<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 June 30, 1998
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
(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 July 31, 1998 there were 9,816,917 shares of Common Stock ($.001 par value
per share) outstanding.
<PAGE>
INDEX
DSP GROUP, INC.
Page No.
PART I. FINANCIAL INFORMATION
- -----------------------------------------------------
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-June 30, 1998
and December 31, 1997 ............................. 3
Condensed consolidated statements of income-Three and six
months ended June 30, 1998 and 1997................ 4
Condensed consolidated statements of cash flows-Six
months ended June 30, 1998 and 1997................ 5
Condensed consolidated statements of Stockholders' Equity -
Three and six months ended June 30, 1998 and 1997.. 6
Notes to condensed consolidated financial statements-
June 30, 1998...................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 20
PART II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings ...........................................21
Item 2. Changes in Securities ........................................22
Item 3. Defaults upon Senior Securities ..............................22
Item 4. Submission of Matters to a Vote of Security Holders ..........22
Item 5. Other Information ............................................22
Item 6. Exhibits and Reports on Form 8-K .............................23
SIGNATURES ............................................................23
2
<PAGE>
PART 1. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
DSP GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS (Unaudited) (Note)
CURRENT ASSETS:
Cash and cash equivalents $8,690 $7,325
Marketable securities 56,222 58,619
Accounts receivable, net 6,153 3,594
Inventories 3,827 4,116
Deferred income taxes 2,850 2,850
Prepaid expenses and other 1,720 1,441
--------- -----------
TOTAL CURRENT ASSETS 79,462 77,945
Property and equipment, at cost: 10,241 9,010
Less accumulated depreciation and amortization (6,289) (5,522)
--------- -----------
3,952 3,488
Other investments, net of accumulated amortization 1,594 2,935
Other assets 135 150
Deferred income taxes 650 650
--------- -----------
TOTAL ASSETS $85,793 $85,168
--------- -----------
--------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $3,980 $3,319
Other current liabilities 8,575 7,679
--------- -----------
TOTAL CURRENT LIABILITIES 12,555 10,998
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common Stock 10 10
Additional paid-in capital 73,968 74,418
Unrealized gain on marketable equity security -- 1,050
Retained earning (deficit) 6,164 (1,308)
Treasury stock at cost (6,904) --
--------- -----------
TOTAL STOCKHOLDERS' EQUITY 73,238 74,170
--------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $85,793 $85,168
--------- -----------
--------- -----------
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date. See notes to condensed consolidated financial
statements.
3
<PAGE>
DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------- ------- ------- -------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Product sales $13,045 $12,181 $26,446 $24,079
Licensing, royalties and other 3,704 2,461 5,979 4,741
------- ------- ------- -------
TOTAL REVENUES 16,749 14,642 32,425 28,820
COST OF REVENUES:
Cost of product sales 7,861 7,544 15,588 15,074
Cost of licensing, royalties and other 132 503 198 846
-------- -------- --------- --------
TOTAL COST OF REVENUES 7,993 8,047 15,786 15,920
-------- -------- --------- --------
GROSS PROFIT 8,756 6,595 16,639 12,900
OPERATING EXPENSES:
Research and development 2,500 2,018 4,528 3,959
Sales and marketing 1,278 1,075 2,591 2,331
General and administrative 1,189 1,125 2,281 2,204
-------- -------- -------- -------
TOTAL OPERATING EXPENSES 4,967 4,218 9,400 8,494
-------- -------- -------- -------
OPERATING INCOME 3,789 2,377 7,239 4,406
OTHER INCOME (EXPENSE):
Interest and other income 920 642 1,860 1,253
Interest expense and other (66) (57) (108) (121)
Gain on sale of marketable
equity security 1,086 -- 1,086 --
Equity in loss of equity
method investees, net (49) (313) (115) (517)
------- ------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES 5,680 2,649 9,962 5,021
Provision for income taxes 1,419 424 2,490 780
------- ------- ------- -------
NET INCOME $4,261 $2,225 $7,472 $4,241
------- ------- ------- -------
------- ------- ------- -------
NET INCOME PER SHARE:
Basic $0.43 $0.23 $0.75 $0.44
Diluted $0.42 $0.23 $0.73 $0.44
SHARES USED IN PER SHARE COMPUTATIONS:
