<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission File Number 0-23006
DSP GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2683643
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(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
3120 Scott Boulevard, Santa Clara, California 95054
-----------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (408) 986-4300
--------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
As of October 31, 1997 there were 9,917,996 shares of Common Stock ($.001 par
value per share) outstanding.
<PAGE>
INDEX
DSP GROUP, INC.
<TABLE>
<CAPTION>
Page No.
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PART I. FINANCIAL INFORMATION
- -------------------------------
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- September 30,
1997 and December 31, 1996............................. 3
Condensed consolidated statements of operations -- Three
and nine months ended September 30, 1997 and 1996 ..... 4
Condensed consolidated statements of cash flows -- Nine
months ended September 30, 1997 and 1996 ............... 5
Notes to condensed consolidated financial statements --
September 30, 1997...................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .............................. 11
</TABLE>
<TABLE>
<CAPTION>
PART II. OTHER INFORMATION
- ----------------------------
<S> <C> <C>
Item 1. Legal Proceedings ................................. 18
Item 2. Changes in Securities .............................. 19
Item 3. Defaults upon Senior Securities .................... 19
Item 4. Submission of Matters to a Vote of Security
Holders........................................... 19
Item 5. Other Information................................... 19
Item 6. Exhibits and Reports on Form 8-K.................... 19
SIGNATURES........................................................ 20
EXHIBIT INDEX..................................................... 21
</TABLE>
2
<PAGE>
PART 1. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
DSP GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
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ASSETS (Unaudited) (Note)
<S> <C> <C>
Current Assets
Cash and cash equivalents $14,911 $12,172
Marketable securities 46,281 30,762
Accounts receivable, net 2,582 4,861
Inventories 3,987 2,957
Deferred income taxes 500 500
Prepaid expenses and other 2,349 1,357
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Total current assets 70,610 52,609
Property and equipment 8,745 7,324
Accumulated depreciation and amortization (4,976) (4,033)
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3,769 3,291
Investments in unconsolidated subsidiaries,
net of amortization of goodwill 1,856 2,415
Other assets, net 150 388
Deferred income taxes 504 504
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TOTAL ASSETS $76,889 $59,207
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $4,070 $ 1,428
Other current liabilities 6,637 3,330
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Total current liabilities 10,707 4,758
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock 10 10
Additional paid-in capital 70,925 66,781
Accumulated deficit (4,753) (12,342)
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66,182 54,449
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $76,889 $59,207
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Note: The balance sheet at December 31, 1996 has been derived from the audited financial statements at that date.
See notes to condensed consolidated financial statements.
</TABLE>
3
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DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Product sales $13,547 $11,403 $37,626 $29,136
Royalties, licensing and other 3,011 2,208 7,752 8,693
------- ------- ------- -------
Total revenues 16,558 13,611 45,378 37,829
Cost of revenues:
Cost of product sales 8,232 8,378 23,306 21,511
Cost of licensing, royalties and other 276 218 1,122 596
------- ------- ------- -------
Total cost of revenues 8,508 8,596 24,428 22,107
------- ------- ------- -------
Gross profit 8,050 5,015 20,950 15,722
Operating expenses:
Research and development 2,084 1,802 6,043 6,584
Sales and marketing 1,220 941 3,551 3,316
General and administrative 1,168 1,125 3,372 4,370
Acquired in-process technology -- 1,529 -- 1,529
------- ------- ------- -------
Total operating expenses 4,472 5,397 12,966 15,799
------- ------- ------- -------
Operating income (loss) 3,578 (382) 7,984 (77)
Other income (expense):
Interest and other income 753 331 2,006 1,131
Other expenses (55) (48) (176) (121)
Equity in loss of unconsolidated subsidiaries, net (42) (193) (559) (287)
------- ------- ------- -------
Income before income taxes 4,234 (292) 9,255 646
Provision (benefit from) for income taxes 886 (29) 1,666 68
------- ------- ------- -------
Net income (loss) $3,348 $ (263) $ 7,589 $ 578
------- ------- ------- -------
------- ------- ------- -------
Net income (loss) per share:
Primary $ 0.32 $ (0.03) $ 0.76 $ 0.06
Fully diluted $ 0.32 $ (0.03) $ 0.73 $ 0.06
Shares used in per share computations:
Primary 10,350 9,534 10,018 9,567
Fully diluted 10,531 9,534 10,441 9,567
</TABLE>
See notes to condensed consolidated financial statements.
4
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DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1997 1996
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<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES $ 15,848 $ 1,888
INVESTING ACTIVITIES:
Purchase of available-for-sale marketable securities (48,139) (9,145)
Sale and maturity of available-for-sale
marketable securities 32,619 18,933
Purchases of equipment (1,899) (700)
Equity investment in Aptel -- (2,158)
Sale of equipment 166 --
Capitalized software development costs -- (152)
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(17,253) 6,778
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FINANCING ACTIVITIES:
Repayment of stockholders' notes receivable -- 312
Sale of common stock for cash upon
exercise of options and warrants 4,144 495
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4,144 807
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INCREASE IN CASH AND CASH EQUIVALENTS $ 2,739 $ 9,473
-------- -------
-------- -------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and nine months ended September 30, 1997, are not necessarily
indicative of the results that may be expected for the year ended December
31, 1997. For further information, reference is made to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996. Certain
reclassifications have been made in the 1996 consolidated financial
statements to conform to 1997 presentation.
NOTE B - INVENTORIES
Inventory is valued at the lower of cost (first-in, first-out method) or
market. The components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ -----------
<S> <C> <C>
Work-in-process $ 56 $ 217
Finished goods 3,931 2,740
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$3,987 $2,957
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------------ -----------
</TABLE>
NOTE C - NET INCOME (LOSS) PER SHARE
Primary and Diluted - Net income (loss) per share are computed using the
weighted average number of shares of common stock and dilutive common
equivalent shares from stock options and warrants (using the treasury stock
method). In February 1997, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards No. 128 Earnings per Share ("SFAS
No. 128") which is required to be adopted by the Company on December 31, 1997.
6
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DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under
the new requirements for calculating basic earnings per share, the dilutive
effect of stock options will be excluded. The impact of SFAS No. 128 is
expected to result in basic earnings per share as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30 Ended September 30,
------------------ ------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic earnings per share.............. $0.34 $(0.03) $0.79 $0.06
</TABLE>
The impact of SFAS 128 on the calculation of diluted earnings per share for
these periods is not expected to be material.
NOTE D - INVESTMENTS
The following is a summary of the cost of available-for-sale securities (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ -----------
<S> <C> <C>
Corporate obligations $37,889 $19,301
Obligations of states and political subdivisions 10,998 16,891
Municipal auction rate preferred stock -- 2,200
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$48,887 $38,392
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------------ -----------
Amounts included in marketable securities $46,281 $30,762
Amounts included in cash and cash equivalents 2,606 7,630
------------ -----------
$48,887 $38,392
------------ -----------
------------ -----------
</TABLE>
At September 30, 1997 and at December 31, 1996, the carrying amount of
securities approximated their fair market value and the amount of unrealized
gain or loss was not significant. Gross realized gains or losses for the
three months ended September 30, 1997 and 1996, were not significant. The
amortized cost of available-for-sale debt securities at September 30, 1997,
by contractual maturities, is shown below (in thousands):
7
<PAGE>
DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Amortized cost
--------------
<S> <C>
Due in one year or less $46,900
Due after one year to eighteen months 1,987
--------------
$48,887
--------------
--------------
</TABLE>
NOTE E - INCOME TAXES
The effective tax rate used in computing the provision for income taxes is
based on projected fiscal year income before taxes, including estimated
income by tax jurisdiction. The difference between the effective tax rate and
the statutory rate is due primarily to the utilization of net operating loss
carryforwards and tax exempt income in Israel.
NOTE F - SIGNIFICANT CUSTOMERS
Product sales to a distributor accounted for 39% and 25% of total revenues
for the three months ended September 30, 1997 and 1996, respectively, and 32%
and 14% of total revenues for the nine months ended September 30, 1997 and
1996, respectively. Product sales to a different distributor accounted for
11% of total revenues for both the three and nine months ended September 30,
1996. The loss of one or more major distributors or customers could have a
material adverse effect on the Company's business, financial condition and
results of operations.
NOTE G - EQUITY INVESTMENT
The Company has two investments in companies which are accounted for under
the equity method.
AudioCodes, Ltd.: AudioCodes, Ltd., an Israeli corporation ("AudioCodes"), is
primarily engaged in research, development, production and marketing of voice
communication products. On July 14, 1997, AudioCodes completed a private
placement of its equity securities without the participation of the Company,
which resulted in the Company's equity position being diluted to 29% of the
capital stock of AudioCodes.
Aptel Ltd.: During the third quarter of 1996, the Company made an initial
cash investment of $2 million for approximately 40% of Aptel Ltd. ("Aptel").
Aptel, which is located in Israel, has expertise in spread spectrum direct
sequence modulation technology.
8
<PAGE>
DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Expenses related to the acquisition in the third quarter of 1996, were
$158,000. The acquisition was accounted for as a purchase 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 in the third quarter of 1996, a one-time
write-off of acquired in-process technology of $1.5 million based on an
independent estimate of value.
The condensed consolidated statements of income for the three and nine months
ended September 30, 1997, include a $0 and $407,000 equity loss,
respectively, of the Company's proportionate share of Aptel's net loss in the
same period, limited to the Company's remaining equity investment in Aptel.
The book value of the Company's original equity investment in Aptel has been
zero since June 30, 1997.
NOTE H-CONTINGENCIES
The Company is involved in certain claims arising in the normal course of
business, including claims that it may be infringing patent rights owned by
third parties. The Company is unable to foresee the extent to which these
matters will be pursued by the claimants or to predict with certainty the
eventual outcome. However, the Company believes that the ultimate resolution
of these matters will not have a material adverse effect on its business,
financial position, or results of operations. The estimate of the potential
impact on the Company's financial position or overall results of operations
or cash flows for the above matter could change in the future.
In November 1995, after the Company's stock price declined, several lawsuits
were filed in the United States District Court for the Northern District of
California accusing the Company, its former Chief Executive Officer, and its
former Chief Financial Officer of issuing materially false and misleading
statements in violation of the federal securities laws. These lawsuits were
consolidated into a single amended complaint in February 1996. In the
amended complaint, plaintiffs sought unspecified damages on behalf of all
persons who purchased shares of the Company's Common Stock during the period
June 6, 1995 through November 10, 1995. On June 11, 1996, the Court granted
the Company's motion to dismiss the lawsuit, with leave to amend. The
plaintiffs filed an amended complaint on July 11, 1996. On March 7, 1997,
the Court issued an order dismissing with prejudice all claims based on
statements issued by the Company. The Court permitted plaintiffs to proceed
with their claims regarding statements the Company allegedly made to
securities analysts. The Court also dismissed with leave to amend
plaintiffs' claim that the Company is responsible for the statements
contained in analysts' reports, but the plaintiffs have chosen not to amend
this claim. On November 5, 1997, the parties reached an agreement in
principle to settle this litigation. The proposed settlement requires that
the Company fund approximately $50,000 of the settlement amount to fulfill
the retention amounts under the Company's insurance policy. The proposed
settlement is subject to the execution of a stipulation of settlement and
9
<PAGE>
DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
court approval. 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 flow.
NOTE I - SUBSEQUENT EVENT
On October 9, 1997, Nexus Telecommunication Systems Ltd. ("Nexus") announced
its intent to acquire one hundred percent of Aptel's shares from Aptel's
current shareholders, for an aggregate of 925,000 shares of Nexus common
stock. On such date, the last reported sale price reported on the OTC
Bulletin Board Service for Nexus' common stock was $6.00 per share. The
closing of such transaction is proposed to take place in November 1997.
Aptel has issued convertible debentures for $900,000, which will be converted
into shares of its common stock prior to Nexus' proposed acquisition of
Aptel. Furthermore, Aptel issued additional convertible debentures, for which
the Company invested approximately $176,000 in Aptel. If the proposed
acquisition of Aptel by Nexus is completed, the Company will hold
approximately 297,000 shares of Nexus common stock.
