Corporation may require Kohavi to
personally sign this undertaking.
6. TRADE SECRETS.
a. Special Techniques. It is hereby agreed that the Corporation has
developed or acquired certain products, technology, unique or
special methods, manufacturing and assembly processes and
techniques, trade secrets, special written marketing plans and
special customer arrangements, and other proprietary rights and
confidential information and shall during the service period
continue to develop, compile and acquire said items (all hereinafter
collectively referred to as the "Corporation's Property"). It is
expected that Kohavi will gain knowledge of and utilize the
Corporation's Property during the course and scope of his engagement
with the Corporation, and will be in a position of trust with
respect to the Corporation's Property.
b. Corporation's Property. It is hereby stipulated and agreed that the
Corporation's Property shall remain the Corporation's sole property.
In the event that this Agreement is terminated, for whatever reason,
The Contractor agrees that Kohavi will not copy, make known disclose
or use, any of the Corporation's Property without the Corporation's
prior written consent which may be unreasonably withheld. In such
event, the Contractor further agrees for itself and for Kohavi, not
to endeavor or attempt in any way to interfere with or induce a
breach of any prior proprietary contractual relationship that the
Corporation may have with any employee, customer, contractor,
supplier, representative, or distributor for nine (9) months. The
Contractor agrees upon termination of his agreement to cause Kohavi
to deliver to the Corporation all confidential papers, documents,
records,
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lists and notes (whether prepared by Kohavi or others) comprising or
containing the Corporations' Property. The Corporation recognizes
that violation of covenants and agreements contained in this Section
6 may result in irreparable injury to the Corporation which would not
be fully compensable by way of money damages. As a precondition of
his engagement, the Corporation may require Kohavi to personally sign
this undertaking.
c. Covenant Not to Compete. For a period of one (1) year from the date
of any termination of this agreement with the Corporation, the
Contractor and/or Kohavi shall not, directly or indirectly, either as
an employee, employer, consultant, agent, principal, partner,
stockholder, corporate officer, Director, or in any other individual
or representative capacity, engage or participate in any activities
within the States of Israel and California, which are the same as, or
competitive with, the activities in which the Corporation is
presently engaged. As a precondition of his engagement, the
Corporation may require Kohavi to personally sign this undertaking.
7. TERMINATION
a. General. The Corporation may terminate this Agreement without cause,
by written notice. The Contractor may voluntarily terminate his
agreement hereunder upon ninety (90) days' advance written notice to
the Corporation.
b. Termination for Cause. The Corporation may immediately terminate
this agreement at any time for cause. Termination for cause shall be
effective from the receipt of written notice thereof to the
Contractor specifying the grounds for termination and all relevant
facts. Cause shall be deemed to include: (i) neglect of Kohavi's
duties or a violation of any of the provisions of this Agreement,
which continues after written notice and a reasonable opportunity
(not to exceed thirty (30) days) in which to cure; (ii) fraud,
embezzlement, defalcation or conviction of any felonious offense; or
(iii) any intentional imparting of confidential information relating
to the Corporation or its business to competitors or to other third
parties other than in the course of carrying out of the duties
hereunder. The Corporation's exercise of its rights to terminate
with cause shall be without prejudice to any other remedy it may be
entitled at law, in equity, or under this Agreement.
c. Termination Upon Death or Disability. This Agreement shall
automatically terminate upon Kohavi's death. In addition, if any
disability or incapacity of Kohavi to perform his duties as the
result of any injury, sickness, or physical, mental or emotional
condition continues for a period of thirty (30) business days out of
any one hundred twenty (120) calendar-day period, the Corporation may
terminate this Agreement upon written notice.
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d. Compensation Upon Termination. Notwithstanding any provisions of
this Agreement, the Corporation may terminate this Agreement for any
reason. If the Corporation terminates this Agreement without cause
(including upon death or disability as specified in paragraph c
above), the Corporation shall pay the Contractor an amount equal to
the monthly fixed payment at the then-current rate, multiplied by the
number nine (9). The Corporation shall not pay any amount of
compensation if this Agreement is terminated by the Corporation for
cause. If the Contractor voluntarily terminates this agreement no
compensation shall be due. In the event of a nonrenewal by the
Corporation, the Corporation shall pay to the Contractor as a
compensation an amount equal to the fixed monthly payment at the
then-current rate, multiplied by the number (6).
8. CORPORATE OPPORTUNITIES.
a. Duty to Notify. In the event that the Contractor or Kohavi, during
the service period, shall become aware of any business opportunity
related to the Corporations' digital signal processing business, they
shall promptly notify the Corporation's Directors of such
opportunity. The Contractor or Kohavi shall not appropriate for
themselves, or for any other person other than the Corporation, or
any affiliate of the Corporation, any such opportunity unless, as to
any particular opportunity, the Board of Directors of the Corporation
fails to take appropriate action within thirty (30) days. The
Contractor's and Kohavi's duty to notify the Corporation and to
refrain from appropriating all such opportunities for thirty (30)
days shall neither be limited by nor shall such duty limit, the
application of the general law relating to the fiduciary duties of
agents or officers.
b. Failure to Notify. In the event that the Contractor of Kohavi fails
to notify the Corporation of, or so appropriates, any such
opportunity without the express written consent of the Board of
Directors, the Contractor shall be deemed to have violated the
provisions of this Section, notwithstanding the following:
i. The capacity in which such opportunity was acquired; or
ii. The probable success in the Corporation's hands of such
opportunity.
9. MISCELLANEOUS
a. Entire Agreement. This Agreement constitutes the entire agreement
and understanding between the parties with respect to the subject
matters herein, and supersedes and replaces any prior agreements and
understandings, whether oral or written between them with respect to
such matters. The provisions of this Agreement may be waived,
altered, amended or repealed in whole or in part only upon the
written consent of both parties to this Agreement.
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b. No Implied Waivers. The failure of either party at any time to
require performance by the other party of any provision hereof shall
not affect in any way the right to require such performance at any
time thereafter, nor shall the waiver by either party of a breach of
any provision hereof be taken or held to be a waiver of any
subsequent breach of the same provision or any other provisions.
c. Personal Services. It is understood that the services to be
performed by Kohavi hereunder are personal in nature and the
obligations to perform such services and the conditions and covenants
of this Agreement cannot be performed by the Contractor through any
other person, or assigned by Kohavi. Subject to the foregoing, and
except as otherwise provided herein, this Agreement shall inure to
the benefit of and bind the successors and assigns of the
Corporation.
d. Indemnity. It is expressly agreed that Kohavi is the employee of
the Contractor only. The Contractor undertakes to make all necessary
payments to the tax and National Insurance authorities in respect of
Kohavi, and further undertakes to immediately indemnify the
Corporation for any liability that may be imposed on it for any
failure of the Contractor. The Corporation shall be entitled to set
off any sum owed to it by the Contractor pursuant to the
indemnification obligations under this provision.
e. Severability. If for any reason any provision of this Agreement
shall be determined to be invalid or inoperative, the validity and
effect of the other provisions hereof shall not be affected thereby;
provided that no such severabilty shall be effective if it causes a
material detriment to any party.
f. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
g. Notices. All notices, requests, demands, instructions or other
communications required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly given upon
delivery, if delivered personally, or if given by prepaid telegram,
or mailed first-class, postage prepaid, registered or certified mail,
return receipt requested, shall be deemed to have been given
seventy-two (72) hours after such delivery, if addressed to the other
party at the addresses as set forth on the signature page below.
Either party hereto may change the address to which such
communications are to be directed by given written notice to the
other party of such change in the manner above provided.
[Remainder of page intentionally left blank]
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h. Merger, Transfer of Assets, or Dissolution of the Corporation. This
Agreement shall not be terminated by any dissolution of the
Corporation resulting from either merger or consolidation in which
the Corporation is not the consolidated or surviving corporation or a
transfer of all or substantially all of the assets of the
Corporation. In such event, the rights, benefits and obligations
herein shall automatically be assigned to the surviving or resulting
corporation or to the transferee of the assets.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above
DSP Semiconductors, Ltd. Niko Consulting and Management
and Israeli company an Israeli company (1995) Ltd.
By: /s/ Eli Ayalon By: /s/ Igal Kohavi
--------------------------- ----------------------------
Name: Eli Ayalon Name: Igal Kohavi
Title: President and CEO Title: President
Agreed by:
DSP Group, Inc.
a Delaware corporation
By: /s/ Eli Ayalon
-----------------------------------------
Name: Eli Ayalon
Title: President and Chief Executive Officer
I, Igal Kohavi, an employee of Niko Consulting and Management (1995) Ltd.,
will cause that the Contractor fulfill its obligations under the above
Service Agreement and will personally render the services required of the
Contractor under the above Services Agreement.
/s/ Igal Kohavi
------------------------------
Igal Kohavi
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DSP GROUP, INC.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock (Nasdaq symbol "DSPG") began trading publicly on
the Nasdaq National Market on February 11, 1994 in connection with the
Company's initial public offering. Prior to that date, there was no public
market for the Company's Common Stock. The following table presents for the
periods indicated the intraday high and low sale prices for the Common Stock
as reported by the Nasdaq National Market.
1996 HIGH LOW
---- ---
First Quarter $13.75 $8.25
Second Quarter $15.00 $8.75
Third Quarter $10.50 $6.75
Fourth Quarter $11.25 $7.38
1995 HIGH LOW
---- ---
First Quarter $23.25 $13.75
Second Quarter $26.00 $19.25
Third Quarter $26.00 $17.50
Fourth Quarter $19.25 $ 7.75
As of December 31, 1996, there were approximately 180 holders of record of
the Company's common stock, which the Company believes represents
approximately 9,000 beneficial holders. The Company has not paid cash
dividends on its common stock and presently intends to follow a policy of
retaining any earnings for reinvestment in its business, and in any case, the
Company is prohibited from paying dividends until its accumulated deficit of
$12,342,000 is eliminated.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS: 1996
RESULTS OF OPERATIONS
1996 has been a unique year for DSP Group. Results of operations for 1996
must be viewed as a two-phase era divided by the turnaround the Company went
through in the second half of 1996. A major setback, showing signs back in
the fourth quarter of 1995, affected the first half of 1996, resulting in the
decline of product gross margins, accumulation of inventories and negligible
operating income.