Basic 9,884 9,589 9,981 9,574
Diluted 10,142 9,745 10,264 9,715
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------- -------
1998 1997
-------- -------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $6,29 $6,431
INVESTING ACTIVITIES
Purchase of available-for-sale marketable securities (36,148) (23,616)
Sale of available-for-sale marketable securities 38,545 17,529
Purchases of equipment (1,231) (1,104)
Sale of equipment -- 166
Proceeds from sale of Nexus 1,262 --
-------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,428 (7,025)
-------- -------
FINANCIAL ACTIVITIES
Sale of Common Stock for cash upon
exercise of options and employee
stock purchase plan 700 832
Purchase of treasury stock (8,054) --
-------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (7,354) 832
-------- -------
INCREASE IN CASH AND CASH EQUIVALENTS $1,365 $238
-------- -------
-------- -------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED ADDITIONAL RETAINED OTHER TOTAL
JUNE 30, 1998 COMMON STOCK PAID-IN EARNINGS TREASURY COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL (ACCUMULATED STOCK INCOME EQUITY
EARNINGS AT COST
(DEFICIT)
------ --- ------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1998 10,052 $10 $74,128 $ 1,903 $ (1,527) $ 1,086 $75,600
Net income -- -- -- 4,261 -- -- 4,261
Other comprehensive income
Decrease in unrealized gain
on marketable equity security -- -- -- -- -- (1,086) (1,086)
Comprehensive income -- -- -- -- -- -- 3,175
Exercise of Common Stock
options by employees 13 -- (160) -- 291 -- 131
Sale of Common Stock under
employee stock purchase plan -- -- -- -- -- -- --
Purchase of Treasury stock (280) -- -- -- (5,668) -- (5,668)
------ --- ------- --------- -------- ------- --------
Balance at June 30, 1998 9,785 $10 $73,968 $ 6,164 $ (6,904) $ -- $73,238
------ --- ------- --------- -------- ------- --------
THREE MONTHS ENDED JUNE 30, 1997
------ --- ------- --------- -------- ------- --------
Balance at March 31, 1997 9,563 $10 $66,903 $ (10,326) $ -- $ -- 56,587
Net income -- -- -- 2,225 -- -- 2,225
Exercise of Common Stock
options by employees 67 -- 623 -- -- -- 623
Sale of Common Stock under
employee stock purchase plan 11 -- 87 -- -- -- 87
------ --- ------- --------- -------- ------- --------
Balance at June 30, 1997 9,641 $10 $67,613 $ (8,101) $ -- $ -- $59,522
------ --- ------- --------- -------- ------- --------
SIX MONTHS ENDED JUNE 30, 1998
------ --- ------- --------- -------- ------- --------
Balance at December 31, 1997 10,094 $10 $74,418 $ (1,308) $ -- $ 1,050 $74,170
Net income -- -- -- 7,472 -- -- 7,472
Other comprehensive income,
Decrease in unrealized gain
on marketable equity
securities, net of
reclassification adjustment (a) -- -- -- -- -- (1,050) (1,050)
Comprehensive income -- -- -- -- -- -- 6,422
Exercise of Common Stock
options by employees 57 -- (566) -- 1,150 -- 584
Sale of Common Stock under
employee stock purchase plan 13 -- 116 -- -- -- 116
Purchase of Treasury stock (379) -- -- -- (8,054) -- (8,054)
------ --- ------- --------- -------- ------- --------
Balance at June 30, 1998 9,785 $10 $73,968 $ 6,164 $ (6,904) $ -- $73,238
------ --- ------- --------- -------- ------- --------
(a) Disclosure of reclassification
amount:
Unrealized holding gains
arising during period $ 36
Less: reclassification for gains
included in income (1,086)
--------
Net decrease in unrealized
gain on marketable security $(1,050)
--------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED ADDITIONAL RETAINED OTHER TOTAL
JUNE 30, 1998 COMMON STOCK PAID-IN EARNINGS TREASURY COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL (ACCUMULATED STOCK INCOME EQUITY
EARNINGS AT COST
(DEFICIT)
------ --- ------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1997
------ --- ------- --------- -------- ------- --------
Balance at December 31, 1996 9,540 $10 $66,781 $(12,342) $ -- $ -- $54,449
Net income -- -- -- 4,241 -- -- 4,241
Exercise of Common Stock
options by employees 78 -- 660 -- -- -- 660
Sale of Common Stock under
employee stock purchase plan 23 -- 172 -- -- -- 172
------ --- ------- --------- -------- ------- --------
Balance at June 30, 1997 9,641 $10 $67,613 $ (8,101) $ -- $ -- $59,522
------ --- ------- --------- -------- ------- --------
------ --- ------- --------- -------- ------- --------
</TABLE>
7
<PAGE>
DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(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, 1998, are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998. 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, 1997.