On October 21, 1997 the Company entered into an agreement with National
Semiconductor Corporation-Registered Trademark- ("National") under which the
Company has become the worldwide exclusive distributor for general licensing
and support of National's CompactRISC-TM- core technology.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
TOTAL REVENUES. Total revenues increased to $16.6 million in the third
quarter of 1997 from $13.6 million in the third quarter of 1996 due primarily
to increased sales of the Company's TAD speech processors, especially those
utilizing flash memory, and royalties received from licensees. In the first
three quarters of 1997, total revenues increased to $45.4 million from $37.8
million in the comparable period of 1996. This increase was due primarily to
increased product sales.
Export sales, primarily consisting of TAD speech processors shipped to
customers in Europe and Asia as well as license fees on DSP core designs,
represented 90% and 91% of total revenues for the Company in the three and
nine months ended September 30, 1997, respectively, and 94% and 92% of total
revenues in the three and nine months ended September 30, 1996, respectively.
All export sales are denominated in U.S. dollars.
Revenues from Tomen Electronics (a distributor), accounted for 39% and 32% of
total revenues in the three and nine months ended September 30, 1997,
respectively, and 25% and 14% in the three and nine months ended September
30, 1996, respectively. Revenues from DSP Solutions, Inc. (a distributor),
accounted for 11% of total revenues for both the three and nine months ended
September 30, 1996.
GROSS PROFIT. Gross profit as a percentage of total revenues increased to
49% in the third quarter of 1997 from 37% in the third quarter of 1996, and
increased from 42% in the first three quarters of 1996, to 46% in the
comparable period of 1997. The increase in gross profit is primarily due to
the increase in product gross margin. Product gross profit as a percentage of
product sales increased to 39% in the third quarter of 1997 compared to 27%
in the third quarter of 1996, and increased to 38% in the first three
quarters of 1997, from 26% in the first three quarters of 1996 mainly due to
lower costs of manufactured products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $2.1 million in the third quarter of 1997 from $1.8 million in
the third quarter of 1996. In the third quarter of 1997, the Company's
efforts in recruiting additional engineers were successful, resulting in
increased research and development expenses primarily due to increased
headcount as compared to the same period in 1996. Expenses also increased due
to higher levels of maintenance and depreciation. In the first three quarters
of 1997, research and development expenses decreased to $6.0 million from
$6.6 million in the same period in 1996. The decrease is primarily due to a
decrease in the cost of materials associated with the Company's development
of new speech processors for TAD products and personal computer telephony
applications.
11
<PAGE>
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to $1.2
million in the third quarter of 1997 from $0.9 million in the third quarter
of 1996. In the first nine months of 1997, sales and marketing expenses
slightly increased to $3.5 million from $3.3 million in the comparable period
of 1996. The increase is primarily due to higher costs of sales and marketing
personnel, partly due to higher sales. Sales and marketing expenses as a
percentage of total revenues slightly decreased to 7% and 8% in the three and
nine months ended September 30, 1997, respectively, compared to 7% and 9% in
the three and nine months ended September 30, 1996, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
slightly increased to $1.2 million in the third quarter of 1997 from $1.1
million in the third quarter of 1996. The increase is due primarily to a
temporary increase in rent expenses and an increase in depreciation. In the
first three quarters of 1997, general and administrative expenses decreased
to $3.4 million from $4.4 million in the comparable period of 1996. These
expenses as a percentage of total revenues decreased to 7% in the first three
quarters of 1997, compared to 12% in the comparable period of 1996. The
expense decline is due primarily to resigned officers' severance pay which
was incurred in the second quarter of 1996, and to the relocation of certain
general and administrative functions to Israel, where salaries and related
costs are lower.
ACQUIRED IN-PROCESS TECHNOLOGY. In August 1996, the Company expensed $1.5
million of in-process technology in connection with the purchase of
approximately a 40% equity interest in Aptel. See Note G of Notes to
Condensed Consolidated Financial Statements.
OTHER INCOME (EXPENSE) - NET. Interest and other income (expense), net was
$1.8 million in the nine months ended September 30, 1997, compared to $1.0
million in the nine months ended September 30, 1996. The increase is
primarily the result of higher levels of cash equivalents and marketable
securities in 1997 as compared with 1996 as well as higher interest yields.
EQUITY IN LOSS OF INVESTEES. Equity in loss of investees was a $42,000 loss
for the third quarter of 1997 as compared to a $193,000 loss in the third
quarter of 1996. In the first three quarters of 1997, equity in loss of
investees was a $559,000 loss compared to a $287,000 loss in the comparable
period of 1996. The condensed consolidated statements of income for the first
three quarters of 1997 include a $407,000 equity loss for the Company's
proportionate share of the results of operations of Aptel, and a loss of
$152,000 on the Company's equity basis in AudioCodes. The Company's initial
investment in Aptel was in the third quarter of 1996, and accordingly the
Company's results of operations for the first two quarters of 1996 do not
include any amounts pertaining to Aptel. During the first half of 1997, the
Company's share of equity losses in Aptel reduced the book value of the
Company's investment to zero and, therefore, the Company does not continue to
recognize equity losses of Aptel.
PROVISION FOR INCOME TAXES. In 1997 and 1996, the Company benefited for
federal and state tax purposes from the utilization of its net operating loss
carryforwards, foreign tax holiday and tax exempt interest income, as well as
the recognition of certain other deferred tax assets in 1996.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the nine months ended September 30, 1997, net
cash provided by operations was $15.8 million, primarily due to (i) $7.6
million of net income, (ii) a $2.7 million increase in accounts payable,
(iii) a $2.5 million increase in income taxes payable and accrued expenses,
(iv) a $2.3 million decrease in accounts receivable, (vi) a $1.3 million of
depreciation and amortization, and (v) a $0.6 million equity in loss of
unconsolidated subsidiaries. These were offset primarily by a $1.0 million
increase in inventories and a $1.0 million increase in prepaid expenses and
other current assets.
INVESTING ACTIVITIES. The Company purchased $48.1 million and sold or had
maturities of $32.6 million of investments classified as marketable
securities in the first nine months of 1997. Capital equipment additions in
the first nine months of 1997 totaled $1.9 million, primarily for leasehold
improvements for the Company's Santa Clara offices and its new offices in
Herzlia Pituach, Israel, which the Company moved into in August 1997.
FINANCING ACTIVITIES. During the three and nine months ended September 30,
1997, the Company received $3.3 million and $4.1 million, respectively, upon
the exercise of employee stock options and through purchases pursuant to the
employee stock purchase plan.
At September 30, 1997, the Company's principal source of liquidity consisted
of cash and cash equivalents totaling $14.9 million and marketable securities
of $46.3 million. The Company's working capital at September 30, 1997 was
$59.9 million.
The Company believes that its current cash will be sufficient to meet its
cash requirements through at least the next twelve months. As part of its
business strategy, the Company occasionally evaluates potential acquisitions
of businesses, products and technologies. Accordingly, a portion of its
available cash may be used for the acquisition of complementary products or
businesses. Such potential transactions may require substantial capital
resources, which may require the Company to seek additional debt or equity
financing. There can be no assurance that the Company will consummate any
such transactions. See "Factors Affecting Future Operating Results --
Acquisition Strategy."
13
<PAGE>
FACTORS AFFECTING FUTURE OPERATING RESULTS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING THE COMPANY'S
FUTURE PRODUCTS, EXPENSES, REVENUE, LIQUIDITY AND CASH NEEDS AS WELL AS THE
COMPANY'S PLANS AND STRATEGIES. THESE FORWARD-LOOKING STATEMENTS ARE BASED
ON CURRENT EXPECTATIONS AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THIS
INFORMATION. NUMEROUS FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER
SIGNIFICANTLY FROM THE RESULTS DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS,
INCLUDING THE FOLLOWING RISK FACTORS.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's
revenues are derived predominately from product sales and accordingly vary
significantly depending on the volume and timing of product orders, which may
fluctuate significantly due to seasonal customer buying patterns for TADs.
The Company's quarterly operating results also depend on the timing of
recognition of license fees and the level of per unit royalties. Through
1997, the Company expects that revenues from its DSP core designs and
TrueSpeech will be derived primarily from license fees rather than per unit
royalties. The uncertain timing of these license fees has caused, and may
continue to cause, quarterly fluctuations in the Company's operating results.
The Company's per unit royalties from licenses are entirely dependent upon
the success of its original equipment manufacturer ("OEM") licensees in
introducing products utilizing the Company's technology and the success of
those OEM products in the marketplace.
The Company's quarterly operating results may also fluctuate significantly 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; fluctuations in the level of sales by OEMs and
other vendors of products incorporating the Company's products; the mix of
products sold; 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 over time 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. While the Company achieved significant cost
reductions in the fourth quarter of 1996 and in first three quarters of
fiscal 1997, there is no guarantee that the Company's ongoing efforts to
reduce costs will be successful or that they will keep pace with the
anticipated, continuing decline in average selling prices.
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, sales
and distribution resources and management expertise than the Company. The
markets for each of the Company's products are extremely competitive, and the
Company expects that such competition will continue to increase.
14
<PAGE>
For example, sales of TAD products comprise a substantial portion of the
Company's product sales. As a result, 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. Furthermore, any adverse change in the
digital TAD market or the Company's ability to compete and maintain its
position in that market would have a material adverse effect on the Company's
business, financial condition and results of operations.
RELIANCE ON 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 September 30, 1997, 68 of
the Company's 96 employees were located in Israel, including 100% of the
Company's research and development personnel. In addition, although the
Company is incorporated in Delaware, approximately half of the Company's
directors and executive officers are non-residents of the United States.
Therefore, the Company is directly affected by the political, economic and
military conditions to which Israel is subject. In addition, many of the
Company's expenses in Israel are paid in Israeli currency, thereby also
subjecting the Company to foreign currency fluctuations and to economic
pressures resulting from Israel's generally high rate of inflation. 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. The rate of
inflation in Israel for the first nine months of 1997 was 6.4% and for 1996
was 10.6%. 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.
15
<PAGE>
ACQUISITION STRATEGY. The Company has pursued, and will continue to pursue,
growth opportunities through internal development and acquisition of
complementary businesses, products and technologies. The Company is unable
to predict whether or when any prospective acquisition will be completed. The
process of integrating an acquired business may be prolonged due to
unforeseen difficulties and may require a disproportionate amount of
resources and management's attention. There can be no assurance that the
Company will be able to successfully identify suitable acquisition
candidates, complete acquisitions, integrate acquired businesses into its
operations, or expand into new markets. Once integrated, acquisitions may
not achieve comparable levels of revenues, profitability or productivity as
the existing business of the Company or otherwise perform as expected. The
occurrence of any of these events could have a material adverse effect on the
Company's business, financial condition or results of operations. Future
acquisitions may require substantial capital resources, which may require the
Company to seek additional debt or equity financing.
RELIANCE ON 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 OEMS TO OBTAIN REQUIRED COMPLEMENTARY COMPONENTS. Certain of the
raw materials, components and subassemblies included in the products
manufactured by the Company's OEM customers, which also incorporate the
Company's products, are obtained from a limited group of suppliers.
Disruptions, shortages or termination of certain of these sources of supply
could occur. For example, the Company's customers for TAD speech processors
have in the past experienced difficulties obtaining sufficient timely
supplies of ARAMs which are included in certain digital TADs. These
shortages are due to the increasing demand for ARAMs for TAD products, and
fluctuations in ARAM production as ARAMs are a by-product in the fabrication
of dynamic random access memories ("DRAMs") with ARAM yields varying
inversely with the DRAM yield. Although such shortages were alleviated
during most of 1996 and in the first three quarters of fiscal 1997, there is
no guarantee that such favorable circumstances will continue. In addition,
there is a trend in the industry toward the production of 16 Mbit DRAMs,
rather than 4 Mbit DRAMs, which may increase the cost of TAD systems because
such systems mainly use 4 Mbit ARAMs. Supply disruptions, shortages or
termination could have an adverse effect on the Company's business and
results of operations due to its customers delay or discontinuance of orders
for the Company's products until such components are available.
16
<PAGE>
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 permitted plaintiffs to proceed with their claims regarding statements
the Company allegedly made to securities analysts. The Court also dismissed
with leave to amend plaintiffs' claim that the Company is responsible for the
statements contained in analysts' reports, but the plaintiffs have chosen not
to amend this claim. On November 5, 1997, the parties reached an agreement
in principle to settle this litigation. The proposed settlement requires that
the Company fund approximately $50,000 of the settlement amount to fulfill
the retention amounts under the Company's insurance policy. The proposed
settlement is subject to the execution of a stipulation of settlement and
court approval. 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.