The second half of 1996 is marked by the introduction of a new management
team and the Company's turnaround. Product costs decreased, R&D sensibly
redirected and G&A expenses reduced. The turnaround resulted in gradually
improving margins which stabilized in the fourth quarter on new profitable
levels.
TOTAL REVENUES
Total revenues were $52.9 million in 1996, $50.4 million in 1995 and
$28.6 million in 1994, representing an increase over the prior year of 5% for
1996 compared with 76% for 1995. These results reflect the major setback the
Company went through, beginning in the fourth quarter of 1995, as well as the
marked turnaround performed by the new management in the second half of 1996.
This setback was a result of a decline in revenues of TAD speech processors
(due to softness in the TAD market caused by declining average selling
prices). The new management targeted the high costs of manufacturing and
operating expenses and succeeded in reducing both to create higher profits.
Through 1996 the Company maintained its role as a leading supplier of
technologically advanced, cost effective speech processors. The Company's
future operating results will be dependent upon a variety of factors - see
also "Factors Affecting Operating Results" in this report and in Form 10K.
Export sales, primarily consisting of TAD speech processors shipped
to manufacturers in Asia and Europe, represented 91%, 81% and 80% of total
revenues for the Company in 1996, 1995 and 1994 respectively.
All export sales are denominated in U.S. dollars.
SIGNIFICANT CUSTOMERS
Revenues from a distributor, Tomen Electronics, accounted for 17% of
total revenues in 1996 compared to 25% in 1995. Revenues from the Samsung
group accounted for 11% of total revenues in 1996.
In 1994 revenues from three customers, Tomen Electronics, RTI Industries
(a distributor) and Texas Instruments, accounted for 22%, 16% and 10% of
total revenues, respectively. The loss of one or more major distributors or
major customers could have an adverse effect on the Company's business,
financial condition and results of operations.
GROSS PROFIT
Gross profit as a percentage of total revenues was 42% in 1996, 48% in
1995 and 50% in 1994. The overall decline in gross margin was due to
competitive market pricing pressure for TAD products and the setback
discussed earlier. In the fourth quarter of 1996 gross margins increased to
44%.
Product gross profit as a percentage of product sales decreased to 29% in
1996 from 40% in 1995 and 35% in 1994. The low margins were primarily due to
lower average selling prices which were not accompanied by a reciprocal
decrease in product costs. However, product gross margin in the fourth
quarter of 1996 increased to 35% from an average gross margin of 26% in the
first three quarters.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased marginally in 1996 to $8.5
million from $8.4 million in 1995. However, through 1997 the Company expects
R&D expenses to stabilize on an annual rate of $8.0 million. This slightly
lower level of R&D expenses, achieved while maintaining R&D capacity, is
attributable to the consolidation of R&D activities in Israel and elimination
of redundancies. The outcome is a closely managed, leaner and better focused
research team. Other factors contributing to lower R&D were a reduction in
the tape-out counts per chip and 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. Research and
development expenses as a percentage of total revenues decreased to 16% in
1996 from 17% in 1995.
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Research and development expenses increased to $8.4 million in 1995 from
$4.4 million in 1994. The increase was due primarily to the reinforcement
and build up of a stronger R&D work-force to maintain revenues in excess of
$50 million a year. As a result of these increases, research and development
expenses as a percentage of total revenues increased to 17% in 1995 from 15%
in 1994.
SALES AND MARKETING EXPENSES
Sales and marketing expenses decreased in 1996 to $4.4 million from $5.1
million in 1995. The annualized rate for the second half of 1996 was even
lower at $4.1 million. This decrease was due primarily to the consolidation
of sales and sales related activities in the U.S., a reduction in sales and
marketing personnel including the elimination of redundant managerial layers
and strict monitoring of expenses. The above decrease was partially offset by
higher marketing expenses in the European office which had started to operate
at the end of 1995.
Sales and marketing expenses increased to $5.1 million in 1995 from $3.8
million in 1994. The increase was due primarily to expenses associated with
increased sales and marketing staff essential for the penetration stage to
the market of TAD, DSPCore and TrueSpeech-Registered Trademark- technologies.
Sales and marketing expenses as a percentage of total revenues declined to 8%
in 1996 from 10% and 13% in 1995 and 1994, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased marginally to $5.7 million
in 1996 from $5.6 million in 1995. G&A expenses in 1996 contain one time
charges associated with the departure of senior management in the Santa Clara
office offset by reduced legal expenses. In the second half of 1996 the
annualized rate of G&A expenses was $4.9 million compared to $6.5 million in
the first half.
General and administrative expenses increased to $5.6 million in 1995
from $4.1 million in 1994. The increase was due primarily to legal,
insurance and other expenses as well as expenses associated with litigation
against Rockwell International ("Rockwell") for unfair trade practices.
General and administrative expenses as a percentage of total revenues
decreased to 11% in 1996 and 1995 from 14% in 1994 due primarily to the
growth in total revenues.
UNUSUAL ITEMS
In July 1996 the Company invested $2.0 million of cash for approximately
40% of the equity interests in Aptel Ltd. ("Aptel"), a related party, which
is located in Israel. Aptel 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. In connection with the
acquisition, the Company recorded a one-time write-off of acquired in-process
R&D technology of $1.5 million based on an independent estimate of value.
In the second quarter of 1995, the Company decided to sell its 89% equity
interest in its subsidiary Nogatech Inc. Accordingly, the Company incurred a
charge of $500,000 to write down Nogatech Inc., to its estimated fair value
less costs to sell. In addition, in April 1995, the former chairman of the
board resigned to pursue other business interests and the Company incurred
$413,000 of severance expense as a result.
In May 1994, the Company expensed $1.1 million of acquired research and
development obtained in connection with the purchase of all the outstanding
stock of Nogatech, Inc., not previously held by the Company amounting to
approximately an additional 50% of the then outstanding stock of Nogatech,
Inc. In September of 1994, the Company sold its optical disk technology
obtained in the purchase of Nogatech to an investor group, and recorded a
gain of $646,000.
OTHER INCOME (EXPENSE)
Interest and other income increased to $1.6 million in 1996 from $1.4
million in 1995 and $1.2 million in 1994. The increase in 1996 and 1995 is a
result of higher average cash, cash equivalents and marketable securities
balances while the increase in 1994 was attributed to the investment of the
proceeds from the Company's initial public offering in February 1994. In the
last quarter of 1996, cash and cash equivalents and marketable securities
rose by more than
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$9.0 million to $43.0 million. Other income in 1994 also included $205,000 of
previously unrecognized gains due to adjustments to stockholder notes
receivable resulting from changes in the consumer price index.
Equity in loss of unconsolidated subsidiaries was $457,000, $212,000 and
$238,000 in 1996, 1995 and 1994 respectively. The increase in 1996 was mainly
due to equity loss of Aptel since July of 1996, when the Company acquired a
40% equity ownership interest. Equity in loss of unconsolidated subsidiaries
also included amortization of the excess of purchase price over net assets
acquired for an equity investment in AudioCodes, Ltd., made in the second
quarter of 1994.
GAIN ON SETTLEMENT OF LITIGATION
In October 1996, the Company entered into a settlement agreement with
Rockwell International Corporation. As part of the litigation settlement a
one time gain of $3.8 million, net of legal expenses was recorded.
GAIN ON SALE OF STOCK IN AFFILIATE
The Company sold its remaining equity interest in DSP Communications,
Inc. ("DSPC"), in DSPC's initial public offering in 1995. DSPC is the
successor of a former subsidiary of the Company, DSP Telecommunications,
Ltd. The equity interest, which had no book value, was sold for $1.9 million
of cash. In 1994, the Company sold a portion of its equity interest in DSPC
for $1.9 million of cash, including amounts to related parties of $1.4
million, resulting in a pretax gain of $1.9 million.
PROVISION FOR INCOME TAXES
The effective tax rate for the years ended December 31, 1996, 1995 and
1994 was 15%, .7% and 8%, respectively. The tax rate for 1996 is greater than
1995 due to decreased benefits from the utilization of net operating loss
carry forwards and other deferred tax assets, offset slightly by greater
benefits received from tax exempt interest income and foreign tax holidays.
In 1995 and 1994, the Company benefited, for federal, state, and Israeli tax
purposes, from the utilization of its net operating loss carry forwards as
well as the recognition of certain other deferred tax assets in 1995. The tax
provision for 1994 consisted primarily of federal alternative minimum tax,
and withholding taxes on royalties from an independent foundry.
DSP Semiconductors Ltd. in Israel has been granted "Approved Enterprise"
status by the Israel government according to two investment plans. The
Approved Enterprise status allows a tax holiday for a period of 2 - 4 years
and a corporate tax rate of 10% for additional 6 - 8 years on the respective
investment plans' proportionate share of taxable income. The Company
believes its effective tax rate may remain lower than the statutory rate in
the future due to increased benefits of the Israeli tax holiday.
A net deferred tax asset of approximately $1.0 million is reflected in
the financial statements. Approximately $3.0 million of the future U.S.
taxable income will be necessary to realize this deferred tax asset. While
there can be no assurance that future U.S. income will be sufficient to
realize this benefit, management is of the opinion that it is more likely
than not that this benefit will be realized in the near future based upon
projected income. A valuation allowance of approximately $3.7 million was
provided in the financial statements. Approximately, $2.2 million of the
valuation allowance for deferred tax assets is attributable to stock option
deductions, the benefit of which will be credited to equity when realized.
The remaining valuation allowance relates to U.S. operating losses, tax
credit carry forwards, and temporary differences for which the generation of
U.S. taxable income in the near future is not projected.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. In 1996, net cash provided by operating activities
was $11.3 million provided primarily by (i) $6.0 million of net income of
which $3.8 million was derived from the settlement with Rockwell, (ii) $1.7
million of depreciation and amortization and a $1.5 million write-off of
acquired in-process technology R&D from a related party (iii) a $1.2 million
decrease in deferred income tax and a $2.6 million decrease in accounts
receivable. These were partially offset by (i) a $1.0 million decrease in
accounts payable and (ii) a $0.6 million decrease in income taxes payable.
