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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 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.
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(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
incorporation or organization) identification number)
3120 Scott Boulevard, Santa Clara, California 95054
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(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 July 31, 1997 there were 9,682,324 shares of Common Stock ($.001 par
value per share) outstanding.
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INDEX
DSP GROUP, INC.
PAGE NO.
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--June 30, 1997
and December 31, 1996........................................ 3
Condensed consolidated statements of income--Three and
six months ended June 30, 1997 and 1996 ..................... 4
Condensed consolidated statements of cash flows--Six
months ended June 30, 1997 and 1996 ........................ 5
Notes to condensed consolidated financial statements--
June 30, 1997 ............................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 11
PART II. OTHER INFORMATION
- ---------------------------------------------
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............................. 20
SIGNATURES............................................................. 20
EXHIBIT INDEX.......................................................... 21
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DSP GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
1997 1996
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ASSETS (Unaudited) (Note)
Current Assets
Cash and cash equivalents $12,410 $12,172
Marketable securities 36,849 30,762
Accounts receivable, net 5,622 4,861
Inventories 2,562 2,957
Deferred income taxes 500 500
Prepaid expenses and other 1,849 1,357
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Total current assets 59,792 52,609
Property and equipment 7,952 7,324
Accumulated depreciation and amortization (4,482) (4,033)
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3,470 3,291
Investments in unconsolidated subsidiaries,
net of amortization of goodwill 1,898 2,415
Other assets, net 150 388
Deferred income taxes 504 504
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TOTAL ASSETS $65,814 $59,207
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $2,056 $1,428
Other current liabilities 4,236 3,330
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Total current liabilities 6,292 4,758
Commitments and Contingencies
Stockholders' Equity
Common Stock 10 10
Additional paid-in capital 67,613 66,781
Accumulated deficit (8,101) (12,342)
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59,522 54,449
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $65,814 $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.
3
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DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------
1997 1996 1997 1996
--------- --------- -------- ---------
Revenues:
Product sales $12,181 $10,078 $24,079 $17,733
Royalties, licensing and other 2,461 2,943 4,741 6,485
--------- --------- -------- ---------
Total revenues 14,642 13,021 28,820 24,218
Cost of revenues:
Cost of product sales 7,544 7,933 15,074 13,133
Cost of licensing, royalties
and other 503 148 846 378
-------- -------- --------- ---------
Total cost of revenues 8,047 8,081 15,920 13,511
-------- -------- --------- ---------
Gross profit 6,595 4,940 12,900 10,707
Operating expenses:
Research and development 2,018 2,238 3,959 4,782
Sales and marketing 1,075 1,007 2,331 2,375
General and administrative 1,125 1,682 2,204 3,245
--------- --------- -------- ---------
Total operating expenses 4,218 4,927 8,494 10,402
--------- --------- -------- ---------
Operating income 2,377 13 4,406 305
Other income (expense):
Interest and other income 642 377 1,253 799
Other expenses (57) (28) (121) (71)
Equity in loss of
unconsolidated subsidiaries,
net (313) (61) (517) (94)
--------- --------- -------- ---------
Income before income taxes 2,649 301 5,021 939
Provision for income taxes 424 33 780 97
--------- --------- -------- ---------
Net income $2,225 $ 268 $4,241 $842
--------- --------- -------- ---------
--------- --------- -------- ---------
Net income per share $ 0.23 $ 0.03 $ 0.44 $ 0.09
--------- --------- -------- ---------
--------- --------- -------- ---------
Number of shares used in
per share computation 9,745 9,568 9,715 9,550
--------- --------- -------- ---------
--------- --------- -------- ---------
See notes to condensed consolidated financial statements.
4
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DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six Months Ended
June 30,
------------------
1997 1996
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CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 6,431 $ (1,768)
INVESTING ACTIVITIES:
Purchase of available-for-sale
marketable securities (23,616) (8,001)
Sale and maturity of available-for-sale
marketable securities 17,529 8,744
Purchases of equipment (1,104) (332)
Sale of equipment 166 --
Capitalized software development costs -- (113)
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(7,025) 298
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FINANCING ACTIVITIES:
Repayment of stockholders' notes
receivable -- 313
Sale of common stock for cash upon
exercise of options and warrants 832 366
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832 679
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INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 238 $ (791)
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See notes to condensed consolidated financial statements.
5
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DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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 six months ended June 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):
June 30, December 31,
1997 1996
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Work-in-process $ -- $ 217
Finished goods 2,562 2,740
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$2,562 $2,957
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NOTE C - NET INCOME PER SHARE
Net income per share is computed using the weighted average number of shares
of Common Stock and dilutive common equivalent shares from stock options and
warrants (using the treasury stock method). Dual presentation of primary and
fully diluted net income per share is not shown on the face of the income
statement because the differences are not significant.