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.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 1995, after the Company's stock price declined, several lawsuits
were filed in the United States District Court for the Northern District of
California accusing the Company, its former Chief Executive Officer, and its
former Chief Financial Officer of issuing materially false and misleading
statements in violation of the federal securities laws. These lawsuits were
consolidated into a single amended complaint in February 1996. In the
amended complaint, plaintiffs sought unspecified damages on behalf of all
persons who purchased shares of the Company's Common Stock during the period
June 6, 1995 through November 10, 1995. On June 11, 1996, the Court granted
the Company's motion to dismiss the lawsuit, with leave to amend. The
plaintiffs filed an amended complaint on July 11, 1996. On March 7, 1997,
the Court issued an order dismissing with prejudice all claims based on
statements issued by the Company. The Court permitted plaintiffs to proceed
with their claims regarding statements the Company allegedly made to
securities analysts. The Court also dismissed with leave to amend
plaintiffs' claim that the Company is responsible for the statements
contained in analysts' reports, but the plaintiffs have chosen not to amend
this claim. On November 5, 1997, the parties reached an agreement in
principle to settle this litigation. The proposed settlement requires that
the Company fund approximately $50,000 of the settlement amount to fulfill
the retention amounts under the Company's insurance policy. The proposed
settlement is subject to the execution of a stipulation of settlement and
court approval.
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 parties have stipulated to trial by a
United States Magistrate. Trial is scheduled to commence in the summer of
1998. Currently, both parties are pursuing discovery. The Company believes
the lawsuit to be without merit and intends to continue defending itself
vigorously.
18
<PAGE>
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Lease, dated November 28, 1996, by and between DSP Semiconductors
Ltd. and Bayside Land Corporation, Ltd., relating to the property
located on Shenkar Street, Herzlia Pituach, Israel.
10.2 Agreement, dated August 18, 1997, by and between DSP Semiconductors
Ltd. and Aptel Ltd.
11.1 Statement re: Computation of Per Share Earnings
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DSP GROUP, INC.
(Registrant)
By /s/ Avi Basher
--------------------------------------------------------------------
Avi Basher, Vice President of Finance and Chief Financial Officer
and Secretary (Principal Financial Officer and Principal Accounting Officer)
Date: November 14, 1997
20
<PAGE>
EXHIBIT INDEX
Exhibit 10.1 Lease, dated November 28, 1996, by and between DSP
Semiconductors Ltd. and Bayside Land Corporation, Ltd., relating
to the property located on Shenkar Street, Herzlia Pituach,
Israel.
Exhibit 10.2 Agreement, dated August 18, 1997, by and between DSP
Semiconductors Ltd. and Aptel Ltd.
Exhibit 11.1 Statement re Computation of Per Share Earnings
Exhibit 27.1 Financial Data Schedule
21
<PAGE>
OFFICER'S CERTIFICATE
OCTOBER 30, 1997
__________________________
The undersigned, Avi Basher, hereby certifies as follows:
(a) I am the duly elected, qualified, acting and incumbent Vice
President of Finance and Chief Financial Officer of DSP Group, Inc. (the
"Company").
(b) Attached hereto is an English translation of a Lease
Contract, dated as of November 28, 1996, by and between Bayside Land
Corporation, Ltd. and DSP Semiconductors, Ltd.
(c) To my knowledge, such translation is a fair and accurate
translation as required under Rule 306 of Regulation S-T promulgated by the
Securities and Exchange Commission.
IN WITNESS WHEREOF, the undersigned has duly executed this
Certificate on behalf of the Company as of the date first written above.
DSP GROUP, INC.
/s/ AVI BASHER
--------------------------------------
Avi Basher, Vice President of Finance
and Chief Financial Officer
<PAGE>
Lease Contract
Drawn-up and signed in Haifa on November 28th, 1996
Between
Bayside Land Corporation, Ltd.
of 2 Herzl St., Haifa
(hereinafter: "The Lessor")
And
D.S.P. Semiconductors Ltd.
Company No. 51-135472-2
of 13 Gush Etzion St., Givat Shmuel
(hereinafter: "The Lessee")
WHEREAS The Lessor is the proprietor of lease rights in the land property,
known as Parcel 57 and 73 in Block 6592 (hereinafter: "The Plot"),
located in Shenkar Street, Herzlia Pituach, all as indicated in
the map and in the land extract, attached to this Contract as
Appendices "A" and "C";
AND WHEREAS The Lessor, among others, intends to construct on the Plot several
constructions, which would be referred to as Gav Yam Center,
including a building in accordance with a construction permit that
was duly issued, the building will be in a gross area of approx.
27,000 sq.m., known as Building No. 1 (hereinafter: "The
Building"), which is intended for lease, all as indicated in the
map, Appendix A, and in the technical specification, Appendix D;
AND WHEREAS The Lessor has prepared a detailed plan of the Building
(hereinafter: "The Plan")
1
<PAGE>
AND WHEREAS The Lessee declares and approves that the aforementioned Plan is
appropriate for its requirements and it is interested in leasing
part of the Building, in an inclusive area of approx. 1,668 sq.m.
intended for the purpose stated in this Contract;
AND WHEREAS The Lessor declares that it agrees to lease to the Lessee part of
the Building, in accordance with the terms and provisions stated
in this Contract;
Therefore, it has been declared and agreed between the parties as follows:
1. GENERAL
1.1 The preamble to this Contract constitutes an inseparable part
hereof.
1.2 This Lease Contract includes the map - Appendix A. - plans of the
leased premises - Appendix B. - Land Registration Extract -
Appendix C. - Technical Specification - Appendix D. - Insurance
Appendix - Appendix E. - Parking-Lot Contract - Appendix G. -
Electricity Appendix - Appendix H. - Bank Guarantee Appendix -
Appendix I. In order to remove any doubt, it is hereby clarified
that in any event of discrepancy between the provisions of this
Contract and the provisions of the Appendices, the provisions
which are less favoring upon the Lessee shall supersede.
1.3 Wherever an amount in Dollars is stated in this Contract, it is
made only for purposes of convenience, lacking any legal validity,
as the amount indicated in Dollars will be translated to Shekels
upon the signing date of this Contract in accordance with the
representative rate of the Dollar, known upon the signing date of
the Contract, i.e. 3.257 Shekels per one United States Dollar.
2. HEADINGS
The headings of the Clauses were inserted only for purposes of
convenience and shall not serve in the interpretation of the
Contract.
2
<PAGE>
3. INTERPRETATION
Without prejudice to other definitions specified in this Contract,
the following terms shall mean and be construed according to the
definitions stated alongside them:
3.1 "The Leased Premises" Part of the Building on an area of
approx. 1,668 sq.m., located on the 1st
floor of the Building, including the
equipment and accessories that will be
installed therein, all as marked in
yellow in Appendix B.
In order to remove any doubt, the leased
area, as specified above, includes a
common area of the entrance lobby of the
Building, which is shared by all four
floors of offices in the Building.
3.2 "Delivery" Placing the Leased Premises at the
disposal of the Lessee, as it is ready
for reasonable usage, according to the
purposes of the Lessee, all in
accordance with the provisions of this
Contract.
3.3 "The Inspector" Mr. Menashe Freedman or any other person
from another inspection office, that
will replace him, all according to the
determination of the Lessor.
4. THE LEASE AND THE LEASE PERIOD
4.1
4.1.1 Subject to that stated hereunder, the Lessor leases to the
Lessee and the Lessee hereby leases the Leased Premises
from the Lessor for the purpose of the lease, as specified
in Clause 7 hereunder, for a five year period, according
to the other terms of this Contract.
3
<PAGE>
4.1.2 Without prejudice to that stated above, the Lessee shall
have an option to extend the lease period for an
additional period of four years and eleven months
(hereinafter: "The Option Period"), so long as a prior
written notice will be given to the Lessor at least nine
months prior to the completion of the lease period.
4.2 The lease period shall commence upon the date of delivery of the
Leased Premises to the Lessee, i.e. on June 1st 1997 (hereinafter:
"The Delivery Date" or "The Day of Delivery") so long as the
Lessee has fulfilled its obligations in accordance with this
Contract.
4.3 The parties agree that in one or more of the events specified
hereunder, the Delivery Date will be extended accordingly and a
delay as aforementioned shall not be regarded as a breach of this
Contract.
4.3.1 In the event of a delay with the delivery of the Leased
Premises to the Lessee and/or in the placement of the
Leased Premises at the possession of the Lessee, as
specified in Section 5 hereunder, in consequence of a
force major and also in consequence of actions and/or
provisions and/or writs and/or commissions of competent
authorities which are not as a result of the conduct of
the Lessor and/or general strikes in the construction
sector, including all its subsectors, and also due to any
cause and/or circumstance which is not in the control of
the Lessor.
4.3.2 In the event of a delay with the delivery of the Leased
Premises to the Lessee, caused as a result of changes made
in the Leased Premises due to the requirement of the
Lessee and/or works that are carried out in the Leased
Premises by the Lessee and/or by anyone on its behalf,
with the exception of finish works, according to their
definition in Section 6.2 hereunder.
4
<PAGE>
4.3.3 The parties agree that the inspector shall have the sole
and exclusive authority to determine whether the
conditions specified in Sub-Clauses 4.3.1 and 4.3.2 above
were met and also what extension in the Delivery Date is
obligated in consequence thereof. The determinations of
the inspector, as stated, will be final and binding upon
the parties.
5. RECEIPT OF THE LEASED PREMISES
5.1 The Lessee declares that it has examined and approved the plans of
the Leased Premises, Appendix B, and also the Technical
Specification, Appendix D, found them suitable and appropriate for
the purpose of the lease in accordance with this Contract, and it
is obligated to receive the possession of the Leased Premises upon
the Delivery Date, so long as the inspector issued the approval,
stated hereunder.
The Lessor is obligated, that by the Delivery Date, the finish
works will be completed, as stated in Clause 6.2 hereunder, the
central systems of the sewage, air-conditioning and lifts will be
in an operative condition and that the Leased Premises will
receive regular supply of electricity, water and telephone feed
infrastructure at the end point according to the Technical
Specification and the specifications of the finish works
(hereinafter: "The Systems"). Upon the Delivery Date of the
Leased Premises to the Lessee, as stated above, a tour to the
Leased Premises will be carried out in the presence of the
representative of the Lessee, the representative of the Lessor and
the inspector, in which framework the inspector will approve that
the Leased Premises were constructed in accordance with the plans
and the Technical Specification and the technical protocol will be
prepared, specifying the works and repairs which should be carried
out, if any. The technical protocol will be signed by the
representatives of the Lessor and the Lessee and it will serve as
crucial evidence as to the condition of the Leased Premises upon
the Delivery Date.
5
<PAGE>
5.2 In any event, the determination of the inspector that the Leased
Premises are ready for delivery in accordance with the Contract
and the Appendices, will be final, crucial and binding for the
purposes of this Contract.
5.3 In order to remove any doubt, the Lessee declares that it was
brought to its knowledge that upon the Delivery Date the Lessor
will still be working on the Finish Works in the Building and/or
in leased premises of other lessees in the Building and the Lessee
shall have no contention and/or claim against the Lessor in this
matter, so long as there will be no interference to the reasonable
usage of the Leased Premises by the Lessee.
6. THE LEASED PREMISES - TECHNICAL DESCRIPTION AND CHANGES, FINISH WORKS,
SUPPLEMENTS AND ADDITIONS
6.1 Both the Leased Premises and the Building including all their
elements, will be constructed and completed in accordance with the
plans, Appendix B, and the Technical Specification, Appendix D,
and changes made in it according to the discretion of the Lessor,
with the exception of essential changes, in accordance with the
final and crucial determination of the inspector, made in the
consent of the Lessee. A deviation in a rate of up to 2% between
the plan and the actual condition shall not be regarded as an
essential change.
The Leased Premises, including all its elements, will be
constructed of materials of good quality by means of a
professional contractor.
6.2 In light of the request of the Lessee, that the Lessor will carry
out Finish Works in the Leased Premises (hereinafter: "The Finish
Works") prior to the Delivery Date, it was agreed between the
parties as follows:
6.2.1 Until January 1st, 1997, the Lessee will pass to the
Lessor all the technical materials pursuant to the issuing
of a bid for the performance of the Finish
6
<PAGE>
Works, which will be approved in advance by the Lessor,
including the technical specifications, the work plans and
the letters of quantities.