It should be noted that cash provided by operating activities for the
second half of 1996 was $13.1 million compared
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with $1.8 million of cash used in operating activities in the first half.
In 1995, net cash provided by operations was $4.1 million, provided
primarily by (i) $7.2 million of net income of which $1.9 million was derived
from the sale of stock in an affiliate, (ii) $1.6 million of depreciation and
amortization and a $500,000 non-cash charge to write-down of impaired assets,
and (iii) a $1.3 million increase in income taxes payable. These were
partially offset by (i) a $1.7 million decrease in accounts payable, (ii) a
$1.5 million increase in accounts receivable associated with growth in
revenues, (iii) a $1.0 million increase in inventories to maintain
availability of finished TAD products, and (iv) a $2.2 million increase in
deferred income taxes.
In 1994, net cash used in operations was $356,000, caused primarily by a
$3.9 million increase in accounts receivable associated with the increase in
revenues, and a $2.3 million increase in inventories to maintain availability
of finished TAD products and to introduce the Nogavision product line. These
uses were partially offset by (i) $4.0 million of net income, of which $1.9
million was derived from the sale of stock in an affiliate and $1.0 million
was derived from the reimbursement of expenses and gain on sale of technology
to related party in exchange for notes receivable, (ii) a $2.9 million
increase in accounts payable associated with the growth in business, and
(iii) a charge to income of $1.1 million for acquired research and
development.
INVESTING ACTIVITIES
In 1996, 1995 and 1994, the Company purchased $32.2 million, $28.3 and
$21.0 million, respectively, and sold $20.6 million, $18.2 million and $12.0
million, respectively, of investments classified as marketable securities.
Capital equipment additions in 1996, 1995 and 1994 were $0.8 million, $3.1
million and $1.7 million, respectively, for computer hardware and software
used in engineering development, engineering test equipment, vehicles, and
furniture and fixtures. The 1995 acquisitions of capital equipment were
primarily in response to increased headcount and new facility requirements in
Israel. The Company capitalized $173,000, $265,000 and $288,000 of software
development costs in 1996, 1995 and 1994, respectively.
In July 1996, the Company invested $2.0 million of cash for
approximately 40% of the equity interests in Aptel, a related party.
Expenses related to the acquisition were $158,000. The total cost of the
acquisition was allocated to the estimated fair value of the assets acquired,
and as a result the Company incurred a one-time write-off of acquired
in-process technology of $1.5 million based on an independent estimate of
value. The Company has a two-year option to purchase additional stock from
Aptel at the same valuation to enable the Company to increase its ownership
interest to 51% in Aptel, and an additional option to acquire the then
remaining outstanding stock of Aptel from its shareholders payable at the
seller's option in either cash or stock of the Company.
In March 1995 the Company sold all of its shares of DSPC Common Stock in
DSPC's initial public offering and in April 1995 upon the exercise of the
underwriters' overallotment option. Net proceeds of the sales, after
underwriters' commissions, amounted to $1.9 million in 1995. In 1994, the
Company had previously sold a portion of its holding in DSPC for $1.9 million
of cash.
In August, 1995, the Company concluded the sale of its equity interest
in Nogatech to two purchasers for $1.5 million of cash. In addition, in
exchange for the receipt from Nogatech of certain fixed assets, reimbursement
of post June 30, 1995 cash fundings of Nogatech, a $400,000 secured
promissory note and future sales of certain Nogatech products, the Company
issued limited licenses to Nogatech to use certain technology of the Company
and canceled all other amounts owed the Company by Nogatech. The Company has
attributed $250,000 of the purchase price to the value of these limited
licenses sold to Nogatech based upon the Company's licensing pricing
structure.
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In 1994, the Company acquired from Scitex Corporation, Ltd, the then
remaining 50% of outstanding capital stock of Nogatech, Inc. not previously
held by the Company for cash payment of $2.0 million. Legal, accounting and
professional costs associated with the purchase were $100,000. In 1994, the
Company also increased its equity interests in AudioCodes, Ltd., by purchasing
common stock directly from AudioCodes for $1.6 million of cash and purchasing
common stock and options from two founders of AudioCodes for $280,000 of cash
to each founder. In 1993, the Company made a $500,000 investment in AudioCodes.
The Company now has a 35% equity interest in AudioCodes.
FINANCING ACTIVITIES
In 1996, the Company received $0.5 million compared to $1.9 million and
$2.0 million in 1995 and 1994, respectively, upon the exercise of employee
stock options and issuance of Common Stock under the employee stock purchase
plan. Repayment of stockholders' notes receivable accounted for $0.4 million,
$0.7 million and $0.9 million in 1996, 1995 and 1994, respectively.
The Company's revolving line of credit with a domestic bank provides for
borrowings of up to $2.0 million and expires in June 1997. Amounts borrowed
under the line of credit are collateralized by substantially all of the
Company's U.S. tangible assets and the Company is also subject to certain
financial covenants. At December, 1996, the aggregate amount available to be
borrowed under the revolving line of credit was $2.0 million.
In July 1995, the former Chairman of the Board paid $1.1 million as full
payment on two full-recourse promissory notes and accrued interest. The notes
had been issued in 1994 in connection with a warrant exercise and related
withholding taxes.
The Company completed its initial public offering in February 1994. Net
proceeds, after underwriting commissions and expense associated with the
offering, were $27.6 million. The Company also received cash of $2.0 million
upon the exercises of common stock options and warrants in 1994. In 1994,
the Company repaid the $1.5 million note to a foreign bank as well as repaid
$335,000 owed under a line of credit with the same foreign bank.
At December 31, 1996, the Company's principal source of liquidity
consisted of cash and cash equivalents totaling $12.2 million, marketable
securities of $30.8 million and amounts available under the domestic bank
line of credit of $2.0 million. The Company's working capital at December 31,
1996 was $47.9 million up from $39.3 million at December 31, 1995.
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. The Company has investigated, and continues to
investigate, means to acquire greater control over wafer production, whether
by joint venture, equity investments in or loans to wafer suppliers. There
can be no assurance that the Company will consummate any such transactions.
As part of its business strategy, the Company occasionally evaluates
potential acquisitions of business, products and technologies. Accordingly,
a portion of its available cash may be used for the acquisition of
complementary products or business. Such potential transactions may require
substantial capital resources, which may require the Company to seek
additional debt or equity financing.
FACTORS AFFECTING OPERATING RESULTS
The stockholders' letter and discussion in this annual report concerning
the Company's future products, expenses, revenue, liquidity and cash needs as
well as the Company's plans and strategies contain forward-looking statements
concerning the Company's future operations and financial results. These
forward-looking statements are based on current expectations and the Company
assumes no obligation to update this information. Numerous factors could
cause results to differ from those described in these statements and
prospective investors and stockholders should carefully consider the factors
set forth below in evaluating these forward-looking statements.
The Company's revenues are derived predominantly 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 the recognition of license fees and the level of per unit royalties. The
uncertain timing of such license fees has caused, and may continue to cause,
quarterly fluctuations in the Company's operating results. The Company's per
unit royalties
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are dependent upon the success of its original equipment manufacturer ("OEM")
licensees in introducing products utilizing the Company's technology and the
success of those OEM products in the marketplace. In the fourth quarter of
1995, the first shipment of products utilizing the Company's PineDSPCore
technology occurred. However, royalties from such shipments and TrueSpeech
have not been significant to date.
The Company's quarterly operating results may fluctuate significantly as
demand for TADs varies during the year due to seasonal customer buying
patterns, and other factors, including the mix of products sold; fluctuations
in the level of sales by OEMs and other vendors of products incorporating the
Company's products; changes in general economic conditions; and other
factors, including those documented elsewhere in this report.
The Company has experienced and is experiencing a decrease in the average
selling prices of its TAD speech processors. During 1996, the Company was
able to partially offset this decrease on an annual basis through
manufacturing cost reductions and the introduction of new higher priced
products with higher performance. However, any inability of the Company to
respond to increased price competition for these and other products through
the continuing and frequent introduction of new products or reductions of
manufacturing costs would have a material adverse effect on the Company's
business, financial condition and results of operations. The markets for the
Company's products are extremely competitive and the Company expects this
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, selling and distribution resources and management
expertise than the Company. Sales of TAD products comprise a substantial
part 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 material adverse effect on the Company's business,
financial condition and results of operations.
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, quality levels and costs, and to allocate to the
Company a sufficient portion of foundry capacity to meet the Company's needs
in a timely manner. To meet increased wafer requirements, the Company has
added additional independent foundries to manufacture its TAD speech
processors. The Company believes that it now has sufficient foundry capacity
through 1998. Revenues could be materially and adversely affected, however,
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.
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. Distribution shortages or termination of certain of these sources
of supply could occur. For example, the Company's customers for TAD speech
processors have experienced difficulties obtaining sufficient timely supplies
of Audio-grade random access memories ("ARAMs") which are included in current
digital TADs. These shortages were 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. Supply disruptions,
shortages or termination could have an adverse effect on the Company's
business and a result of operations due to its customer's delay or
discontinuance of orders for the Company's products until such components are
available.
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 markets. This would create an
opportunity for the Company to develop and market speech co-processors that
provide TrueSpeech solutions and enhance the performance and functionally of
products incorporating these co-processors. In the fourth quarter of 1995,
the International Telecommunications Union ("ITU") gave final approval to
TrueSpeech as the speech compression technology for low bit-
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rate video conferencing (G.723.1). For simultaneous voice and data ("DSVD")
modems, the ITU has adopted a proposed audio standard based on an existing
standard (G.729) sponsored by the University of Sherbrooke rather than a
standard based on TrueSpeech. The Company intends to license the speech
compression standard selected by the ITU to be included in the Company's DSVD
co-processors. The failure to establish industry standards based on
TrueSpeech algorithms or to develop and market competitive speech
co-processors would have material adverse effect on the Company's business,
financial condition and results of operations.
G.723.1 is also one of the speech coders for the H.323 based conferencing
applications. This standard provides conferencing capabilities over the
packet-based networks, most significantly the Internet and other IP networks.