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>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
Work-in-process $ -- $ 16
Finished goods 3,827 4,100
------ -----------
$3,827 $4,116
------ -----------
------ -----------
</TABLE>
8
<PAGE>
DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - NET INCOME PER SHARE
Basic net income per share is based on the weighted average number of shares of
Common Stock outstanding during the period. For the same periods, diluted net
income per share further includes the effect of dilutive stock options
outstanding during the period. The following table sets forth the computation of
basic and diluted net income per share (in thousands except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------- ------- ------- -------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 4,261 $ 2,225 $ 7,472 $ 4,241
------- ------- ------- -------
------- ------- ------- -------
Denominator:
Weighted average number of shares of Common
Stock outstanding during the period used to
compute basic earnings per share 9,884 9,589 9,981 9,574
Incremental shares attributable to exercise of
outstanding options (assuming proceeds would
be used to purchase treasury stock) 258 156 283 141
Weighted average number of shares of
Common Stock used to compute diluted
earnings per share 10,142 9,745 10,264 9,715
------- ------- ------- -------
------- ------- ------- -------
Basic net income per share $0.43 $0.23 $0.75 $0.44
------- ------- ------- -------
------- ------- ------- -------
Diluted net income per share $0.42 $0.23 $0.73 $0.44
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
9
<PAGE>
DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - INVESTMENTS
The following is a summary of the cost of available-for-sale securities (in
thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
Corporate obligations $41,499 $53,270
Government and other
agency's obligations 16,041 6,002
------- -----------
$57,540 $59,272
------- -----------
------- -----------
Amounts included in marketable securities $56,222 $58,619
Amounts included in
cash and cash equivalents 1,318 653
------- -----------
$57,540 $59,272
------- -----------
------- -----------
</TABLE>
At June 30, 1998 and at December 31, 1997, 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, 1998 and 1997, were not significant. The amortized cost of
available-for-sale debt securities at June 30, 1998, by contractual
maturities, is shown below (in thousands):
<TABLE>
<CAPTION>
Amortized cost
--------------
<S> <C>
Due in one year or less $ 6,345
Due after one year to two years 51,195
--------------
$57,540
--------------
--------------
</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 foreign tax holiday and tax exempt income in Israel.
10
<PAGE>
DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F - SIGNIFICANT CUSTOMERS
Product sales to a distributor accounted for 42% and 34% of total revenues for
the three months ended June 30, 1998 and 1997, respectively, and 46% and 28% of
total revenues for the six months ended June 30, 1998 and 1997, respectively.
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 - OTHER INVESTMENTS
Other investments are comprised of:
AudioCodes, Ltd.: AudioCodes, Ltd. ("AudioCodes") is an Israeli corporation
primarily engaged in research, development, production and marketing of voice
communication products. In July 1997, AudioCodes completed a private placement
of additional equity securities without the participation of the Company and, as
a result, the Company's equity ownership interest in AudioCodes was diluted from
approximately 35% to approximately 29%. The Company also has an option to
purchase up to an additional 5% of the outstanding stock of AudioCodes. The
condensed consolidated statements of income for the three months ended June 30,
1998 and 1997, include a $49,000 and $89,000 equity loss, respectively, in the
Company's investment in AudioCodes.