6.2.2 The plan of the Finish Works will be carried out by the
architect Ilan Eldar for the Lessee, and his fee will be
paid by the Lessor. The architect Eldar will be entitled
to hire additional consultants pursuant to the performance
of his work. The identity of the consultants will be
approved by the Lessor and their fee will be paid by it.
6.2.3 The plan of the Finish Works will be carried out in
coordination with the Lessor and will require the approval
of the Lessor.
6.2.4 In addition to the cost of the Finish Works, the Lessee
will pay to the Lessor 5% of the cost of the Finish Works
and the management fees and also 3% of the fee of the
inspector.
6.2.5 The Lessor will issue a bid for the receipt of proposals
for the carrying out of the Finish Works, as a whole set,
and the winner of the bid will be chosen by a joint bid
committee of both the Lessor and the Lessee, which will
include one representative of each party.
6.2.6 The Lessor will enter a contract with the winner of the
bid (hereinafter: "The Contractor of the Finish Works").
6.2.7 The Lessee is obligated to pay to the Lessor each and
every invoice, which the Lessor will approve for payment
to the Contractor of the Finish Works, that being upon the
date of payment of the invoice to the Contractor of the
Finish Works. In any event of a deviation from the
conditions of the original proposal of the Contractor of
the Finish Works, no payment will be made without the
deviation being approved in advance by the Lessee.
6.2.8 Pursuant to the assurance of the payments to the
Contractor of the Finish Works, as specified in
Clause 6.2.7 above, the Lessee will furnish the
7
<PAGE>
Lessor with an index linked bank guarantee in the amount
of 25% of the amount of the proposal of the Contractor of
the Finish Works.
6.2.9 In order to remove any doubt, the Lessee is obligated to
pay to the Lessor all the costs of the performance of the
Finish Works, including works and materials, whether such
are paid by the Lessor to the Contractor of the Finish
Works or paid directly by him to any other body, so long
as any deviation from the conditions of the original
proposal of the Contractor of the Finish Works will
require the prior approval of the Lessee.
6.2.10 The Lessor will be liable to the Lessee for each and every
matter pertaining to the quality of the Finish Works, that
being for a one year period from the Delivery Date and the
provisions of Clause 5.1 with regard to the delivery of
the Leased Premises will apply to the delivery of the
Finish Works.
6.2.11 In any event of a delay with the carrying out of the
Finish Works, caused in consequence of an action or
omission of the Lessee or of anyone on its behalf,
including a delay with the carrying out of the plan and
including a delay with the furnishing of the documents, as
stated in Clause 6.2.1 above - it will have no effect on
the receipt date of the Leased Premises, on the Delivery
Date and on the obligation of the Lessee to pay to the
Lessor the lease payments as from the Delivery Date,
according to its definition in Clause 4.2 above.
6.3 The parties further agree that any supplement or addition in the
Leased Premises at the expense of the Lessee will become the
property of the Lessor, that being in the event that such
supplement or change accords with the definition of installations,
as per their definition in the Land Law, 1969. In the event that
such changes or supplements do not accord with the definition of
installations, they will be regarded as a property of the Lessee
and the Lessee will be entitled to remove and/or disassemble them
upon the completion of the lease period, on condition that Lessee
8
<PAGE>
will return the Leased Premises, as it is in a good condition
suitable for immediate leasing. In order to remove any doubt, the
provisions of this Clause shall not apply to movable partitions
(open space) and movable furniture. In order to remove any doubt,
in any event that the Lessee will choose not to remove and/or to
disassemble the supplement or the change which does not accord
with the definition of installations, the Lessee will not be
entitled to require and receive from the Lessor whatever
consideration for them.
6.4 The Lessee declares that it is well aware that nearby and attached
to the Building, additional constructions will be built by the
Lessor and/or by anyone on its behalf and that it waives any
contention and/or claim toward the Lessor in this matter and in
all matters deriving therefrom.
Furthermore, the Lessor is obligated that the construction of any
such additional constructions, as stated above, shall not
interfere with the access to the Leased Premises and that the
aforementioned construction works will be carried out in such
manner that they will not prevent reasonable usage of the Leased
Premises.
7. THE PURPOSE OF THE LEASE
The purpose of the lease is for development of Hi-Tech products and also
for management, laboratories and marketing activities in the computer
field alone, and the Lessee is hereby obligated to use the Leased
Premises only for this purpose (hereinafter: "The Purpose of the Lease").
8. THE LEASE PAYMENTS
8.1
8.1.1 For offices - NIS 76,969 per month (an amount in Shekels
equivalent to US$23,632 per month) (hereinafter: "The
Basic Lease Payment").
9
<PAGE>
8.1.2 For parking places - as specified in Clause 14a hereunder
and in the Parking Management Agreement, Appendix G.
8.1.3 The maintenance fees for the Leased Premises - as stated
in Clause 20 hereunder.
8.1.4 Payments for electricity, as specified in the Electricity
Appendix, Appendix H.
8.2 The Lease Payments upon the beginning of the option period will be
added with a real addition of 6% above the Lease Payments, which
would have been paid upon the beginning of the option period
without the increase, as stated. All the other provisions of this
Contract, including the provisions of this Clause 8, will apply
accordingly to the Lease Payments during the option period.
8.3 The Basic Lease Payment will be added with index linkage
differences, as specified in Clause 11 hereunder.
The index that was published on November 15th 1996 of 141.1 points
was determined as the basic index for the purpose of this Contract
(hereinafter: "The Basic Index").
8.4 The Lessee is obligated to pay to the Lessor the Basic Lease
Payment together with the addition of linkage differences and
together with the addition of VAT, during the entire lease period,
as follows:
8.4.1 The Lease Payments for the first three lease months in the
amount of NIS 230,908 (an amount in Shekels equivalent to
US$70,896) will be paid by the Lessee upon the signing of
this Contract.
The remaining Lease Payments will be paid by means of
three-month payments for each period in advance, upon the
first day of each period.
8.4.2 Payment of the Lease Payments, as stated above, will be
made by way of a bank transfer from the bank account of
the Lessee to the bank account of the Lessor.
10
<PAGE>
8.4.3 Payment of the Lease Payments will be updated, as
specified in Clause 11.
8.4.4 The Lessee hereby waives any requirement, if any, for the
giving of an earlier notice or requirement for the payment
of the Lease Payments.
9. SHAREHOLDERS
9.1 The Lessee hereby declares that D.S.P. Group Inc. (hereinafter:
"D.S.P. Group") is the principal shareholder of it.
9.2 The Lessee is obligated to see to it that upon the signing of this
Contract, its principal shareholder, D.S.P. Group, will guarantee
to all the obligations of the Lessee toward the Lessor in
accordance with the conditions of this Contract, including all its
Appendices.
9.3 The Lessee is obligated that during the lease period, no changes,
whether directly or indirectly, will be made in the holdings of
the shares by D.S.P. Group in such manner that the holding of the
shares of D.S.P. Group in the Lessee will decrease below 51%,
unless the Lessor gives his explicit, prior consent in writing.
Notwithstanding that stated above, it is agreed that the Lessee
will not be required to receive the consent of the Lessor for a
change in the holdings, as stated, should it furnish the Lessor
with a bank guarantee according to a sufficient amount, to the
satisfaction of the Lessor.
10. INAPPLICABILITY OF THE TENANT'S PROTECTION LAWS
10.1 The Lessee approves and declares as follows:
10.1.1 The tenant's protection in accordance with the Tenant's
Protection Law (Combined Version), 1972, or according to
any other Law shall not apply to this lease.
10.1.2 The Lessor received no key moneys or any other
consideration whatsoever for allowing this lease, whether
directly or indirectly.
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10.1.3 Upon the commencement date of this lease, there will be no
tenant in the Leased Premises who is entitled to hold it
by Law.
The Lessee declares and approves that its expenses and investments
pursuant to the preparation of changes in the Leased Premises,
supplements and/or renovations and/or participation in expenses or
in any other investment made in order to adjust the Leased
Premises for its purposes, will not be regarded in any manner
whatsoever as key moneys of any kind whatsoever and will not
confer the Lessee any right, as these investments will not alter
that stated above, by which none of the Tenant's Protection Laws
apply to the Leased Premises.
11. LINKAGE
11.1 For the purpose of this Contract:-
The Index - The Consumer Price Index (including fruits and
vegetables), published by the Central Bureau of Statistics,
including the same index if it will published by another
governmental institute, and also including any official index that
will replace it, whether such an index will be based on the same
data, on which the current index is based upon, or not, and as the
ratio between the indexes will be decided according to the
determination of the Central Bureau of Statistics, including the
same index if it will published by another governmental institute
that will be replacing it.
In the event that the ratio between the indexes will not be
determined, as stated, the ratio will be determined by the
Economical Department of Leumi Bank of Israel Ltd. (at the expense
of the Lessee and the Lessor in equal parts).
11.2 The Basic Lease Payments as well as all the other amounts that are
indicated in this Contract in Shekels will be linked to the
increase in the index, as per its definition above. In the event
that upon the payment date of any part of the Lease Payments
(hereinafter: "The Determining Date"), the index published most
recently prior to
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the Determining Date (hereinafter: "The New Index") will be higher
than the Basic Index, the Lessee will be obligated to pay the
Lessor same Basic Lease Payments, as they are increased relatively
to the rate of increase of the New Index in comparison with the
Basic Index.
The addition to the Basic Lease Payments, according to the
aforementioned calculation, will be referred to in this Contract
as "Linkage Differences".
11.3 For the purpose of the calculation of the increase in the index,
the date on which the Lease Payments were actually paid will be
regarded as the payment date, however, it is hereby explicitly
emphasized that it does not constitute any relinquishment or
consent on the part of the Lessor with regard to the obligation of
the Lessee to pay the Lease Payments upon the dates agreed upon or
waiving the remedies to which the Lessor is entitled in case of
failure to pay in due time.
11.4 The Lessee is hereby obligated to pay the Linkage Differences to
the Lessor forthwith upon its first requirement.
11.5 Linkage Differences will be calculated as lease moneys for each
and every purpose.
11.6 The Lessee will have the right to pay the Lease Payments in
advance for each part of the lease period, and in such case the
linkage on such amount will apply until its actual payment.
12. SUITABILITY, USAGE, RECEIPT OF PERMITS AND ABIDING BY LAWS
12.1 The Lessee is obligated to use the Leased Premises only for the
purpose for which it was leased, as stated in Clause 7 above, and
not for any other purpose whatsoever.
12.2 The Lessee declares that it had the opportunity to view and
examine the plan of the Leased Premises and the Development
Agreement and/or the Lease Agreement and/or the Urban Construction
Plan applying to it, and that the designation of the Leased
Premises in accordance with that stated above is known to it and
that each
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and every payment that would apply to the Leased Premises due to
the specific usage of the Lessee - shall apply to the Lessee.
12.3 The Lessee is obligated to obtain all the permits required by Law
in order to use the Leased Premises or any part of it for the
operation of its business and is obligated to act according to
them.
12.4 In order to remove any doubt, the Lessee hereby declares that it
shall have no contentions whatsoever toward the Lessor due to
usage possibilities of the Leased Premises and that it is well
aware that the Lessor will bear no liability whatsoever for the
receipt of any permits, required for the operation of the business
of the Lessee in the Leased Premises or to the accordance of the
Leased Premises with any provisions and instructions of any
competent authority for the issuing of a permit, as above.
That stated above will not derogate from the basic obligation of
the Lessor to construct and complete the Leased Premises in
accordance with a duly issued construction permit and from
fulfilling all the provisions of the Law with regard to the
completion of the Leased Premises and its inhabitation.
12.5 The Lessee is obligated to abide by the Law and act in accordance
with the provisions of any permit applying to the Leased Premises
and/or to any part thereof and to avoid making any action or
omission, which may impose any liability on the Lessor toward any
person or property.
12.6 The Lessor declares that it is entitled to lease the Leased
Premises according to the lease purpose, defined in this Contract,
and that there is no prevention by Law, agreement or any previous
obligation of the Lessor, preventing it from leasing the Leased
Premises to the Lessee.