Since G.723.1 is the lowest bit-rate technology in the list of speech coders
for this standard, it may be adopted by the industry as the choice of speech
coder for the Internet conferencing applications.
As is typical in the semiconductor industry, 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
asserted that G.723.1, which is primarily composed of TrueSpeech algorithm,
includes certain elements covered by patents held by AT&T and has requested
that video conferencing manufacturers license such technology from AT&T.
Other organizations including Lucent, NTT and VoiceCraft recently raised
claims in public that they have patents related to the G.723.1 technology. 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
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 used by the Company could cause the Company to incur
substantial liabilities and to suspend the manufacture of products utilizing
the technology. However, the Company in its licensing activities represents
only the four co-developers' patents and intellectual property rights as they
relate to the G.723.1 technology. The Company believes that the ultimate
resolution of these matters will not have material adverse effect on the
Company's financial position and results of operations, or cash flows.
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, and the Court on
August 14, 1996, held a hearing on the Company's motion to dismiss the
complaint. 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 the plaintiffs to proceed with their claims regarding statements
the Company allegedly made to securities analysts, and is also permitting the
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.
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.
25
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
DSP Group, Inc.
We have audited the accompanying consolidated balance sheets of DSP Group,
Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of DSP Group, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
San Jose, California
January 26, 1997,
except for Stockholders' Litigation under
Note 5, as to which the date is
March 7, 1997
<PAGE>
DSP GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
1996 1995
-------------------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents $12,172 $14,679
Marketable securities 30,762 19,149
Accounts receivable, less allowance for returns and
doubtful accounts of $636 in 1996 and $613 in 1995 4,833 7,461
Accounts and notes receivable from related parties
and officers 28 668
Inventories 2,957 3,000
Deferred income taxes 500 784
Prepaid expenses and other current assets 1,357 876
------------------------
Total current assets 52,609 46,617
Property and equipment, at cost:
Computer equipment 5,985 5,518
Furniture and fixtures and other 1,040 718
Leasehold improvements 299 452
------------------------
7,324 6,688
Less accumulated depreciation and amortization 4,033 2,591
------------------------
3,291 4,097
Investments in unconsolidated subsidiaries, net of
accumulated amortization of $695 in 1996 and
$409 in 1995 relating to excess of purchase price
over net assets acquired 2,415 2,244
Other assets, net of accumulated amortization of $284
in 1996 and $98 in 1995 388 507
Deferred income taxes 504 1,389
------------------------
Total assets $59,207 $54,854
------------------------
------------------------
See accompanying notes.
<PAGE>
DSP GROUP, INC.
CONSOLIDATED BALANCE SHEETS (continued)
DECEMBER 31,
1996 1995
------------------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,428 $ 2,437
Accrued compensation and benefits 1,739 1,891
Income taxes payable 908 1,517
Accrued royalties 176 547
Deferred revenue - 50
Accrued expenses and other 507 871
------------------------
Total current liabilities 4,758 7,313
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares - 5,000
Issued and outstanding shares - none - -
Common stock, $0.001 par value:
Authorized shares - 20,000
Issued and outstanding shares - 9,540 in 1996
and 9,439 in 1995 10 9
Additional paid-in capital 66,781 66,287
Stockholders' notes receivable - (434)
Accumulated deficit (12,342) (18,321)
------------------------
Total stockholders' equity 54,449 47,541
------------------------
Total liabilities and stockholders' equity $59,207 $54,854
------------------------
------------------------
See accompanying notes.
<PAGE>
DSP Group, Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Product sales $41,290 $41,425 $20,170
Licensing, royalties, and other (includes
related party revenues of $1,709 in 1996,
$884 in 1995, and $308 in 1994) 11,620 9,012 8,434
------------------------------------------
Total revenues 52,910 50,437 28,604
Cost of revenues:
Cost of product sales 29,432 24,775 13,083
Cost of licensing, royalties, and other (includes
related party costs of $355 in 1996 and
$179 in 1995) 1,096 1,308 1,146
------------------------------------------
Total cost of revenues 30,528 26,083 14,229
------------------------------------------
Gross profit 22,382 24,354 14,375
Operating expenses:
Research and development (includes related party
expenses of $269 in 1996, $127 in 1995,
and $672 in 1994) 8,481 8,396 4,350
Sales and marketing (includes related party
expenses of $0 in 1996, $85 in 1995,
and $2 in 1994) 4,429 5,135 3,779
General and administrative (includes related party
expenses of $0 in 1996, $34 in 1995,
and $100 in 1994) 5,669 5,624 4,074
Unusual items 1,529 913 458
------------------------------------------
Total operating expenses 20,108 20,068 12,661
------------------------------------------
Operating income 2,274 4,286 1,714
Other income (expense):
Interest and other income 1,627 1,399 1,214
Interest expense and other (158) (102) (142)
Gain on settlement of litigation, net of expenses 3,750 - -
Equity in income (loss) of unconsolidated
subsidiaries, net of amortization of goodwill
of $286 in 1996, $273 in 1995, and $136 in 1994 (457) (212) (238)
Gain on sale of stock in affiliated company
(includes gain on sale to related party of
$1,351 in 1994) - 1,893 1,851
------------------------------------------
Income before provision for income taxes 7,036 7,264 4,399
Provision of income taxes 1,057 53 367
------------------------------------------
Net income $ 5,979 $ 7,211 $ 4,032
------------------------------------------
------------------------------------------
Net income per share $ 0.62 $ 0.75 $ 0.44
Shares used in per share computation 9,581 9,658 9,135
</TABLE>
See accompanying notes.
<PAGE>
DSP GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDERS' TOTAL
------------------------------------------- PAID-IN NOTES ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT EQUITY
---------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 3,446 $ 4 2,705 $ 3 $32,952 $(878) $(29,564) $ 2,517
Exercise of Common Stock
options by employees and
third parties for cash and
notes receivable - - 395 - 2,001 (181) - 1,820
Sale of Common Stock for cash
upon exercise of warrants - - 63 - 132 - - 132
Exercise of Common Stock
warrants in exchange for
notes receivable and cash - - 141 - 427 (425) - 2
Conversion of Preferred Stock
to Common Stock (3,446) (4) 3,512 4 - - - -
Cashless exercise of warrants - - 83 - - - - -
Sale of Common Stock, net of
issuance costs - - 2,300 2 27,639 - - 27,641
Repayments on notes - - - - - 862 - 862
Consumer price index
adjustment - - - - - (205) - (205)
Net income - - - - - - 4,032 4,032
-------------------------------------------------------------------------------------------------
Balance at December 31, 1994 - - 9,199 9 63,151 (827) (25,532) 36,801
Exercise of Common Stock
options by employees and
third parties for cash and
notes receivable - - 224 - 1,986 (313) - 1,673
Compensation expense upon
acceleration of stock option
vesting - - - - 130 - - 130
Sale of Common Stock under
employee stock purchase plan - - 16 - 222 - - 222
Income tax benefit from stock
options exercised - - - - 798 - - 798
Payments on notes receivable
from stockholders - - - - - 706 - 706
Net income - - - - - - 7,211 7,211
-------------------------------------------------------------------------------------------------
Balance at December 31, 1995 - - 9,439 9 66,287 (434) (18,321) 47,541
Exercise of Common Stock
options by employees - - 77 1 283 - - 284
Sale of Common Stock under
employee stock purchase plan - - 24 - 211 - - 211
Payments on notes receivable
from stockholders - - - - - 434 - 434
Net income - - - - - - 5,979 5,979
-------------------------------------------------------------------------------------------------
Balance at December 31, 1996 - $ - 9,540 $10 $66,781 $ - $(12,342) $54,449
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
<PAGE>
DSP GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
----------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,979 $ 7,211 $ 4,032
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,729 1,551 911
Amortization of software development costs 185 98 -
Loss (gain) on disposal of equipment - (30) 22
Deferred revenue (50) (53) (78)
Deferred income tax 1,169 (2,173) -
Reimbursement of expenses and gain on sale
of technology to related party - - (977)
Gain on sale of stock of affiliated company - (1,893) (1,851)
Gain on write-off of deferred rent (380) - -
Consumer price index and foreign currency
translation adjustments to stockholders'
notes receivable - - (205)
Acquired research and development from
related party 1,529 - 1,104
Equity in (income) loss of unconsolidated
subsidiaries 171 (61) 96
Write-down/write-off of assets 290 500 -
Write-off of capitalized software development
cost 31 89 -
Compensation expense upon acceleration of
stock option vesting - 130 -
Changes in operating assets and liabilities:
Accounts receivable 2,628 (1,521) (3,861)
Accounts and notes receivable from
related parties 640 742 (743)
Inventories 43 (1,044) (2,317)
Prepaid expenses and other current assets (481) (297) 1,005
Other assets (14) 41 (142)
Accounts payable (1,009) (1,673) 2,889
Accrued compensation and benefits (152) 600 17
Income taxes payable (609) 1,344 133
Accrued royalties (371) 249 (188)
Accrued expenses and other 16 335 (203)
----------------------------------------
Net cash provided by (used in) operating activities 11,344 4,145 (356)
See accompanying notes.
<PAGE>
DSP GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31,
1996 1995 1994
----------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
INVESTING ACTIVITIES
Purchase of available-for-sale marketable
securities $(32,217) $(28,310) $(21,009)
Sale of available-for-sale marketable securities 20,604 18,171 12,000
Purchases of equipment (836) (3,060) (1,664)
Sale of equipment - 75 40
Purchase of Nogatech, Inc., net of cash acquired - - (2,034)
Sale of Nogatech, Inc. - 1,259 -
Equity investment in AudioCodes, Ltd. - - (2,194)
Sale of stock of affiliated company - 1,893 1,851
Equity investment in Aptel Ltd. (2,158) - -
Capitalized software development costs (173) (265) (288)
Payment on note receivable issued in connection
with reimbursement of expenses and sale of
technology to related party - - 250
----------------------------------------
Net cash used in investing activities (14,780) (10,237) (13,048)
----------------------------------------
FINANCING ACTIVITIES
Line of credit - 5 (165)
Repayments of debt and notes payable to
related parties - - (1,540)
Sale of Common Stock for cash upon exercise
of options, warrants, and employee stock
purchase plan 495 1,895 1,954
Sale of Common Stock, net of issuance costs - - 27,641
Repayment of stockholders' notes receivable 434 706 862
Income tax benefit from stock option exercises - 798 -
----------------------------------------
Net cash provided by financing activities 929 3,404 28,752
----------------------------------------
Increase (decrease) in cash and cash equivalents (2,507) (2,688) 15,348
Cash and cash equivalents at beginning of year 14,679 17,367 2,019
----------------------------------------
Cash and cash equivalents at end of year $ 12,172 $ 14,679 $ 17,367
----------------------------------------
----------------------------------------
See accompanying notes.