6
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DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In February 1997, the financial Accounting Standards Board issued 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. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact of
SFAS No. 128 on the calculations of primary earnings per share and fully
diluted earnings per share for the quarters ended June 30, 1997 and June 30,
1996 is not expected to be material.
NOTE D - INVESTMENTS
The following is a summary of the cost of available-for-sale securities (in
thousands):
June 30, December 31,
1997 1996
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Corporate obligations $ 24,787 $19,301
Obligations of states and
political subdivisions 14,506 16,891
Municipal auction rate preferred
stock -- 2,200
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$39,293 $38,392
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Amounts included in
marketable securities $36,849 $30,762
Amounts included in
cash and cash equivalents 2,444 7,630
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$39,293 $38,392
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At June 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 June 30, 1997 and 1996, were not significant. The amortized cost of
available-for-sale debt securities at June 30, 1997, by contractual
maturities, is shown below (in thousands):
7
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DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Amortized Cost
--------------
Due in one year or less $37,306
Due after one year to eighteen months 1,987
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$39,293
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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, tax exempt income in Israel and tax exempt interest income.
NOTE F - SIGNIFICANT CUSTOMERS
Product sales to two distributors accounted for 40% and 22% of total revenues
for the three months ended June 30, 1997 and 1996, respectively, and 33% and
18% of total revenues for the six months ended June 30, 1997 and 1996,
respectively. Product sales to two customers accounted for 18% and 10% of
revenues for the three months ended June 30, 1996 and 14% and 6% of revenues
for the six months ended June 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.: The Company made an initial investment in Aptel Ltd. ("Aptel")
during the third quarter of 1996 and currently owns 40% of Aptel. Aptel,
which is located in Israel, has expertise in spread spectrum direct sequence
modulation technology.
8
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DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The condensed consolidated statements of income for the three and six months
ended June 30, 1997, include a $224,000 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.
As of June 30, 1997, the book value of the Company's original equity
investment in Aptel was zero. In addition, in June 1997, the Company's
Chairman of the Board and Chief Executive Officer resigned from Aptel's Board
of Directors.
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. The Company believes the ultimate resolution of this matter will
not have a material adverse effect on the Company's financial position,
results of operations, or cash flows. The Company believes the lawsuit to be
without merit and intends to defend itself vigorously. The estimate of the
potential impact on the Company's financial position or overall results of
operations or cash flows for the above matter could change in the future.
9
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DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I- STOCKHOLDER RIGHTS AGREEMENT
On June 5, 1997, the Company adopted a Stockholders' Right Agreement
pursuant to which one preferred stock purchase right (a "Right") was
distributed for each outstanding share of Common Stock to stockholders of
record at the close of business on June 10, 1997. Each right entitles
stockholders to purchase one one-thousandth of a share (a "Unit") of Series A
Preferred Stock ("Preferred Stock") at a purchase price of $70.00 per Unit of
Preferred Stock, upon the happening of certain events. The Rights expire on
June 5, 2007.
The Rights become exercisable if a person acquires 15% or more of the
Company's Common Stock or announces a tender offer that would result in such
person owning 15% or more of the Company's Common Stock. If the Rights
become exercisable, the holder of each Right (other than the person whose
acquisition triggered the exercisability of the Rights) will be entitled to
purchase, at the Right's then current exercise price, Units of Preferred
Stock or, at the option of the Board of Directors, a number of shares of the
Company's Common Stock having a market value of twice the purchase price. In
addition, if the Company were to be acquired in a merger or business
combination after the Rights become exercisable, each Right will entitle the
holder to purchase, at the Right's then current purchase price, common stock
of the acquiring company having a market value of twice the purchase price.
The Rights are redeemable by the Company at a price of $0.01 per Right at any
time within ten business days after a person has acquired 15% or more of the
Company's Common Stock.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
TOTAL REVENUES. Total revenues increased to $14.6 million in the second
quarter of 1997 from $13.0 million in the second quarter of 1996 due
primarily to increased sales of the Company's TAD speech processors,
especially those utilizing flash memory. In the first half of 1997, total
revenues increased to $28.8 million from $24.2 million in the comparable
period of 1996. This increase was due primarily to increased product sales,
and increased royalties received from licensees.
Export sales, primarily consisting of TAD speech processors shipped to
manufacturers in Europe and Asia as well as license fees on DSP core designs,
represented 84% and 86% of total revenues for the Company in the three and
six months ended June 30, 1997, respectively, and 93% and 91% of total
revenues in the three and six months ended June 30, 1996, respectively. All
export sales are denominated in U.S. dollars.
Revenues from Tomen Electronics (a distributor), accounted for 34% and 28% of
total revenues in the three and six months ended June 30, 1997, respectively.