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13. TRANSFER OF RIGHTS
13.1 The Lessee is obligated not to deliver and/or transfer and/or
lease and/or assign and/or endorse and/or mortgage its rights in
accordance with this Contract or to use them in any other way or
manner and will not allow any third party to use and/or to hold
the Leased Premises or any part thereof and will not join any
third party whatsoever in the possession of the Leased Premises or
the use of it or in any benefit from it, in any manner whatsoever,
not even as an authorized representative or as a concessionaire,
whether directly or indirectly, whether in consideration or not,
unless it received the explicit and earlier consent in writing of
the Lessor to that effect.
13.2 Notwithstanding that stated above, the Lessee will be entitled to
sub-lease the Leased Premises, entirely or partially, on condition
that such a part will not be of less than 400 sq.m., according to
a sub-lease, so long as the following conditions were fulfilled:
13.2.1 The Lessor gave its earlier consent in writing with regard
to the identity of the sub-lessee.
In order to remove any doubt, the parties agree that the
Lessor will not deny its consent unless for reasonable
grounds. Furthermore, the parties agree that sub-letting
to subsidiaries or affiliates of the Lessee or to the
parent company of the Lessee will not require the approval
of the Lessor and the conditions of Clauses 13.2.2 and
13.2.4 shall apply, but not the provisions of
Clause 13.2.3 hereunder.
13.2.2 The contract with the sub-lessee will be according to the
drafting of this Contract, mutatis mutandis, including all
its Appendices and its schedules, which will not be longer
than the schedules indicated in this Contract, and without
the sub-lessee being given any preference right exceeding
those of the Lessee in accordance with this Contract.
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13.2.3 The Lessor, according to its exclusive discretion, is
entitled to engage directly with the sub-lessee and
concurrently to revoke the contract with the Lessee.
13.2.4 The contract with such sub-lessee will be for the purposes
of operating a business and/or a plant engaging in the
sector of the Hi-Tech industries.
13.3 Without prejudice to the generality of that stated in Clause 13.2
above, it is agreed that in the event of a sub-letting as stated
above, the Lessee will still be liable toward the Lessor for the
fulfillment of all its obligations and/or the obligations of the
sub-lessee in accordance with this Contract and/or the sub-letting
agreement.
13.4 The Lessor will be entitled to deliver and/or transfer and/or
assign and/or endorse and/or mortgage and/or pledge all its rights
and/or obligations in accordance with this Contract in any way and
manner, without any restriction and without any requirement to
receive the consent of the Lessee, so long as the rights of the
Lessee in accordance with this Contract will not be injured.
13.5 The Lessee is obligated to sign any document or deed, which would
be required pursuant to the transferring of the rights of the
Lessor to any third party, it will sign such documents or deeds,
as stated, forthwith upon receipt of a demand of the Lessor, so
long as such signature will not impose any further charges on the
Lessee, beyond the charges and obligations applying to it in
accordance with the provisions of this Contract.
14. CHANGES IN THE LEASED PREMISES AFTER THE DELIVERY OF THE LEASED PREMISES
TO THE LESSEE
The parties agree that in any event in which the Lessee will be
interested in making changes in the Leased Premises after the Delivery
Date of the Leased Premises, the following provisions shall apply:
14.1 The Lessee is obligated not to make or allow anyone else to make
any internal and/or external changes in the Leased Premises and
avoid adding any addition to it
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and will also avoid any destruction of any part of the Leased
Premises and/or any of its facilities and will not allow others to
make any such changes and/or additions and/or destruction
(hereinafter: "The Changes") without receiving the earlier consent
of the Lessor in writing.
In order to remove any doubt, it is hereby agreed and declared
that the installation of movable partitions in the Leased
Premises, including gypsum partitions and also the placing of
movable furniture will not be regarded as Changes for the purpose
of this Clause.
In the event that the Lessee has made Changes, as stated, and the
Lessor requires that the condition of the Leased Premises will be
reverted to its previous condition, the Lessee will be obligated
to do so within 14 days from the date of such a requirement.
In the event that the Lessee failed to fulfill this obligation, as
stated, the Lessor will be entitled to perform that stated above
by itself and/or by means of anyone on its behalf, at the expense
of the Lessee, together with an addition of 10% of the said amount
for the covering of general expenses of the Lessor and the Lessee
shall have no contention and/or requirement of any type and kind
whatsoever with regard to a performance by the Lessor, as stated
above.
14.2 In the event that the Lessor gave its consent to the request of
the Lessee to make Changes in the Leased Premises and such changes
will include the addition of installations, according to their
definition in the Land Law, 1969, these installations will become
the property of the Lessor upon the vacating of the Leased
Premises, and the Lessee will not be entitled to remove them from
the Leased Premises or to revert the Leased Premises to its
previous condition as it was prior to the Changes, unless the
Lessor notified the Lessee in writing and in advance that it
requires the Lessee to return the Leased Premises to its previous
condition, as it was prior to the Changes.
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In order to remove any doubt, any Change that includes the
addition of installations, as stated, will not be regarded as
payment of key moneys, according to their definition in the
Tenant's Protection Law, 1972, and the Lessee will not be entitled
to any consideration for these installations either from the
Lessor and/or from anyone else.
In the event that the Lessee will make Changes in the Leased
Premises, with the agreement of the Lessor, which do not
correspond with the definition of installations, as stated above,
the Lessee will be obligated upon the completion of the lease
period to revert the condition of the Leased Premises to its
previous condition prior to the making of such changes, unless the
Lessor will notify the Lessee in writing and in advance of its
consent to leaving the changes in the Leased Premises. In the
event that the Lessor notified of its consent to leaving the
Changes in the Leased Premises, the Lessee will not be entitled to
remove them from the Leased Premises or to make any change in them
and they shall be transferred upon the completion of the lease
period to the possession of the Lessor and will become its
property without the Lessee being entitled to require and/or to
receive any compensation or payment for it and without it being
regarded as payment of key moneys, as stated.
14.3 The Lessor will be entitled to carry out any construction on the
Leased Premises' roof, subject to avoiding any injury to the
reasonable benefit of the Lessee from the Leased Premises, during
the construction period and/or thereafter.
14a. PARKING LOTS
The Lessee was informed that the Lessor and/or anyone on its behalf will
be operating an underground parking-lot in the Building, all as specified
in Appendix G. to this Contract, subject to the provisions of this
Clause , as follows:
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14a.1 The parties agree that the Lessee shall have the right to lease
marked parking places and parking access rights, according to
their definition hereunder up to an inclusive amount of ______
parking places in the parking lots, that being according to the
prices indicated in Clauses 14a.1.1 and 14a.1.2 hereunder:
14a.1.1. In consideration of parking places that will be
intended for the singular usage of the Lessee
and/or its employees and/or its visitors
(hereinafter: "The Marked Parking Places") - a
total of NIS 456 (a total in Shekels equivalent to
US$140) for each marked parking place per month.
14a.1.2 In consideration of the access right to the parking
lot on the basis of vacant places, without the
Lessee having any right for a specific parking
place (hereinafter: "Parking-Lot Access Right") - a
total of NIS 358 (an amount in Shekels equivalent
to US$110) for each Parking-Lot Access Right, per
month.
14a.1.3 Out of ____ parking places which the Lessee is
entitled to lease, the Lessee is obligated to lease
from the Lessor during the lease period at least
_______ Marked Parking Places and _____ Parking-Lot
Access Rights.
Not later than the Delivery Date, the Lessee is
obligated to notify the Lessor with respect to the
number of Marked Parking Places and Parking-Lot
Access Rights which Lessee desires to lease, in
addition to the _____ parking places mentioned
above, out of a total of ___ parking places, that
it is entitled to lease, as stated in Clause 14a.1.
14a.1.4 Notwithstanding that stated above and in
Appendix G., the parties agree that the Lessee will
be entitled to change the number of parking places
on a quarterly basis, that being according to the
occupation of the parking lot.
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14a.2 The provisions concerning the operation dates of the parking lot
and the other provisions of Appendix G. shall be obligating upon
the Lessee for each and every purpose. Without prejudice to the
generality of that stated above, it is agreed that the parking lot
will be opened and accessible for the Lessee between the 06:00 to
22:00 on Sunday - Thursday, and between 07:00 - 14:00 on Friday,
with the exception of holidays.
14a.3 The parking fee in consideration of the Marked Parking Places and
in consideration of the Access Rights will be regarded as lease
moneys for each and every purpose, thereby will be linked to the
index, as specified in the Parking Appendix, Appendix G., as all
the provisions of this Contract shall apply to them, without
prejudice to any remedy to which the Lessor and/or the Management
Company and/or The Parking-Lot Management Company is entitled in
accordance with the Parking-Lot Management Agreement.
14a.4 In order to remove any doubt, it is hereby clarified that in any
event of discrepancy between the provisions of this Contract and
the provisions of Appendix G., the less favoring provisions upon
the Lessee shall supersede.
15. MAINTENANCE AND AVOIDANCE OF NUISANCES
15.1 The Lessee will maintain the Leased Premises in a good and orderly
condition, will see to the cleanness of the Leased Premises and
its surroundings, its facilities and accessories and those that
are appurtenant to it, including service rooms that are located in
the Leased Premises and all the wash rooms intended for the
singular usage of the Lessee, and it will use them carefully and
avoid causing any damage or spoilage to the Leased Premises or to
its facilities.
Without prejudice to the generality of that stated above and
below, the Lessee is obligated to maintain all the systems
installed in the Leased Premises in an orderly condition and will
see to their day-to-day maintenance, including repairs and seeing
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to their replacement, as required, and upon the date of returning
the Leased Premises to the Lessor, as stated above, will return
the Leased Premises to the Lessor in a good and orderly condition,
with the exception of wear and tear emerging from normal and
reasonable use of the Leased Premises.
15.2 The Lessee will follow the instruction of any competent authority,
as such would prevail from time to time in connection with
cleaning arrangements, manner of removal of waste residuals and
preserving the orderly condition of the sewage system and all the
other systems in the Leased Premises.
15.3 The Lessee is obligated to see to the cleaning of the Leased
Premises and its surroundings, to avoid the accumulation of waste
and materials that may cause a fire and also to the removal of bad
smells, rust and will also take any reasonable measures to prevent
fire.
15.3.1 In order to remove any doubt, the Lessee declares that it
is well aware that there are or will be other lessees in
the surrounding premises and that it should see to taking
the required means in order to prevent dispersion and/or
smells and/or hazard materials originated in its plant and
which may be of a nuisance and/or cause pollution to other
leased premises in its surroundings.
15.3.2 The Lessee will refrain from causing any nuisance,
including noises, bad smells and shocks that may disturb
neighboring lessees.
Furthermore, the Lessee is obligated to take any required
means in order to prevent fire.
15.4 The Lessee will notify the Lessor of any damage to the Leased
Premises or of any nuisance caused to the Leased Premises or to
other leased premises, which originated from the Leased Premises,
that being within 48 hours from its discovery. In the event that
the Lessee fails to notify, as stated, it will bear any additional
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expense caused to the Lessor in consequence of the failure to give
notice to the Lessor in due time.
15.5 The Lessor will see to the orderly maintenance of the Leased
Premises, including all its systems and including the finish
supplements and will repair at its expense any defect or spoilage
in the Leased Premises and/or its systems and the finish
supplements, that being without prejudice to the liability of the
Lessor to the quality of the Finish Works, as stated in
Clause 6.2.10 above, and/or any defect or spoilage that may cause
a nuisance to other lessees, that resulted or evolved or
discovered in the Leased Premises or from it and in any part of
it, including plumbing repairs and various other repairs, that
being upon their evolving and/or emerging and/or discovering, with
the exception of damages to the Building or to systems operated by
the Management Company in accordance with the provisions of the
Management Agreement, which were not caused by the Lessee.
15.6 In the event that the Lessee failed to carry out its obligations,
or any part of them, in accordance with that stated in Clause 15,
including all its Sub-Clauses, or if the damage was not fixed to
the satisfaction of the engineer of the Lessor, the Lessor will be
entitled, but not obligated, to carry out the repairs by itself
and all the repair expenses will apply to the Lessee, who will be
obligated to refund them to the Lessor upon its first requirement,
together with index linkage difference, as per Clause 11 above,
including arrears interest, as per Clause 22 hereunder, calculated
as from the repair's payment date by the Lessor until their actual
full reimbursement to the Lessor.
The invoices of the Lessor concerning the rate of its expenses in
accordance with this Clause will constitute a prima facie evidence
as to their correctness and truthfulness and the Lessee is
obligated to pay them immediately upon its first requirement.