<PAGE>
DSP GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31,
1996 1995 1994
------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest expense $ 17 $ 7 $ 49
Income taxes $372 $221 $ 73
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Issuance of Common Stock in exchange for notes
receivable, net of repurchases $ - $313 $181
Exercise of Common Stock warrants in exchange
for notes payable $ - $ - $425
Conversion of Preferred Stock into Common Stock $ - $ - $ 4
</TABLE>
See accompanying notes.
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DSP Group, Inc. (the "Company") is engaged in the development of
high-performance, cost-effective DSP-based software and integrated circuits
for digital speech products targeted at the convergence of the personal
computer, communications, and consumer electronics markets. The Company has
three wholly owned subsidiaries: DSP Semiconductors Ltd. (DSP Semiconductors
Israel), an Israeli corporation primarily engaged in VLSI design; Nihon DSP
K.K. (DSP Japan), a Japanese corporation primarily engaged in marketing and
sales; and DSP Group Europe SARL, a French corporation primarily engaged in
marketing and sales.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly and majority owned subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
REVENUE RECOGNITION
PRODUCT SALES
Product sales relate to shipments of speech processors for digital telephone
answering machines. Revenue is recognized upon shipment. The Company has no
ongoing commitments after shipment other than for warranty and sales
returns/exchanges by distributors. The Company accrues estimated sales
returns/exchanges upon recognition of sales. The Company has not experienced
significant warranty claims to date, and accordingly, the Company provides
for the cost of warranty when specific problems are identified.
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
LICENSING AND ROYALTY REVENUES
Licensing revenues, including technology revenues, are generally recognized
on shipment by the Company provided that no significant vendor or
post-contract support obligations remain outstanding and collection of the
resulting receivable is deemed probable. Insignificant vendor and
post-support obligations are accrued upon shipment. Certain royalty
agreements provide for per unit royalties to be paid to the Company based on
shipments by customers of units containing the Company's products. Revenue
under such agreements is recognized at the time of shipment by the customer.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Depreciation and amortization are provided using the straight-line method
over the estimated useful lives of the assets, which range from three to
seven years, or the life of the lease, whichever is shorter.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and are composed of the following:
DECEMBER 31,
-------------------
1996 1995
-------------------
(IN THOUSANDS)
Raw materials $ - $ 2
Work-in-process 217 28
Finished goods 2,740 2,970
-------------------
$2,957 $3,000
===================
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUITY INVESTMENTS
The Company has investments in two companies which are accounted for under
the equity method.
AUDIOCODES, LTD.
The Company has a 35% ownership interest in AudioCodes, Ltd. (AudioCodes), an
Israeli corporation primarily engaged in DSP-related contract engineering
relating to speech and audio algorithm technologies. In 1993, the Company
purchased stock of AudioCodes for a total cost of $500,000, representing a
26% equity interest. In 1994, the Company acquired additional stock
representing approximately a 9% equity interest for $2,172,000 in cash. The
Company purchased this stock directly from AudioCodes for $1,612,000 in cash
and from two founders of AudioCodes for $280,000 in cash to each individual.
The Company also obtained options to purchase an additional 5% of the
outstanding stock of AudioCodes.
The Company accounts for its ownership in AudioCodes using the equity method.
The investment amount includes the excess of purchase price over net assets
acquired (approximately $1,907,000 at the date of purchase), which was
attributed to developed technology, and is being amortized over a seven-year
period. The Company contributed almost all of the cash of AudioCodes, and as
such, it will record 100% of any cumulative losses incurred by AudioCodes
from the date of the Company's investment. If AudioCodes has cumulation
profits from the date of the Company's investment, the Company will record
only its percentage share of earnings. The Company and AudioCodes have joint
ownership of any speech-related technology developed by AudioCodes, and the
Company has a license to such technology in exchange for quarterly license
fees and royalties payable by the Company to AudioCodes. The Company's equity
in the net income (loss) of AudioCodes was $36,000 in 1996, $61,000 in 1995,
and $(102,000) in 1994. As of December 31, 1996, the difference in the
investment in AudioCodes and the Company's proportionate share of net assets
is $1,269,000, primarily related to the unamortized portion of developed
technology.
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUITY INVESTMENTS (CONTINUED)
APTEL LTD.
In July 1996, the Company invested $2,000,000 of cash for approximately 40%
of the equity interests in Aptel Ltd. (Aptel), which is located in Netanya,
Israel. Aptel 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. Expenses related to the acquisition were $158,000. In
accordance with Accounting Principles Board Opinion No. 16, the total cost of
the acquisition was allocated to the estimated fair value of the assets
acquired, and as a result, the Company incurred a one-time write-off of
acquired in-process technology of $1,529,000 based on an independent estimate
of value.
The Company has a two-year option to purchase additional stock from Aptel at
the same price to enable the Company to increase its ownership interest to
51% and an additional option to acquire the then remaining outstanding stock
of Aptel from its stockholders payable at the seller's option in either cash
or stock of the Company. Igal Kohavi, Chairman of the Company, is Chairman of
Polaris Venture Capital Fund which, together with other associated parties
under its leadership, held an approximate 70% equity interest in Aptel prior
to the Company's investment, and is a director of Aptel. The Company's equity
in the net losses of Aptel, including amortization of related intangibles,
was $221,000 in 1996. As of December 31, 1996, the difference between the
Company's recorded investment in Aptel and its proportionate share of net
assets is $53,000.
FOREIGN CURRENCY TRANSACTIONS
Foreign operations are measured using the U.S. dollar as the functional
currency. Accordingly, monetary accounts (principally cash, receivables, and
liabilities) are remeasured using the foreign exchange rate at the balance
sheet date. Operations accounts and nonmonetary balance sheet accounts are
remeasured at the rate in effect at the date of transaction. The effects of
foreign currency remeasurement are reported in current operations and have
not been significant to date.
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Convertible
Preferred Stock (using the if-converted method). Net income per share
includes the dilutive effect of stock options and warrants (using the
treasury stock method). Fully diluted earnings per share is not presented
because it is not significantly different than primary earnings per share.
CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to credit risk consist
principally of cash, cash equivalents, marketable securities, and trade
receivables. By policy, the Company places its cash, cash equivalents, and
marketable securities only with high-credit quality financial institutions
and corporations and, other than U.S. Government Treasury instruments, limits
the amounts invested in any one institution or type of investment. The
majority of the Company's product sales are to distributors who in turn sell
to manufacturers of consumer electronics products. The Company's licensing
revenues are primarily from customers that have licensed rights to use the
Company's DSPCore microprocessor architectures and speech compression
technology. No collateral is required from the Company's customers; however,
some of the customers pay using letter of credit. Write-offs for bad debts
have not been significant to date.
CONCENTRATION OF OTHER RISKS
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. The Company's operating results also depend on the timing of the
recognition of license fees and the level of per unit royalties. During 1997,
the Company expects that revenues from its DSPCore designs and TrueSpeech
will continue to be derived primarily from license fees rather than per unit
royalties. However, the uncertain timing of such license fees may continue to
cause fluctuations in the Company's operating results. The Company's
royalties from such products are totally dependent upon the success of its
original equipment manufacturer (OEM) licenses in introducing these products
and the success of such products in the marketplace.
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF OTHER RISKS (CONTINUED)
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 business, the Company is and will continue
to be dependent upon these foundries to achieve acceptable manufacturing
yields, quality levels, costs, and to allocate to the Company sufficient
foundry capacities to meet the Company's needs in a timely manner. 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. 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.
ACCOUNTS AND NOTES RECEIVABLE FROM RELATED PARTIES AND OFFICERS
Accounts and notes receivable from related parties and officers included
$400,000 of notes receivable from related parties at December 31, 1995. Such
notes receivable were repaid in full in fiscal 1996.
NOTES FROM OFFICERS
In July 1995, the Company accepted from the former Chairman a $383,000
full-recourse promissory note as consideration for his exercise of an option
to purchase 22,000 shares of Common Stock and payment for related withholding
taxes. The note's interest rate was prime plus 1% per annum (9.75% at
December 31, 1995). The former Chairman paid $70,000 of principal in
September 1995 and paid the remaining principal and interest in February
1996. In August 1994, the Company agreed to accept from its former Chairman a
$425,000 full-recourse promissory note bearing interest at 6.5% per annum,
due in August 1997, as consideration for a warrant exercise of approximately
141,000 shares of Common Stock and a $592,000 full-recourse promissory note
bearing interest at 8.76% per annum, due in August 1995, for withholding
taxes on this exercise. Both notes were repaid in 1995.
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents. The carrying amount (at cost)
of cash and cash equivalents as of December 31, 1995 and 1996 approximates
fair value (quoted market price).
SECURITIES AVAILABLE-FOR-SALE
All debt and equity securities have been designated as available-for-sale
under Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (FAS 115). The amortized
cost of available-for-sale debt securities is adjusted for the amortization
of premiums and accretion of discounts to maturity. Such amortization is
included in investment income. Realized gains and losses and declines in
value judged to be other-than-temporary on available-for-sale securities are
included in investment income. The cost of securities sold is based on the
specific identification method. Interest and dividends on securities
classified as available-for-sale are included in interest and other income.