Revenues from Samsung, DSP Solutions (a distributor) and Siemens,
accounted for 18%, 15% and 10% of total revenues in the three months ended
June 30, 1996, respectively, and 14%, 11% and 6% of total revenues in the six
months ended June 30, 1996, respectively.
GROSS PROFIT. Gross profit as a percentage of total revenues increased to
45% in the second quarter of 1997 from 38% in the second quarter of 1996.
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 38% in the second quarter of 1997 compared to 21% in the second quarter of
1996 mainly due to lower costs of manufactured products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased to $2.0 million in the second quarter of 1997 from $2.2 million in
the second quarter of 1996. In the first half of 1997, research and
development expenses decreased to $4.0 million from $4.8 million in the same
period in 1996. The decreases are 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, as well as
reductions in engineering costs as a result of the consolidation of research
and development activities in Israel.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased
slightly to $1.1 million in the second quarter of 1997 from $1.0 million in
the second quarter of 1996. In the first half of 1996, sales and marketing
expenses decreased to $2.3 million from $2.4 million in the comparable period
of 1996. Sales and marketing expenses as a percentage of total revenues
decreased to 7% and 8% in the three and six months ended June 30, 1997,
respectively, compared to 8% and 10% in the three and six months ended
June 30, 1996, respectively.
11
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GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased to $1.1 million in the second quarter of 1997 from $1.7 in the
second quarter of 1996. In the first half of 1997, general and administrative
expenses decreased to $2.2 million from $3.2 million in the comparable period
of 1996. These expenses as a percentage of total revenues remained at 8% in
both the three and six months ended June 30, 1997 and 13% in both the three
months and the six months ended June 30, 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.
OTHER INCOME (EXPENSE) - NET. Interest and other income (expense) - net was
$1.1 million in the six months ended June 30, 1997, compared to $0.7 million
in the six months ended June 30, 1996. The increase was primarily the result
of higher levels of cash equivalent and marketable securities in 1997 as
compared with 1996 as well as higher yield of finance investments.
EQUITY IN INCOME (LOSS) OF INVESTEES. Equity in income (loss) of investees
was a $313,000 loss for the second quarter of 1997 as compared to a $61,000
loss in the second quarter of 1996. In the first half of 1997, equity in
income (loss) of investees was a $517,000 loss compared to a $94,000 loss in
the comparable period of 1996. The condensed consolidated statements of
income for the first half 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 $110,000 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. For the first half of 1996, equity
loss in AudioCodes, was $94,000. During the second 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 will 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.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the six months ended June 30, 1997, net cash
provided by operations was $6.4 million, primarily due to (i) $4.2 million of
net income, (ii) a $1,135,000 increase in accounts payable, income taxes
payable and accrued expenses, (iii) $759,000 of depreciation and
amortization, (iv) a $517,000 equity in loss of unconsolidated subsidiaries,
and (v) a $395,000 decrease in inventories. These were offset by a $761,000
increase in accounts receivable and a $576,000 increase in prepaid expenses
and other current assets.
12
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INVESTING ACTIVITIES. The Company purchased $23.6 million and sold or had
maturities of $17.5 million of investments classified as marketable
securities in the first six months of 1997. Capital equipment additions in
the first six months of 1997 totaled $1,104,000, primarily for leasehold
improvements for the Santa Clara facility and the new offices in Israel.
FINANCING ACTIVITIES. During the three and six months ended June 30, 1997,
the Company received $710,000 and $832,000, respectively, upon the exercise
of employee stock options and through purchases pursuant to the employee
stock purchase plan.
At June 30,1997, the Company's principal source of liquidity consisted of
cash and cash equivalents totaling $12.4 million and marketable securities of
$36.8 million. The Company's working capital at June 30, 1997 was $53.5
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
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FACTORS AFFECTING FUTURE OPERATING RESULTS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING THE COMPANY'S
FUTURE PRODUCTS, EXPENSES, REVENUE, LIQUIDITY AND CASH NEEDS AS WELL AS THE
COMPANY'S PLANS AND STRATEGIES. THESE FORWARD-LOOKING STATEMENTS ARE BASED
ON CURRENT EXPECTATIONS AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THIS
INFORMATION. NUMEROUS FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER
SIGNIFICANTLY FROM THE RESULTS DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS,
INCLUDING THE FOLLOWING RISK FACTORS.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's
revenues are derived predominately from product sales and accordingly vary
significantly depending on the volume and timing of product orders, 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 half 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
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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 June 30, 1997, 61 of the
Company's 91 employees were located in Israel, including 88% 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 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
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ACQUISITION STRATEGY. The Company has pursued, and will continue to pursue,
growth opportunities through internal development and acquisition of
complementary businesses, products and technologies. The Company is unable
to predict whether or when any prospective acquisition will be completed. The
process of integrating an acquired business may be prolonged due to
unforeseen difficulties and may require a disproportionate amount of
resources and management's attention. There can be no assurance that the
Company will be able to successfully identify suitable acquisition
candidates, complete acquisitions, integrate acquired businesses into its
operations, or expand into new markets. Once integrated, acquisitions may not
achieve comparable levels of revenues, profitability or productivity as the
existing business of the Company or otherwise perform as expected. The
occurrence of any of these events could have a material adverse effect on the
Company's business, financial condition or results of operations. Future
acquisitions may require substantial capital resources, which may require the
Company to seek additional debt or equity financing.