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15.7 The Lessee hereby gives its full consent and authorization, that
the representatives of the Lessor, its employees and/or agents
will be entitled to enter the Leased Premises in coordination in
advance with the Lessee, at any reasonable time, in order to check
the condition of the Leased Premises, the fulfillment of the
obligations of the Lessee in accordance with this Contract, the
systems of the Leased Premises, its equipment and installations,
and also in order to carry out any repair and/or maintenance
works, to which the Lessor is obligated in accordance with the
provisions of this Contract and according to the any Law
whatsoever, for technical and other arrangements, and the
representatives of the Lessor will be entitled to enter the Leased
Premises in order to show it to other potential lessees during the
last nine months of the lease period.
15.8 The Lessee will follow all the instructions of the Lessor, the
insurance company and the instructions of any other competent
authority in connection with fire extinguishing arrangements and
procedures, fire prevention, Civil Defense and safety, as would be
necessary according to the actions of the Lessee in the Leased
Premises. Furthermore, the Lessee will take any means required in
order to prevent explosion and/or fire.
15.9 The Lessee is obligated to follow all the provisions of any Law
whatsoever, including any regulation, writ, by-law or any
instruction of a competent authority with regard to the management
of its business in the Leased Premises and in connection with the
possession of the Leased Premises and the use thereof. The Lessee
shall also be liable for the payment of each and every fine
imposed in consequence of a failure to fulfill such provisions and
instructions.
16. SAFEKEEPING OF THE LEASED PREMISES
16.1 The Lessee will not place in the Leased Premises any equipment
which may cause damage to the Leased Premises and will avoid
placing loads on the floor of the
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Leased Premises above the load for which it was designed. The
permitted load in the office floor is 500 Kg. per 1 sq.m. The
permitted load in the parking lot is 250 Kg per 1 sq.m.
16.2 In any event of a special or concentrated load or anchoring of
machinery, the Lessee is obligated to file plans and receive the
prior consent in writing of the engineer of the Lessor.
17. SECURITIES AND GUARANTEES
17.1 Pursuant to the assurance of the fulfillment of all the
obligations of the Lessee in accordance with this Contract,
including all its Appendices, the Lessee will furnish the Lessor
upon the signing of this Contract with an unconditional automatic
monetary bank guarantee of an Israeli bank made in favor of the
Lessor, according to the draft of the guarantee attached to this
Contract as Appendix I., that being according to an amount
equivalent to Basic Lease Payments for a three month period
together with the addition of VAT. The guarantee will be linked
to the consumer price index as from its issuance and will be valid
for 15 months thereafter.
17.2 In order to remove any doubt, it is stipulated between the parties
that extending the validity of the guarantee upon dates specified
above is one of the fundamental obligations of the Lessee in
accordance with this Contract and that in the event that the
guarantee will be materialized by the Lessor, the Lessee will be
required to furnish the Lessor with a new guarantee instead of the
materialized guarantee, that being within 7 days from receiving a
notice concerning the materialization of the guarantee.
17.3 Upon the completion of the lease period and upon the delivery date
of the Leased Premises to the Lessor, the Lessee will be required
to furnish the Lessor with approvals concerning the removal of all
payments and fees applying to it and which
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were paid by it until the vacating date of the Leased Premises and
its returning to Lessor and/or with regard to the lease period.
17.4 All the securities that are given to the Lessor in accordance with
this Contract, including the bank guarantee will be returned to
the Lessee within a three month period after the completion of the
lease period or the option period, as the case may be, subject to
the fulfillment of that stated in Clause 17.3 above.
In order to remove any doubt, it is hereby clarified that the
signature of D.S.P. Group on the guarantee attached to this
Contract and also the depositing of a bank guarantee, as stated
above, are a fundamental condition in this Contract.
18. THE USE OF OTHER AREAS OUTSIDE THE LEASED PREMISES
18.1 The Lessee shall have no contention toward the Lessor in the event
of a decrease in the area of the backyard in consequence of
changes in the plan or as a result of the decisions or
requirements of competent authorities or due to any other cause.
18.2 The Lessee will not be entitled to have any singular usage of any
of the sidewalks, roads, stair-cases or in any other area outside
the Leased Premises.
The internal road in the front of the Leased Premises is not
intended for any use, with the exception of vehicle passage and
for passengers.
19. ELECTRICITY, WATER, CHANNELING AND SIGNPOSTS
19.1 Without prejudice to anything that is stated in this Contract
hereunder, the Lessee acknowledges that it well aware that the
installation of water in the Leased Premises and connecting the
Leased Premises to the water mains is stipulated in a contractual
commitment between the Lessee and the local authority or with the
Management Company - with regard to the installation of water
meters for the Leased Premises - as any payment pertaining to it
will be borne by the Lessee.
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19.2 The Lessee agrees that the un-connecting of the Leased Premises
from the electricity network, as stated in Appendix H. and/or to
the water mains shall not derogate from its obligations in
accordance with this Contract and shall not constitute a cause for
damages claim against the Lessor, so long as the Lessor will
supply the Leased Premises with electricity and water supply in
alternative and in a regular manner, which will correspond with
all the requirements of the Lessee until connecting the Leased
Premises to the water and electricity network, as per Appendix H.
Subject to the obligation of the Lessor to supply electricity, as
specified above, it is agreed that the Lessor alone shall have the
right to cease the supply of electricity to the Building and to
see to the connecting of the Leased Premises to the general
electricity network of the Electricity Company and the Lessee
shall have no contention in this regard.
19.2.1 Notwithstanding that stated in Clauses 19.1-19.2 above,
the Lessee declares and approves, that it is well aware
that the Lessor will be entitled to install a central
water facility in the Building, through which the entire
water supply will be channeled to the leased premises in
the Building. In such case, the Lessee is obligated to
pay to the Lessor or to anyone on its behalf in
consideration of the water consumption of the Leased
Premises, immediately upon receipt of a requirement from
the Lessor.
19.3 The Lessee declares and approves, that it is well aware that all
the electrical services of the Building and of the Leased Premises
will be supplied by the Lessor and/or by anyone on its behalf, in
an accumulative manner, and that the Electricity Company will not
be providing the Building and/or Leased Premises with any
electrical services.
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19.3.1 The Lessee is obligated to pay to the Lessor and/or to
anyone on its behalf its share in the electricity expenses
of the Leased Premises, all as specified in Appendix H. to
this Contract - the Electricity Appendix.
19.3.2 The Lessee is obligated to enter the Electricity
Agreement, Appendix H. between it and the Lessor or anyone
on its behalf and to bear all payments for the electrical
services concerning the Leased Premises alone, as
specified in Appendix H. In any event, the Lessee
approves that the provisions of Appendix H., containing
all the provisions specified in this Clause, shall apply
to the lease relationship, subject of this Contract,
whether the Lessee will sign said Agreement or not.
19.3.3 Without prejudice to the generality of that stated above,
the payment obligation of the Lessee in accordance with
the Provisions of the Electricity Agreement, Appendix H.,
is viewed similarly to the obligation to pay the lease
payments and the provisions of the Electricity Agreement
are viewed similarly to the provisions of this Contract,
i.e. the breach of which will entitle the Lessor to all
the remedies, specified in this Contract. In order to
remove any doubt, the provisions of Clause 11, 21.4 and 22
of this Contract shall apply to the obligations of the
Lessee in accordance with the Electricity Agreement, that
being without any prejudice to any other remedy to which
the Lessor is entitled in accordance with the Electricity
Agreement.
19.4 The Lessee is obligated to prevent the occurrence of plugs or
spoilage in the sewage system of the Leased Premises, as a result
of its use or as a result of dumping from its plant and is also
obligated to bear the expenses of repair or replacement of this
system if such is required in consequence of the plugging or
spoiling which is in its direct responsibility.
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19.5 The Lessee shall not affix signposts outside the Leased Premises
or on the Leased Premises, but only after receiving the prior
written approval of the Lessor and/or the Management Company.
The Lessor and/or the Management Company will be entitled to
determine the shape of the signpost, its size and location, and
the Lessee will be obligated to affix the signpost, as determined
by the Lessor and/or by the Management Company. In the event that
the Lessee will affix a signpost while breaching this Clause , the
Lessor and/or the Management Company will be entitled to remove it
at the expense of the Lessee.
19.6 The Lessee will bear each and every tax or fee with respect to the
affixing of the signpost and its keeping and the Lessee is also
obligated to obtain any permit required for the installation of
the signpost.
19.7 In the event that the Lessor and/or the Management Company will
affix a uniform billboard for all the constructions that were
constructed and/or that are being constructed by the Lessor in the
area of the Leased Premises, then the Lessee will be obligated to
pay a relative payment for the affixing of said billboard.
19.8 The Lessor will be entitled to install street-signs on the roof of
the Leased Premises or in its premises for the advertising
purposes of the Lessor and/or its tenant in the Building and/or in
the project, while preserving the architectural and qualitative
character of the Building, and the Lessee will not be entitled to
object to their installation.
20. SUPPLY OF SERVICES AND COMMON FACILITIES
20.1 The Lessee will be entitled to use the common facilities located
in the area of the Leased Premises, but only for the purpose for
which they were designated, all in accordance with the
instructions of the Lessor and/or the Management Company.
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20.2 The Lessee declares and confirms that it is well aware that for
the purpose of the maintenance of the Leased Premises and other
leased premises nearby it, the common services for all the lessees
including the public areas, such as external walls, public
toilets, backyard and security rooms and for the installation in
the Building, the Lessor will provide maintenance and management
services either directly and/or by means of subcontractors and/or
a services company (hereinafter: "The Management Company").
For the purposes of this Clause: main systems - including the
air-conditioning systems, lifts, electrical switchboards,
installation, lighting, water, sewage and channeling systems, fire
control, emergency power generator, smoke detection, public
announcement system and control systems.
Needless to mention, that the Lessee was informed that the Lessor
is entitled to transfer the management of the parking-lot to
another body (hereinafter: "The Parking-Lot Management Company").
20.4 The Lessee is obligated to sign the Management Agreement with the
Lessor and/or the Management Company, according to a draft
determined by the Lessor and/or the Management Company and/or the
Parking-Lot Management Company, as per the draft of the Agreement,
Appendix G. and to bear all the payments as obligated by the
Management Agreement and the Parking-Lot Management Agreement.
In any event, the Lessor approves that the provisions of the
Management Agreement will include all the provisions specified
hereunder and in any event of discrepancy and/or of a supplement
to that stated in this Contract - the provisions of this Contract
will supersede the provisions of the Management Agreement.
20.4.1 The parties agree that the management and maintenance
moneys paid by the Lessee to the Lessor and/or to the
Management Company will amount during the first two years
of the lease period to NIS 9.77 per 1 sq.m. per month (a
total in Shekels equivalent to US$3 per 1 sq.m. per month)
and in
29
<PAGE>
any event the management and maintenance fees will not
exceed the management and maintenance fees collected from
another lessee having similar leased premises (with the
exception of specific services rendered to the Lessee
according to its request). The management and maintenance
fees payable by the Lessee will be linked to the index,
all in accordance with the provisions of Clause 11 above.
The management and maintenance fees upon the completion of
said period will be determined according to the cost of
all the expenses, according to their definition hereunder,
together with a 15% addition and in accordance with the
relative area of the Leased Premises out of the inclusive
area in the Building.
20.4.2 The management and maintenance fees, among others, will
include expenses incurred in the operation of an
information stand, cleaning and gardening expenses,
overhauling services and repairing of various systems
mentioned above, supply of electricity and water to the
public areas, insurance of the public areas, including
breakage insurance and also expenses for any other service
that would be required according to the discretion of the
Lessor and/or the Management Company, including allowances
for an equipment renewal fund.
The Lessee will pay an addition above the management and
maintenance fees for any special service that is not
included within the general framework of the
responsibility of the Management Company, which is given
to the Lessee and/or to the Leased Premises according to
the order of the Lessee.
20.4.3 The Lessor agrees and is obligated to bear its relative
share of all the areas that are intended for lease and
which are not leased.
30
<PAGE>
20.4.4 It is agreed that the Management Agreement will include
the following obligations:
20.4.4.1 The Management Company will keep books and
accounts, that will be audited by an
accountant, and these books will be available
for the examination of the Lessee inasmuch as
it will be required in order to determine the
management and maintenance fees.