The following is a summary of available-for-sale securities at December 31,
1996 and 1995:
AMORTIZED COST
1996 1995
---------------------
(IN THOUSANDS)
Obligations of states and political subdivisions $16,891 $14,753
Municipal auction rate preferred stock 2,200 4,400
Corporate obligations 19,301 -
Other - 636
---------------------
$38,392 $19,789
=====================
Amounts included in marketable securities $30,762 $19,149
Amounts included in cash and cash equivalents 7,630 640
---------------------
$38,392 $19,789
=====================
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
At December 31, 1996 and 1995, the carrying amount of securities approximated
the fair value (quoted market price), and the amount of unrealized gain or
loss was not significant. Gross realized gains or losses for 1996, 1995, and
1994 were not significant.
The amortized cost of available-for-sale debt securities at December 31,
1996, by contractual maturities, are shown below:
AMORTIZED
COST
--------------
(IN THOUSANDS)
Due in one year or less $31,196
Due after one year to eighteen months 4,996
--------------
$36,192
==============
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs beginning at the time
technological feasibility is determined to have occurred using either the
detailed program design or working model approach. Capitalized software
development costs are stated at the lower of cost or net realizable value and
are amortized on a straight-line basis over the greater of their estimated
economic life, generally from two to five years, or the ratio of current
revenues to estimated current and future revenues for the software products.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 and 1995 consolidated
financial statements to conform to the 1996 presentation.
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GAIN ON SETTLEMENT OF LITIGATION
In October 1996, the Company entered into agreements with Rockwell
International, Inc. (Rockwell) to license certain of the Company's TrueSpeech
speech technologies and to settle all pending litigation between the
companies. In connection with the litigation settlement in fiscal 1996, the
Company recorded in other income a one time gain on settlement of litigation,
net of expenses of $3,750,000.
2. STOCKHOLDERS' EQUITY
PUBLIC OFFERING
In February 1994, the Company sold a total of 2,300,000 shares of Common
Stock at $14.00 per share through its initial public offering. The net
proceeds (after underwriters' commissions and fees and other costs associated
with the offering) totaled $27,641,000. In connection with the offering, all
Convertible Preferred Stock totaling 3,446,000 shares with an aggregate
paid-in value of $29,535,000 was converted into 3,512,000 shares of Common
Stock of the Company. At December 31, 1996, the Company had an accumulated
deficit of approximately $12,342,000 and, until this deficit is eliminated,
will be prohibited from paying dividends.
PREFERRED STOCK
The Board of Directors has the authority, without any further vote or action
by the stockholders, to provide for the issuance of up to 5,000,000 shares of
Preferred Stock in one or more series with such designations, rights,
preferences, and limitations as the Board of Directors may determine,
including the consideration received, the number of shares comprising each
series, dividend rates, redemption provisions, liquidation preferences,
sinking fund provisions, conversion rights, and voting rights.
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK PURCHASE PLAN, STOCK OPTION PLANS, AND WARRANTS
The Company has various stock plans under which employees, consultants,
officers, and directors may be granted options to purchase the Company's
Common Stock. A summary of the various plans is as follows:
1991 EMPLOYEE AND CONSULTANT STOCK PLAN
In 1991, the Company adopted the 1991 Employee and Consultant Stock Plan (the
1991 Plan). Under the 1991 Plan, employees and consultants may be granted
incentive or nonqualified stock options or stock purchase rights for the
purchase of the Company's Common Stock. The 1991 Plan expires in 2001 and
currently provides for the purchase of up to 2,800,000 shares of the
Company's Common Stock.
The exercise price of options under the 1991 Plan shall not be less than the
fair market value of the Common Stock for incentive stock options and not
less than 85% of the fair market value of the Common Stock for nonqualified
stock options, as determined by the Board of Directors.
Options under the 1991 Plan are generally exercisable over a 48-month period
beginning twelve months after issuance or as determined by the Board of
Directors. Options under the 1991 Plan expire five years after the date of
grant.
During October 1995, employees and officers holding options to purchase
shares of the Company's Common Stock were offered the opportunity to exchange
their existing options for the same number of options at the then current
market price. Under the terms of the program, options to purchase 395,000
shares of the Company's Common Stock were exchanged and are reflected in
grant and cancelation activity for fiscal 1995.
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK PURCHASE PLAN, STOCK OPTION PLANS, AND WARRANTS (CONTINUED)
DIRECTORS' PLAN
The Directors' Stock Option Plan (the Directors' Plan) was adopted in January
1994. Under the Directors' Plan the Company is authorized to issue
nonqualified stock options to purchase up to 175,000 shares of the Company's
Common Stock at an exercise price equal to the fair market value of the
Common Stock on the date of grant. The Directors' Plan provides that each
person who is an outside director on the effective date of the Directors'
Plan and each outside director who subsequently becomes a member of the Board
of Directors shall automatically be granted an option to purchase 8,000
shares (the First Option). Additionally, each outside director shall
automatically be granted an option to purchase 2,000 shares (a Subsequent
Option) on January 1 of each year if, on such date, he/she shall have served
on the Board of Directors for at least six months.
In May 1996, the stockholders approved certain amendments to the plan to
increase the First Option grant from 8,000 shares to 15,000 shares. In
addition, Subsequent Option grants were increased from 2,000 shares to 5,000
shares commencing with the grants to be made on January 1, 1997.
Options granted under the Directors' Plan generally have a term of ten years.
The First Option is exercisable 25% after the first year (one-third after the
first year for options granted after May 1996) and in quarterly installments
over the ensuing three years (one-third at the end of each twelve-month
period for options granted after May 1996). Each Subsequent Option becomes
exercisable in full on the fourth anniversary from the date of grant
(one-third at the end of each twelve-month period from the date of grant for
options granted after May 1996).
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK PURCHASE PLAN, STOCK OPTION PLANS, AND WARRANTS (CONTINUED)
1993 ISRAELI PLAN
In 1993, the Company adopted the DSP Group, Inc. Israeli Stock Option Plan
(the 1993 Israeli Plan) under which the Company is authorized to issue
nonqualified stock options to purchase up to 167,000 shares of the Company's
Common Stock at an exercise price equivalent to fair market value. Options
are immediately exercisable and expire five years from the date of grant. All
options and shares are held in a trust until the later of 24 months from the
date of grant or the shares are vested based on a vesting schedule determined
by a committee appointed by the Board of Directors. Nonvested shares are
subject to repurchase by the Company at the original issuance price.
A summary of activity under the U.S. Plan, the 1993 Israeli Plan, and the
Directors' Plan is as follows:
OPTIONS OUTSTANDING
--------------------------
SHARES SHARES
AVAILABLE UNDER PRICE PER
FOR GRANT OPTION SHARE
--------------------------------------
(SHARES IN THOUSANDS)
Balance at December 31, 1993 269 556 $ 1.80 - $ 9.75
Authorized 600 - $ -
Granted (754) 754 $11.00 - $22.50
Exercised - (392) $ 1.80 - $14.00
Canceled 29 (29) $ 1.80 - $14.00
----------------------
Balance at December 31, 1994 144 889 $ 1.80 - $22.50
Authorized 500 - $ -
Granted (902) 902 $15.13 - $24.25
Exercised - (224) $ 1.80 - $15.40
Canceled 505 (505) $ 1.80 - $24.25
----------------------
Balance at December 31, 1995 247 1,062 $ 1.80 - $24.25
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK PURCHASE PLAN, STOCK OPTION PLANS, AND WARRANTS (CONTINUED)
OPTIONS OUTSTANDING
--------------------------
SHARES SHARES WEIGHTED
AVAILABLE UNDER AVERAGE
FOR GRANT OPTION EXERCISE PRICE
--------------------------------------
Balance at December 31, 1995 247 1,062 1.80 - $24.25
Authorized 875 - $ -
Granted (990) 990 $9.61
Exercised - (77) $3.71
Canceled 500 (500) $13.00
---------------------
Balance at December 31, 1996 632 1,475 $10.94
=====================
A summary of the Company's stock option activity and related information for the
year ended December 31, 1996, is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------
WEIGHTED NUMBER OF
NUMBER OF AVERAGE WEIGHTED EXERCISABLE WEIGHTED
OUTSTANDING REMAINING AVERAGE AS OF AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1996 LIFE PRICE 1996 PRICE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.80 - $ 7.99 246,596 4.91 $ 6.90 52,026 $ 4.18
$ 8.00 - $ 9.99 356,258 4.81 $ 8.45 22,350 $ 9.75
$10.00 - $14.99 656,544 4.07 $12.27 201,831 $13.10
$15.00 - $24.25 215,635 3.66 $15.25 99,091 $15.25
--------------- --------------
$ 1.80 - $24.25 1,475,033 4.33 $10.94 375,298 $12.29
=============== ==============
</TABLE>
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK PURCHASE PLAN, STOCK OPTION PLANS, AND WARRANTS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
Upon the closing of the Company's initial public offering, the Company
adopted the 1993 Employee Stock Purchase Plan (the 1993 Purchase Plan). An
aggregate of 350,000 shares of the Company's Common Stock have been reserved
for issuance under the 1993 Purchase Plan. The 1993 Purchase Plan provides
that substantially all employees may purchase stock at 85% of its fair market
value on specified dates via payroll deductions. There were approximately
24,000 shares issued under the 1993 Purchase Plan in 1996, 16,000 in 1995,
and none in 1994.
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
Shares of Common Stock of the Company reserved for future issuance at December
31, 1996 are as follows:
1996
----------------
(IN THOUSANDS)
Employee Stock Purchase Plan 310
Stock Options 2,107
Undesignated Preferred Stock 5,000
----------------
7,417
================
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No. 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123), requires the use of option valuation
models that were not developed for use in valuing employee stock options.
Under APB Opinion No. 25, because the exercise price of the Company's stock
options generally equals the market price of the underlying stock on the date
of grant, no compensation expense is recognized.
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
Pro forma information regarding net income and earnings per share is required
by FAS 123 which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of FAS 123. The fair value of
these options was estimated at the date of grant using a Black-Scholes
multiple option pricing model with the following weighted average
assumptions: risk-free interest rates of 6.10% and 6.30% for 1996 and 1995,
respectively; a dividend yield of 0.0%; a volatility factor of the expected
market price of the Company's Common Stock of 0.55; and a weighted average
expected life of the option of 3.6 years. The weighted average net fair value
of options granted in 1996 and 1995 was $4.53 per share and $6.58 per share,
respectively.