RELIANCE ON 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 half 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. The Company believes the lawsuit to be without merit
and intends to defend itself vigorously. The Company believes the ultimate
resolution of this matter will not have a material adverse effect on the
Company's financial position, results of operations, or cash flows. However,
the Company anticipates that in the near term it may incur significant legal
expense to defend itself.
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. The Company believes the lawsuit to be without merit and intends
to defend itself vigorously.
On February 12, 1997, BEKA Electronic GmbH ("BEKA") commenced an action in
the United States District Court for the Northern District of California
against the Company. The action alleges breach of contract, breach of
implied covenant of good faith and fair dealing and requests an accounting by
the Company in connection with the Company's termination of the Sales
Representative Agreement between BEKA and the Company. The complaint seeks
an unspecified amount of damages. The Company believes the lawsuit to be
without merit and intends to defend itself vigorously.
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
The Company's annual meeting of stockholders was held on May 20, 1997.
The following matters were voted upon at the annual meeting:
1. Election of two Class III Directors to serve for a three year term
until the annual meeting of stockholders in 2000. The results of
the voting were as follows:
a. Samuel L. Kaplan
Number of shares voted FOR 6,359,267
Number of shares WITHHELD 168,526
b. Igal Kohavi
Number of shares voted FOR 6,179,065
Number of shares WITHHELD 348,728
2. Ratification of the appointment of Ernst & Young LLP as the independent
auditors of the Company for fiscal 1997. The results of the voting were
as follows:
Number of shares voted FOR 6,407,322
Number of shares voted AGAINST 101,775
Number of shares voted ABSTAINING 18,696
Number of broker non-votes --
ITEM 5. OTHER INFORMATION
None.
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement re: Computation of Per Share Earnings
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on June 6, 1997 relating to the
adoption of the Rights Agreement.
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 August 12, 1997
20
<PAGE>
EXHIBIT INDEX
Exhibit 11.1 Statement re Computation of Per Share Earnings
Exhibit 27.1 Financial Data Schedule
<PAGE>
Exhibit 11.1
DSP GROUP, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share data)
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ----------------
1997 1996 1997 1996
------ ------ ------ ------
Net income $2,225 $ 268 $4,241 $ 842
------ ------ ------ ------
------ ------ ------ ------
PRIMARY:
Computation of weighted average
common and common equivalent
shares outstanding:
Weighted average common shares
outstanding 9,589 9,505 9,574 9,482
Common equivalent shares from
stock options and warrants 156 63 141 68
------ ------ ------ ------
Shares used in per share computation 9,745 9,568 9,715 9,550
------ ------ ------ ------
------ ------ ------ ------
Net income per share $.23 $.03 $.44 $.09
------ ------ ------ ------
------ ------ ------ ------
FULLY DILUTED:
Computation of weighted average
common and common equivalent
shares outstanding:
Weighted average common shares
outstanding 9,641 9,505 9,641 9,482
Common equivalent shares from
stock options and warrants 336 63 356 69
------ ------ ------ ------
Shares used in per share computation 9,977 9,568 9,997 9,551
------ ------ ------ ------
------ ------ ------ ------
Net income per share $.22 $.03 $.42 $.09
------ ------ ------ ------
------ ------ ------ ------
<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 JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 12,410
<SECURITIES> 36,849
<RECEIVABLES> 6,322
<ALLOWANCES> 700
<INVENTORY> 2,562
<CURRENT-ASSETS> 59,792
<PP&E> 7,952
<DEPRECIATION> 4,482
<TOTAL-ASSETS> 65,814
<CURRENT-LIABILITIES> 6,292
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 59,512
<TOTAL-LIABILITY-AND-EQUITY> 65,814
<SALES> 12,181
<TOTAL-REVENUES> 14,642
<CGS> 7,544
<TOTAL-COSTS> 8,047
<OTHER-EXPENSES> 2,018
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57
<INCOME-PRETAX> 2,649
<INCOME-TAX> 424
<INCOME-CONTINUING> 2,225
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,225
<EPS-PRIMARY> .23
<EPS-DILUTED> .22
</TABLE>