20.4.4.2 The Lessee will not be entitled to offset
from amounts due to the Management Company
from it and will not be entitled to offset
from amounts due from it any amounts that are
due to the Management Company.
20.4.4.3 Upon the signing of this Contract, the Lessee
will furnish the Lessor with an automatic
bank guarantee in favor of the Lessor,
according to the draft, Appendix I, in an
amount equivalent to the management and
maintenance fees for three months together
with the addition of VAT. The guarantee will
be linked to the Consumer Price Index and
will be valid for a 12 month period as from
its issuance.
20.5 Without prejudice to the generality of that stated above, the
payment obligation of the management and maintenance fees by the
Lessee in accordance with the provision of this Contract and/or
the Management Agreement and the Parking-Lot Management Agreement,
Appendix G., is similar to the obligation to pay the lease
payments, and the provision of the Management Agreement and the
Parking-Lot Management Agreement will be viewed similarly to the
provisions of this Contract, the breach of which entitles the
Lessor to all the remedies specified in this Contract, without
prejudice to any remedy to which the Management Company and/or the
Parking-lot Management Company is entitled in accordance with the
Management
31
<PAGE>
Agreement and/or the Parking-lot Management Agreement and/or any
Law whatsoever.
20.6 In the event of providing services, as stated, by the Management
Company and/or the Parking-Lot Management Company, the word
"Lessor" means in this Clause the Lessor and/or the Management
Company and/or the Parking-Lot Management Company.
21. TAXES, FEES AND COMPULSORY PAYMENTS
21.1 All the taxes, municipal taxes, payments and various fees
(hereinafter: "The Taxes") whether municipal or Governmental or
otherwise, imposed or which would be imposed in the future on or
in connection with the use of the Leased Premises or in connection
with the management of the business of the Lessee in the Leased
Premises during the lease period shall apply and be borne by the
Lessee as from the Delivery Date.
Notwithstanding that stated above, fees and/or charges that would
be imposed due to development works and also with regard to lease
payments and improvement fees imposed on the Leased Premises shall
apply to the Lessor.
Municipal taxes that are imposed on the Leased Premises shall
apply and be paid by the Lessee, even if the Law shall determine
that the tax should be paid by the Lessor and/or by the proprietor
of the land.
21.2 That stated above does not impose an obligation on the Lessee to
pay Income Tax and/or Capital Gains Tax and/or Property Tax
applying and/or that would apply to the Leased Premises.
21.3 Value Added Tax that would be imposed on the Lessor or on the
Lessee due to this lease shall apply to the Lessee alone and be
paid by it against the furnishing of an appropriate tax invoice.
32
<PAGE>
21.4 Any payment paid to the Lessor by the Lessee in accordance with
this Contract will be paid together with the addition of VAT,
according to its rate by Law and upon the payment date.
21.5 Notwithstanding that stated above, but subject to that stated in
Clause 21.2 above, it is hereby agreed that in the event that a
new tax will be imposed on the Leased Premises, which payment
applies to proprietors, then such tax and/or taxes will be paid by
the Lessee.
22. ARREARS INTEREST
22.1 Without prejudice to the generality of the rights of the Lessor
according to this Contract or by Law, in any event that the Lessee
will be in delay with any payment whatsoever, which is due to the
Lessor, then, in accordance with this Contract, the Lessee will be
obligated to pay to the Lessor the amount in arrears together with
the maximum interest rate, customary at such time with Discount
Bank of Israel Ltd., Haifa Central Branch, in a debit account for
withdrawals exceeding the permitted overdraft (hereinafter: "The
Interest") or linkage differences and interested accrued on them,
whichever is higher, as per the discretion of the Lessor, that
being from the arrears date until the actual payment.
22.2 The order and crediting of payments paid by the Lessee shall be
determined by the Lessor, as per its discretion.
23. FRUSTRATION OF THE LEASE
23.1 In the event that the Leased Premises will be entirely damaged or
if the benefit from the Leased Premises will be entirely canceled,
then this Contract will be terminated and will be regarded as null
and void, the Lessor will refund the Lessee same lease moneys or
return same securities received in advance for the period
33
<PAGE>
following the aforementioned event, that being according to the
amounts that were actually paid, together with linkage.
24. LIABILITY AND INSURANCE
24.1 The Lessor, including its definition in Clause 20.6 above, shall
not bear any liability whatsoever or any indebtedness for any
bodily damage and/or loss and/or property damage of any kind
whatsoever (either directly or indirectly) caused to the Lessee
and/or to its workers and/or to those employed by him and/or to
its agents and/or its clients and/or its visitors and/or to any
other person who will be located in another area that is held by
the Lessee, in the possession of the Lessor or in area bordering
the Leased Premises and/or any property of the Lessee and/or to
bodily damage or damage to property caused to the neighbors of the
Lessee.
The Lessee hereby undertakes the full liability for any of the
damages specified above, and is obligated to compensate and
indemnify the Lessor for any damage moneys, that the Lessor might
be obligated to pay or compelled to pay in consequence of such a
damage and against any expense borne by the Lessor in connection
with any damage as above, all subject that in the event that any
third party will file a claim against the Lessor, the Lessor will
assume third party procedures against the Lessee.
24.2 The Lessor is obligated to compensate and indemnify the Lessee for
any damage moneys that the Lessee might be obligated to pay or
which it would pay in consequence of any damages, as stated above,
caused due to negligence on the part of the Lessor, subject to
that that in the event that any third party will file a claim
against the Lessee, the Lessee will assume third party procedures
against the Lessor.
34
<PAGE>
24.3 The Lessee is obligated to insure itself against third party
liability, as specified in the Insurance Appendix, attached hereto
and marked E. and to bear the payment for the insurance of the
Building, as specified in Clause 24.15 of Appendix E.
24.4 The payments specified in Clause 24.15 of Appendix E. will be
regarded as lease payments for each and every purpose.
25. THE BREACH OF THE CONTRACT AND ITS CANCELLATION
25.1 Omitted.
25.2 Without prejudice to the provisions of any Law whatsoever, any of
the following actions or refraining from actions will be regarded
as a fundamental breach of the Contract by the Lessee:
25.2.1 The use of the Leased Premises not for the purpose of the
lease, as stated above.
25.2.2 Transferring the rights of the Lessee in the Leased
Premises to another in contrast with the provisions of
Clause 30 above.
25.2.3 Transferring the control over the Lessee without receiving
the consent of the Lessor in contrast with the provisions
of Clause 13 above.
25.2.4 Failure to pay the Lease Payments and/or the management
fees and/or the parking-lot management fees and/or failure
to pay any payment that was paid by the Lessor instead of
the Lessee upon the payment date and/or failure to deliver
and/or to renew the bank guarantee in accordance with this
Contract and/or its Appendices.
It is hereby clarified that a delay with the payment or
with a delivery, as stated, which does not exceed 5 days
shall not be regarded as breach of this Contract.
25.2.5 The issuing of a receiving order or a liquidation order or
the appointment of a receiver to all the assets of the
Lessee or any part of them, whether such
35
<PAGE>
an order is temporary or permanent and which would not be
revoked within 60 days from the date of its issuance.
25.2.6 Causing a significant nuisance which may disturb plants or
businesses that exist now and/or in the future nearby the
Leased Premises and/or also the nonabatement of such a
nuisance.
25.2.7 Failure to return the possession of the Leased Premises in
such manner and condition, as specified in Clause 26
hereunder.
25.2.8 Doing an action which is in contrast with the provisions
of Clauses 14, 15, 16 above.
25.2.9 Non-payment for services rendered to the Leased Premises
in accordance with the Management Agreement and/or the
Parking-Lot Management Agreement and/or the Electricity
Agreement.
25.3 In the event that the Lessee has breached any of the
aforementioned fundamental conditions and failed to cure such a
breach within 10 days from the receipt of a written warning from
the Lessor, the Lessor will be entitled to cancel this Contract,
and this Contract will be regarded null and void from the date
stated in the notice of the Lessor.
25.4 In the event that the Lessor notifies the Lessee of the due
cancellation of the Contract, the Lessee shall vacate the Leased
Premises and return the possession of it to the Lessor, as the
Leased Premises is clear of any holder and object, within 30 days
from the receipt of a notice concerning the cancellation of this
Contract and shall compensate the Lessor for any damage that was
caused to the Lessor.
25.5 Nothing in the provisions of this clause will derogate from other
rights of any of the parties in accordance with this Contract or
by Law.
25.6 Any lack of action and/or lack of response and/or avoiding the use
of a remedy according to this Clause, on the part of the Lessor,
shall in no way be construed as a waiver on its part of its rights
in accordance with the Contract with respect to a
36
<PAGE>
continued or additional breach of the Lessee, unless the Lessor
has explicitly waived its rights in advance and in writing.
26. VACATING THE LEASED PREMISES
26.1 The Lessee will vacate the Leased Premises upon the completion of
the lease period or at any other date by which the lease will be
terminated in accordance with this Contract and will return it to
the Lessor as it is clear of any person and object in accordance
with that stated in this Clause. In the event that the Lessee
will be required to vacate the Leased Premises according to this
Contract, it will return it to the Lessor as it is absolutely
clean and in a good condition ready for immediate use, to the
satisfaction of the engineer of the Lessor, with the exception of
wear and tear deriving from normal and reasonable use of the
Leased Premises.
26.2 In the event that the Lessee shall not vacate the Leased Premises,
as stated in Sub-Clause 1 above and in Clause 25.4 above, the
Lessee will pay to the Lessor a fixed and evaluated in advance
compensation in a rate of 200% of the Basic Lease Payments for
each month of delay and an additional relative rate for the
additional days of delay, together with linkage difference between
the basic index and the index that was most recently published
prior to the actual and the payment. In addition to that, the
Lessee will pay the Lessor any damage or loss, caused to the
Lessor or to a third party in consequence of a delay with the
vacating of the Leased Premises and its leasing to a new lessee by
the Lessor.
27. EXPENSES OF THE CONTRACT AND LEGAL EXPENSES
27.1 Stamp duty of this Contract shall apply to both parties in equal
parts. Stamping expenses of the guarantees, subject of this
Contract shall apply to the Lessee.
27.2 It is agreed and declared between the parties, that in the event
that the Lessee will not vacate the Leased Premises upon the
completion of the lease period or after it
37
<PAGE>
received a notice concerning the cancellation of the lease in
accordance with the provisions of this Contract or in any event
that the Lessee has breached any of the provisions of this
Contract, the Lessee, in addition to all the remedies stated in
this Contract and in the Law, will bear all the expenses incurred
to the Lessor in all matters pertaining to the legal handling in
connection with any hearing or legal action or any action with the
Execution Bureau, including legal fees of the Legal Representative
of the Lessor, all in accordance with the judgment of the Court
and/or any other judicial body.
28. AMENDMENT OF THE CONTRACT
Any change and/or amendment of this Contract will be made only by means
of an explicit document made in writing and signed by both parties.
29. DEVIATION
The consent of a party to this Contract to deviate from its conditions in
a certain case or in a series of cases shall not constitute a precedent
and shall not be deduced with regard to another case in the future.
30. NOTICES AND WARNINGS
30.1 Any notice and warning passed from one party to the other in
connection with this Contract, will be passed by way of registered
mail or delivered by hand, according to the addresses of the
parties, as indicated in the preamble to this Contract (or any
other address in which regard a written notice will be passed) and
a notice or a warning, as stated, will be viewed as if reached its
destination, upon their delivery - if delivered by hand, and if
passed through the Israeli postal services - seventy two hours
after its delivery with postage fully paid in advance.
30.2 The addresses of the parties are as specified in the preamble to
this Contract.
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<PAGE>
31. ADDITIONAL STEPS
The parties will take all additional steps (including the signing of
additional documents) required pursuant to the execution of this Contract
to the letter and to the spirit of it.
32. GENERAL
32.1 Any waiver, negligence, avoidance, failure to take legal measures
or a delay with the use of rights on the part of the Lessor in a
certain case shall in no way be regarded as a waiver, consent, or
admission on the part of the Lessor. The Lessor will be entitled,
at all times, to exercise any of its rights in accordance with
this Contract or according to the Law at all time, as it would
seem necessary, despite any previous wavers, discounts or
negligence.
32.2 For the purpose of this Contract, including all its Appendices,
including a claim concerning its breaching, the parties determine
that the singular and exclusive venue is the competent Court of
Haifa and no other court.