The Company does not recognize compensation cost related to employee purchase
rights under the Employee Stock Purchase Plan. To comply with the pro forma
reporting requirements of FAS 123, compensation cost is estimated for the
fair value of the employees' purchase rights using the Black-Scholes model
with the following assumptions for those rights granted in 1995 and 1996;
dividend yield of 0.0%; an expected life ranging up to 0.5 years; expected
volatility factor of 0.55; and a risk free interest rate of 5.72%. The
weighted average fair value of those purchase rights granted in January 1995,
July 1995, January 1996, and July 1996 were $6.29, $10.96, $2.99, and $2.46,
respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option models require the input of highly
subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options and because changes in
the subjective assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
1996 1995
--------------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Pro forma net income $2,843 $5,112
Pro forma earnings per share $ 0.31 $ 0.53
For pro forma disclosure under FAS 123, the repricing of stock options in
October 1995 is treated as a modification of an award. Any additional
compensation arising from the modification is recognized over the remaining
vesting period of the new grant. FAS 123 is effective for options granted by
the Company commencing January 1, 1995. All options granted before January 1,
1995 have not been valued and no pro forma compensation expense has been
recognized. However, any option granted before January 1, 1995, that was
repriced in 1995, is treated as a new grant within 1995 and is valued
accordingly. In addition, since compensation expense is recognized over the
vesting period of the related options, which are generally four years, and
because pro forma disclosure is only required commencing with 1995, the
initial impact on pro forma income may not be representative of compensation
expense in future years.
3. BORROWINGS
In June 1996, the Company renewed its revolving line of credit with a
domestic bank that provides for borrowings of up to $2,000,000, including
secured letters of credit. The line of credit expires June 1, 1997.
Borrowings are collateralized by substantially all of the Company's U.S.
assets. The Company is also subject to certain financial covenants. At
December 31, 1996, the aggregate amount available to be borrowed under the
revolving line of credit was $2,000,000.
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BORROWINGS (CONTINUED)
In June 1995, the domestic bank renewed a $350,000 standby letter of credit
used as a security deposit for the sublease of the building the Company rents
as its corporate headquarters. Borrowings against the line bear interest at
prime (8.25% at December 31, 1996).
4. INDUSTRY SEGMENT REPORTING
The Company and its subsidiaries operate in one industry segment, principally
the development of affordable, high-performance, cost-effective DSP-based
software, integrated circuits, and circuit boards.
Operations outside the United States include research, development, sales,
and certain general and administrative functions. The Company's Israeli
subsidiary performs research, development, sales, marketing, technical
support, and certain general and administrative functions. The Company's
Japanese and French subsidiaries perform marketing and technical support
activities.
The following is a summary of operations within geographic areas:
1996 1995 1994
----------------------------------
(IN THOUSANDS)
Sales to unaffiliated customers:
United States $51,883 $49,163 $28,299
Israel 1,027 1,274 305
---------------------------------
$52,910 $50,437 $28,604
=================================
Transfers between geographic
areas (eliminated in consolidation):
Israel $ 7,435 $ 4,846 $ 3,282
Japan 574 542 583
Europe 436 - -
---------------------------------
$ 8,445 $ 5,388 $ 3,865
=================================
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INDUSTRY SEGMENT REPORTING (CONTINUED)
1996 1995 1994
----------------------------------
(IN THOUSANDS)
Income (loss) before provision
for income taxes (including
intercompany amounts):
United States $ 7,504 $ 7,183 $ 5,492
Israel (596) 123 (1,204)
Japan 7 36 111
France 121 (78) -
----------------------------------
$ 7,036 $ 7,264 $ 4,399
==================================
Identifiable assets:
United States $54,880 $51,614 $40,928
Israel 4,039 3,045 2,432
Japan 219 195 203
France 69 - -
----------------------------------
$59,207 $54,854 $43,563
==================================
Export sales:
Asia $35,477 $27,636 $14,322
Europe 10,853 12,188 8,357
Israel 1,747 1,274 305
----------------------------------
$48,077 $41,098 $22,984
==================================
Sales to one distributor totaled 17% of total revenues in 1996, and sales to
one other customer totaled 11% of total revenues for 1996. Sales to the same
distributor totaled 25% of total revenue in 1995. In 1994, sales to two
distributors totaled 22% and 16% of total revenues, and sales to another
customer accounted for 10% of total revenues.
<PAGE>
5. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases certain equipment and facilities under noncancelable
operating leases. The Company has significant leased facilities in Givat
Shmuel, Israel and in Santa Clara, California. The Santa Clara facility was
leased by the Company through 2003, and portions of the facility were
subleased to other tenants. In October 1996, however, the Company negotiated
an assignment of its lease obligations to another Company (the Assignee)
effective January 1997. Accordingly, as of January 1, 1997, the Company is no
longer obligated under its former Santa Clara facility lease and is no longer
a sublessor to other tenants. In connection with the assignment of the lease,
the Company wrote off approximately $205,000 of leasehold improvements and
recorded a gain of approximately $380,000 related to deferred rent on the
facility. Beginning in fiscal 1997, the Company will receive payments from
the lessor of $322,000 in 1997, $322,000 in 1998, $322,000 in 1999, and
$295,000 in 2000 as compensation for the higher rents to be paid by the
Assignee. In addition, commencing January 1, 1997, the Company began
subleasing a new space in the same building from the Assignee under a
separate sublease agreement that expires in December 1999.
At December 31, 1996, the Company is required to make the following minimum
lease payments, as revised to reflect the assignment of the Santa Clara
facility lease, the payments to be received from the lessor on the Santa
Clara facility leases, and the Company's sublease of the new space as
described above (IN THOUSANDS):
1997 $ 720
1998 724
1999 634
2000 151
2001 354
Thereafter 143
------------
$2,726
============
Total rental expense for all leases was approximately $334,000 (net of
sublease income of $546,000, and a gain of $380,000 on write-off of deferred
rent), $656,000 (net of sublease income of $171,000), and $546,000 for the
years ended December 31, 1996, 1995, and 1994, respectively.
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
STOCKHOLDERS' 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 (the Court) accusing the Company, its 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 seek unspecified damages on behalf of all persons who
purchased shares of the Company's stock during the period from 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 the plaintiffs to proceed with their claim
regarding statements the Company allegedly made to securities analysts and is
also permitting the plaintiffs to amend their complaint as to their claim
that the Company is responsible for the statements contained in the 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.
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The tax provision (benefit) for the years ended December 31, 1996, 1995, and
1994 consists of the following:
1996 1995 1994
----------------------------------
(IN THOUSANDS)
Federal taxes:
Current $ (180) $ 1,898 $ 154
Deferred 1,099 (2,173) -
----------------------------------
919 (275) 154
State taxes:
Current 3 239 10
Deferred 70 - -
----------------------------------
73 239 10
Foreign taxes:
Current 65 89 203
----------------------------------
Provision (benefit) for
income taxes $ 1,057 $ 53 $ 367
==================================
Pretax income (loss) from foreign operations, exclusive of an in-process
technology write-off of $1,529,000 in 1996, was $1,061,000 in 1996, $(81,000)
in 1995, and $(1,093,000) in 1994.
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate of 34% in 1996 and 35% in 1995 and 1994 is as follows:
YEARS ENDED DECEMBER 31,
1996 1995 1994
----------------------------------
(IN THOUSANDS)
Tax at U.S. statutory rate $ 2,396 $ 2,646 $ 1,539
Operating losses utilized (2,117) (2,603) (1,443)
Valuation of temporary differences 948 (779) (219)
Alternative minimum tax in excess
of regular tax - - 73
State taxes 3 155 -
Tax exempt interest income (422) (177) -
Foreign withholding tax - 31 92
Foreign income taxed at rates other
than U.S. rate (306) 13 23
Research and development expensed
upon acquisition 520 - 175
Basis difference upon sale of
subsidiary - 711 -
Research credit utilized - (126) -
Amortization of intangible assets 92 162 79
Other individually immaterial items (57) 20 48
----------------------------------
$ 1,057 $ 53 $ 367
==================================
As of December 31, 1996, the Company had federal net operating loss and tax
credit carryforwards of approximately $8,000,000 and $450,000, respectively.
The federal net operating loss carryforward will expire at various dates
beginning in the years 2006 through 2009, if not utilized.
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
In September 1993, the Company issued Series F Preferred Stock. The issuance
of such stock resulted in a change in ownership pursuant to the provisions of
the Tax Reform Act of 1986. Accordingly, the Company's federal net operating
losses incurred prior to the change of ownership are subject to an annual
limitation in future periods. Utilization of the net operating loss
carryforwards is limited to approximately $3,300,000 per year.
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1996 and 1995 are as follows:
1996 1995
---------------------
(IN THOUSANDS)
Deferred tax assets:
Research credits $ 450 $ 100
Net operating loss carryforwards 2,700 4,200
Capitalized research and development 450 540
Other 1,100 840
---------------------
Total deferred tax assets 4,700 5,680
Valuation allowance (3,696) (3,507)
---------------------
Net deferred tax assets $ 1,004 $ 2,173
=====================
Approximately $2,227,000 of the valuation allowance at December 31, 1996 is
related to benefits of stock option deductions, which will be allocated to
paid-in capital when realized.
DSP Semiconductors Israel (DSP Israel) has been awarded "Approved Enterprise"
status by the Israeli government according to two investment plans that
included investments of $3,788,000 and $760,000, respectively. The "Approved
Enterprise" status allowed DSP Israel a two-year tax holiday on undistributed
earnings commencing with the year 1992 for which taxable income had been
attained and a corporate tax rate of 10%, for an additional eight years, on
the first investment plan's proportionate share of income. The proportionate
share of income related to the second investment plan will entitle DSP Israel
to a four-year tax holiday on undistributed earnings commencing with the 1996
tax year and a corporate tax rate of 10% for an additional six years. The
aggregate dollar and per share benefit of the Israeli tax holiday was
$306,000 and $0.03, respectively, for 1996.