32.3 Any notice in accordance with this Contract, in the absence of
another determination in the body of the Contract, shall be given
in writing seven business days in advance.
In witness thereof, the parties have signed:
/s/ Hanan Nitsan /s/ Eli Ayalon
- ----------------------------------- -------------------------------
The Lessee The Lessor
By: Hanan Nitsan, CEO By: Eli Ayalon, CEO
/s/ Noach Aviram /s/ Igal Kohavi
- ----------------------------------- -------------------------------
The Lessee The Lessor
By: Noach Aviram, VP By: Igal Kohavi, Chairman
39
<PAGE>
AGREEMENT
This Agreement (this "Agreement") is entered into as of the 18th day of
August, 1997, by and among APTEL Ltd., an Israeli company (the "Company"),
D.S.P. Semiconductors Ltd., an Israeli company ("DSP"), and the persons and
entities whose names and addresses appear on Exhibit A and who are signatories
hereto (collectively, the "Existing Shareholders").
WHEREAS, the parties have entered into that certain Share Purchase and
Shareholders Agreement dated July 4, 1996 (the "Original Agreement"), under
which, inter alia, DSP invested US$2,000,000 in the Company pursuant to the
terms and conditions set forth therein; and
WHEREAS, the Company requires additional funding, and consequently the
Company's Board of Directors resolved on June 24, 1997, to propose a rights
offering (the "Rights Offering") under which the shareholders of the Company
were invited to purchase for up to US$500,000 of convertible debentures of the
Company, based on a conversion price of US$1.247 per one Ordinary Share par
value NIS 0.05 (the "Price Per Share"); and
WHEREAS, after the resignation of the two directors appointed by DSP from
the Company's Board of Directors due to DSP's refocus on other businesses, DSP
indicated that it will not participate in the Rights Offering; and
WHEREAS, certain other shareholders of the Company have agreed, upon the
terms and conditions set forth hereof, to purchase debentures in the Rights
Offering for more of their proportional share in the Company's outstanding share
capital, so that the Company shall receive the full amount of its required
financing; and
WHEREAS, in light of such willingness on the part of such shareholders, and
in light of the changes in the Company's Board of Directors and DSP's revised
position, the parties have agreed upon certain amendments to the Original
Agreement and to the Company's Articles of Association, as set forth herein;
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, and intending to be legally bound hereby, the parties agree as
follows:
1. Purchase of Convertible Debentures
Dovrat Shrem/Yozma Polaris Fund L.P., Dovrat Shrem & Co. Ltd., Leader
Underwriters Ltd., Adasha Yizum Proyektim (Tel-Aviv) Ltd. and El Kanit
Development Ltd. (the "Principal Shareholders") shall, upon execution of this
Agreement, commit to purchase the entire amount of convertible debentures
proposed in the Rights Offering not purchased by other shareholders, to be
allocated pro rata among them or as otherwise they shall inform the Company in
writing.
1
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2. Amendment of Original Agreement
Sections 10.1, 10.2, 10.4, 10.6, 10.9 (solely in respect of first refusal
rights governed by Section 4 of Exhibit 10.9 to the Agreement, but not including
co-sale rights governed by the other Sections of Exhibit 10.9), 10.10, 10.11 and
10.12 of the Original Agreement are hereby terminated in their entirety. In
addition, the parties agree that in respect of the Existing Shareholders Right
of Co-Sale governed by Section 3 of Exhibit 10.9 to the Agreement, the term
"Existing Shareholders Co-Sale Pro Rata Percentage" defined therein shall be
amended to mean from the date hereof one fourth (25%) of the "Transaction
Shares", as defined therein.
3. Termination of Option and Additional Option; Termination of Escrow
Agreement; Amendment of Employee Stock Option Plans
Upon the conversion into equity of the Company of all convertible
debentures purchased by the Principal Shareholders pursuant to the Rights
Offering, whether voluntarily or automatically as set forth in such debentures:
3.1. Sections 8 and 9 of the Original Agreement, granting DSP the "Option"
and the "Additional Option", as such terms are defined therein, shall
be immediately terminated, with no further action of any of the
parties required, and shall have no further force or effect.
3.2. The Escrow Agreement dated August 6, 1996 (the "Escrow Agreement"),
among certain shareholders of the Company and I. Fischer & Co.
Trustees Ltd. (the "Escrow Agent") shall be immediately terminated,
and the Escrow Agent is irrevocably instructed by the parties hereto
to release immediately upon such termination all Ordinary Shares of
the Company held by it in escrow (the "Escrowed Shares") to the
beneficial owners thereof (the "Beneficial Owners"), as follows:
3.2.1. To Dovrat Shrem/Yozma Polaris Fund L.P. - 574,520 Ordinary
Shares;
3.2.2. To Dovrat Shrem & Co. Ltd. - 69,520 Ordinary Shares;
3.2.3. To Leader Underwriters Ltd. - 67,480 Ordinary Shares;
3.2.4. To Adasha Yizum Proyektim (Tel-Aviv) Ltd. - 140,100 Ordinary
Shares;
3.2.5. To El-Kanit Development Ltd. - 30,160 Ordinary Shares;
3.2.6. To Ofer Bar-Or - 8,760 Ordinary Shares;
3.2.7. To Menachem Kenan - 3,860 Ordinary Shares.
2
<PAGE>
Upon such transfer by the Escrow Agent, all proxies granted by the Escrow
Agent to the Beneficial Owners in respect of the Escrowed Shares shall
immediately expire and be of no further force or effect.
The parties acknowledge that the Company has approved such transfer of the
Escrowed Shares to the Beneficial Owners and shall register the Beneficial
Owners as the holders of the Escrowed Shares in its books.
3.3. Upon the termination of the Option and Additional Option, as set forth
in Section 3.1 above, the Company's Board of Directors shall amend the
terms and conditions of the Company's 1996 Employee Stock Option Plan,
adopted by the Board of Directors on July 1, 1996, and of the
Company's 1996 (no. 2) Employee Stock Option Plan, adopted by the
Board of Directors on August 6, 1996, by deleting Section 11.3 of such
Employee Stock Option Plans, and amending accordingly all Grantee
Agreements executed by the Company and its employees pursuant thereto.
4. DSP's Required Consent for Certain Further Financings
Notwithstanding anything to the contrary herein, the parties agree that,
until the Company shall raise, in the aggregate, US$2 million dollars (including
through the conversion of the convertible debentures purchased in the Rights
Offering), at an applicable price per share not lower than the Price Per Share
(to be measured also in light of the other monetary terms of such financing
(e.g., the type of security purchased, options included, etc.) and as adjusted
for any changes in the capitalization of the Company) (the "Release Event"), the
Company shall not raise additional funds through the issuance of any equity
securities, or securities exercisable into or convertible to equity securities,
at a price per share which is lower than the Price Per Share unless the Company
has obtained DSP's prior written consent to the same. Any breach of this
Section 5 is deemed to be a fundamental breach.
DSP agrees that, upon the occurrence of the Release Event, the Company
shall be entitled to convene a general meeting of the shareholders and to
propose the amendment of the Company's Articles of Association by deleting the
addition to Article 84 adopted hereunder (as set forth in paragraph 5.3 below)
from the Articles, and that it will vote all its shares for such a proposal.
DSP irrevocably appoints Mr. Rami Kalish as its proxy, to vote, upon the
occurrence of a Release Event, all of its shares in the Company for such an
amendment to the Company's Articles of Association.
5. Amendments of Corporate Documents
The parties agree to amend the Company's Articles of Association as set
forth below, and irrevocably appoint Mr. Rami Kalish as their proxy to vote for
such amendments in the extraordinary general meeting of the shareholders
convened for the purposes of approving such amendment:
3
<PAGE>
5.1. In Article 61 of the Articles of Association, after the word
"participating votes" in the 12th line there shall come a period, and
the remainder of the Section, beginning with the words ". . .
provided, however, that until . . ." shall be deleted.
5.2. In Article 74 of the Articles of Association, the words ". . . and any
required consent pursuant to Section 61 has been received, . . ."
shall be deleted.
5.3. In Article 84, at its end, the following shall be added:
"Notwithstanding the aforesaid, until the Company shall raise, in
the aggregate, US$2 million dollars from the date this paragraph
is adopted, at an applicable price per share not lower than
US$1.247 (to be measured also in light of the other monetary
terms of such financing (e.g., the type of security purchased,
options included, etc.), and as adjusted for any changes in the
capitalization of the Company), the Company shall not raise
additional funds through the issuance of any equity securities,
or securities exercisable into or convertible to equity
securities, at a price per share which is lower than the
aforesaid price unless the Company has obtained the prior written
consent of DSP Semiconductors Ltd. to the same."
5.4. In Article 92 of the Articles of Association, after the words "decided
by a majority vote" in the 2nd line there shall come a period, and the
remainder of the Section, beginning with the words ". . . provided,
however . . ." shall be deleted.
6. Survival
Other than as amended specifically and expressly herein, the Original
Agreement shall continue in full force and effect pursuant to its terms and
conditions.
7. Mutual Release
Each of the parties hereto confirms that it has no claims, demands, suits,
actions or other rights whatsoever against the other parties hereto in
connection with or related to the Original Agreement, the Company's business or
affairs to date or the provisions set forth above (except in connection with the
enforcement of this Agreement), and that it waives and relinquishes any such
claims, demands, suits, actions or other rights whatsoever which they have or
may have.
8. Approval by Board and Shareholders
This Agreement is subject to the approval of the Board of Directors and of
the shareholders of the Company. The parties undertake to vote their shares in
the Company
4
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to approve this Agreement and will otherwise make their best efforts to have the
agreement approved.
IN WITNESS WHEREOF the parties have signed this Agreement as of the date
first herein above set forth.
/s/ Menachen Kenan /s/ Avi Basher
- ------------------------------ ---------------------------------------
APTEL Ltd. D.S.P. Semiconductors Ltd.
By: Menachen Kenan, CEO By: Avi Basher, CFO
---------------------------
WE AGREE:
/s/ Igal Kohavi
- ------------------------------
DSP Group, Inc.
By: Igal Kohavi, Chairman
5
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EXHIBIT A
Dovrat Shrem/Yozma Polaris Fund L.P.
---------------------------------------
Dovrat Shrem & Co. Ltd.
---------------------------------------
Leader Underwriters Ltd.
---------------------------------------
Adasha Yizum Proyektim (Tel-Aviv) Ltd.
---------------------------------------
El Kanit Development Ltd.
---------------------------------------
Menachem Kenan
---------------------------------------
Ofer Bar Or
---------------------------------------
6
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Exhibit 11.1
DSP GROUP, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 3,348 $ (263) $ 7,589 $ 578
-------- -------- -------- --------
-------- -------- -------- --------
PRIMARY:
Computation of weighted average common and common
equivalent shares outstanding:
Weighted average common shares outstanding 9,773 9,534 9,641 9,500
Common equivalent shares from dilutive stock
options and warrants 577 -- 377 67
-------- -------- -------- --------
Shares used in per share computation 10,350 9,534 10,018 9,567
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share $ .32 $ (.03) $ .76 $ .06
-------- -------- -------- --------
-------- -------- -------- --------
FULLY DILUTED:
Computation of weighted average common and common equivalent
shares outstanding:
Weighted average common shares outstanding 9,773 9,534 9,641 9,500
Common equivalent shares from dilutive stock
options and warrants 758 -- 800 67
-------- -------- -------- --------
Shares used in per share computation 10,531 9,534 10,441 9,567
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share $.32 $ (.03) $ .73 $ .06
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q OF DSP GROUP, INC. FOR
THE QUARTER ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 14,911
<SECURITIES> 46,281
<RECEIVABLES> 3,393
<ALLOWANCES> 811
<INVENTORY> 3,987
<CURRENT-ASSETS> 70,610
<PP&E> 8,745
<DEPRECIATION> (4,976)
<TOTAL-ASSETS> 76,889
<CURRENT-LIABILITIES> 10,707
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 66,172
<TOTAL-LIABILITY-AND-EQUITY> 76,889
<SALES> 37,626
<TOTAL-REVENUES> 45,378
<CGS> 23,306
<TOTAL-COSTS> 24,428
<OTHER-EXPENSES> 6,043
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,255
<INCOME-TAX> 1,666
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,589
<EPS-PRIMARY> .76
<EPS-DILUTED> .73
</TABLE>