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS
In 1996, 1995, and 1994, the Company performed certain contract engineering,
research and development, sales and marketing, and general and administrative
services for and received certain research and development, sales and
marketing, and general and administrative services from DSP Communications,
Inc. (DSPC), amounting to approximately $0 and $0 in 1996, $919,000 and
$122,000 in 1995, and $454,000 and $394,000 in 1994, respectively.
In 1994, the Company entered into a license agreement with DSPC that gave
DSPC rights to develop five integrated circuits using the Company's
OakDSPCore digital signal processor technology. DSPC had previously licensed
the Company's PineDSPCore digital signal processor technology. The Company
recorded $305,000 of licensing and other revenues in connection with this
transaction in 1994.
In 1995 and 1994, the Company performed certain research and development and
general and administrative services for Zen Research, amounting to
approximately $127,000 in 1995 and $41,000 in 1994.
In 1993, the Company entered into a development and licensing agreement with
AudioCodes (SEE NOTE 1). Under the agreement, AudioCodes is to perform
certain research and development services for the Company. Upon development
of the technology, the Company is to pay AudioCodes a licensing fee and
maintenance fees of approximately 15% to 24% of the net revenue and 8% of the
gross revenue realized from the sale of the technology. In 1996, 1995, and
1994, the Company recorded approximately $0, $527,000, and $380,000,
respectively, of research and development costs related to this agreement and
$260,000 in 1996 and $179,000 in 1995 of licensing fees.
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SALE OF STOCK OF DSPC
The Company sold its remaining 131,000 shares of Common Stock of DSPC, the
successor of a former subsidiary of the Company, DSP Telecommunications Ltd.,
in April 1995 upon the exercise of the underwriters' overallotment option in
connection with DSPC's initial public offering. As the Company's basis in the
investment had no book value, the sale resulted in a gain of approximately
$1,200,000 in the second quarter of 1995. The Company had sold 73,000 shares
of Common Stock of DSPC in DSPC's March 1995 initial public offering,
resulting in a gain of approximately $666,000 in the first quarter of 1995.
DSPC is a Delaware corporation primarily engaged in the development and
marketing of integrated circuits based on digital signal processing for the
wireless communications market. In 1994, the Company sold 1,234,000 shares of
DSPC stock to a group of investors for $1,851,000 in cash of which $1,551,000
and $300,000 were sold during the second and fourth quarter of 1994,
respectively. Of this amount, $1,351,000 was sold to investors who were also
stockholders of the Company. As the Company's basis in the investment had no
book value, the sale resulted in a gain of $1,851,000.
9. ACQUISITIONS AND DISPOSALS
The Company had a joint development agreement with Scitex Corporation, Ltd.,
an Israeli corporation, under which Nogatech, Inc. (Nogatech) was formed to
engage in the development and marketing of DSP-based image processing and
video compression technology for products targeting the consumer electronics
and office automation markets. Nogatech was incorporated in January 1993. The
Company contributed technology with no book value in exchange for stock
representing a 50% ownership in Nogatech. The Company accounted for this
investment using the equity method; however, since the Company's basis in the
investment had no book value and the Company was not obligated to fund any
losses under the joint development agreement, the Company did not recognize
any losses on this investment.
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. ACQUISITIONS AND DISPOSALS (CONTINUED)
On May 3, 1994, the Company acquired the remaining 50% of the outstanding
capital stock of Nogatech from Scitex Corporation, Ltd., for $2,000,000 cash.
Legal, accounting, and appraisal costs related to the transaction were
$100,000. The acquisition was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16. The excess of the total
acquisition cost over the recorded value of assets acquired was approximately
$2,015,000 and was allocated, based on values determined by an independent
appraisal, to existing technology which had reached technological
feasibility, in-process research and development, and other tangible and
intangible assets.
To determine the value of the existing technology, the expected future cash
flows of each existing technology product were discounted taking into account
risks related to the characteristics and applications of each product,
existing and future markets, and assessments of the life cycle stage of each
product. Based on this analysis, the existing technology, which had reached
technological feasibility, was assigned a value of $853,000 and capitalized.
This capitalized technology was amortized over a three-year period beginning
with first product shipment in October 1994.
To determine the value of the technology in the development stage, the
Company considered, among other factors, the stage of development of each
project, the time and resources needed to complete each project, expected
income, and associated risks. Associated risks included the inherent
difficulties and uncertainties in completing the project and thereby
achieving technological feasibility and risks related to the viability of and
potential changes to future target markets. This analysis resulted in a value
of $1,104,000 being assigned to technology in the development stage that had
not yet reached technological feasibility and did not have alternative future
uses. Therefore, in accordance with generally accepted accounting principles,
the $1,104,000 of technology in the development stage was expensed.
Other identifiable tangible assets, intangible assets, and liabilities were
also identified in this process and were determined to have a net asset value
of $143,000. The statement of operations includes Nogatech's results of
operations for the eight months ended December 31, 1994, as Nogatech was
acquired on May 3, 1994.
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. ACQUISITIONS AND DISPOSALS (CONTINUED)
Pursuant to the Stock Purchase Agreement, on August 11, 1995, the Company
sold its equity interest in Nogatech to two purchasers for $1,500,000 in
cash. The purchasers consisted of a customer of the Company and a stockholder
of the Company. The Company also agreed to cancel all other amounts that
Nogatech owed the Company and grant limited licenses to Nogatech to use
certain technology of the Company in exchange for: (i) the receipt of certain
fixed assets; (ii) reimbursement of post-June 30, 1995 cash fundings to
Nogatech; (iii) royalties not to exceed $750,000 on any future sales of
certain Nogatech products; and (iv) a $400,000 promissory note to the Company
from Nogatech. The promissory note and interest computed at a rate of 8.75%
per annum was paid in January 1996. The Company attributed $250,000 of the
sales price to the value of these limited licenses sold to Nogatech based
upon the Company's licensing pricing structure.
10. UNUSUAL ITEMS
During the second quarter of 1995, the Company formulated a plan to divest
its 89% equity interest in its Nogatech subsidiary. The Company incurred a
$500,000 charge for the write-down of Nogatech's intangible assets in
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." Nogatech's revenues for the period from January 1, 1995
through August 11, 1995 were $500,000, and Nogatech incurred an operating
loss, exclusive of the $500,000 write-off, of $767,000.
In April 1995, the former Chairman of the Board of Directors resigned to
focus his efforts on DSPC where he serves as Chairman. The Company incurred
$413,000 of severance expense as a result of this resignation. The expense
consisted $283,000 for severance payments to be made over a two-year period
and a $130,000 charge for accelerated vesting of the former Chairman's
outstanding stock options.
In September 1994, the Company sold its optical disk technology to an
investor group who formed Zen Research and recorded a gain of $646,000. On
May 3, 1994, the Company acquired from Scitex Corporation, Ltd. the remaining
50% of the outstanding capital stock of Nogatech not previously held by the
Company and consequently recorded a $1,104,000 charge for acquired research
and development from a related party in the second quarter of 1994 (SEE NOTE
9, ACQUISITIONS AND DISPOSALS).
<PAGE>
DSP GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. UNUSUAL ITEMS (CONTINUED)
In July 1996, the Company acquired a 40% equity ownership interest in Aptel,
Ltd., a company located in Israel. In connection with the acquisition, the
Company recorded a charge of $1,529,000 for acquired research and development
from a related party in the third quarter of 1996 (SEE NOTE 1, EQUITY
INVESTMENTS).
<PAGE>
DSP GROUP, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $52,910 $50,347 $28,604 $12,447 $ 8,860
Net income (loss) $ 5,979 $ 7,211 $ 4,032 $ (467) $ (7,874)
Net income (loss) per share $ .62 $ .75 $ .44 $ (.13) $ (2.42)
Shares used in per share computation 9,581 9,658 9,135 3,504 3,248
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities $42,934 $33,828 $26,376 $ 2,019 $ 2,641
Working capital (deficit) $47,851 $39,304 $29,824 $ 1,797 $ (8,197)
Total assets $59,207 $54,854 $43,563 $ 8,070 $ 5,015
Long-term obligations, less current portion $ - $ - $ - $ 1,211 $ 4,267
Total stockholders' equity (deficit) $54,449 $47,541 $36,801 $ 2,517 $(11,179)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS BY QUARTER
------------------------------------------------------------------------------
1996 | 1995
------------------------------------------------------------------------------
(Unaudited, in thousands, except per share amounts)
QUARTERLY DATA: 4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $15,081 $13,611 $13,021 $11,197 $13,023 $13,068 $12,462 $11,884
Gross Profit $ 6,660 $ 5,015 $ 4,940 $ 5,767 $ 4,837 $ 6,607 $ 6,722 $ 6,188
Net income (loss) (1) $ 5,400 $ (263) $ 268 $ 574 $ 570 $ 2,490 $ 2,438 $ 1,713
Net income (loss) per share $ .56 $ (.03) $ .03 $ .06 $ .06 $ .26 $ .25 $ .18
</TABLE>
- ---------------------------------------------------------------------------
(1) See Notes 8, 9, and 10 of Notes to Consolidated Financial Statements
for explanation of gain on sale of stock in affiliate in first and second
quarters of 1995, write-down of impaired asset and charge for severance
expense in second quarter of 1995, charge for acquired in process research
and development in third quarter of 1996, and the gain on settlement of a
lawsuit in the fourth quarter of 1996.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE ANNUAL REPORT ON FORM 10-K OF DSP GROUP, INC. FOR
THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,172
<SECURITIES> 30,762
<RECEIVABLES> 5,469
<ALLOWANCES> 636
<INVENTORY> 2,957
<CURRENT-ASSETS> 52,609
<PP&E> 7,324
<DEPRECIATION> 4,033
<TOTAL-ASSETS> 59,207
<CURRENT-LIABILITIES> 4,758
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 54,439
<TOTAL-LIABILITY-AND-EQUITY> 59,207
<SALES> 41,290
<TOTAL-REVENUES> 52,910
<CGS> 29,432
<TOTAL-COSTS> 30,528
<OTHER-EXPENSES> 8,481
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 158
<INCOME-PRETAX> 7,036
<INCOME-TAX> 1,057
<INCOME-CONTINUING> 5,979
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,979
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.62
</TABLE>