Aptel Ltd. and Nexus Telecommunications Systems Ltd.: In July 1996, the Company
invested $2.0 million of cash for approximately 40% of the equity interests in
Aptel Ltd. ("Aptel"), an Israeli company. In connection with the investment, the
Company incurred a one-time write-off of acquired in-process technology of $1.5
million. In October 1997, the Company invested approximately $176,000 in
convertible debentures issued by Aptel. In December 1997, the Company converted
its debentures into equity and Aptel's shareholders (including the Company)
exchanged their shares in Aptel for common shares of Nexus Telecommunications
Systems Ltd. ("Nexus"), an Israeli company registered and traded on the Nasdaq
SmallCap Market. In April 1998, the Company sold all of its Nexus shares in a
private transaction and realized a pre-tax one time gain on marketable equity
securities of approximately $1.1 million, which is included under "Other income
(expense)" in the Company's condensed consolidated statements of income for the
three months ended June 30, 1998 and 1997.
NOTE H- REPURCHASE OF COMPANY'S COMMON STOCK
On January 27, 1998, the Company announced that its Board of Directors had
authorized management to repurchase up to 1,000,000 shares of the Company's
Common Stock from time to time on the open-market or in privately negotiated
transactions. In the first half of fiscal 1998, the Company repurchased
approximately 379,000 shares of its Common Stock at an average purchase price of
$21.25 per share. In the three months ended June 30, 1998, the
11
<PAGE>
DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Company repurchased approximately 280,000 shares at an average purchase price
of $20.24 per share.
NOTE I- CONTINGENCIES
The Company is involved in certain claims arising in the normal course of
business, including claims that it may be infringing patent rights owned by
third parties. The Company is unable to foresee the extent to which these
matters will be pursued by the claimants or to predict with certainty the
eventual outcome. However, the Company believes that the ultimate resolution of
these matters will not have a material adverse effect on its financial position,
results of operations or cash flow.
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 permitted
plaintiffs to amend their complaint as to their claim that the Company is
responsible for the statements contained in analysts' reports, but the
plaintiffs chose not to amend their complaint. On November 5, 1997, the parties
reached an agreement in principle to settle this litigation and have executed a
stipulation of settlement, which has been preliminarily approved. The final
court approval hearing for such settlement has been set for September 4, 1998.
The settlement is being funded by insurance proceeds except for $50,000 funded
by the Company in order to fulfill the retention amounts under the Company's
insurance policy. The Company continues to deny all allegations in the law suit.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
TOTAL REVENUES. Total revenues increased to $16.7 million in the second quarter
of 1998 from $14.6 million in the second quarter of 1997. Total revenues also
increased to $32.4 million in the first half of 1998 from $28.8 million in the
first half of 1997. These increases were primarily due to increased revenues
from the Company's TAD speech processors, especially those utilizing flash
memory, as well as increased revenues from licensing due to new licensees.
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 95%
and 94% of total revenues for the three and six months ended June 30, 1998,
respectively, and 84% and 86% of total revenues for the three and six months
ended June 30, 1997, respectively. All export sales are denominated in U.S.
dollars.
Revenues from Tomen Electronics (a distributor), accounted for 42% and 46% of
total revenues for the three and six months ended June 30, 1998, respectively,
and 34% and 28% for the three and six months ended June 30, 1997, respectively.
GROSS PROFIT. Gross profit as a percentage of total revenues increased to 52%
in the second quarter of 1998 from 45% in the second quarter of 1997. The
increase in gross profit was primarily due to an increase in licensing revenues,
which have a higher gross profit than product sales, and to the increase in
product gross profit. Product gross profit as a percentage of product sales
increased to 40% in the second quarter of 1998 compared to 38% in the second
quarter of 1997, primarily due to lower costs of manufactured products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
to $2.5 million in the second quarter of 1998 from $2.0 million in the second
quarter of 1997. In the first half of 1998, research and development expenses
increased to $4.5 million from $4.0 million in the same period of 1997. The
increases were primarily due to an increase in external services provided for
the research and development team and an increase in engineering personnel as
compared to the same periods in 1997.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to $1.3
million in the second quarter of 1998 from $1.1 million in the second quarter of
1997. In the first half of 1998, sales and marketing expenses increased to $2.6
million from $2.3 million in the comparable period of 1997. Salaries and fringe
benefits increased in 1998 compared to 1997, but were offset by lower sales
commissions and lower consulting costs. Sales and marketing expenses as a
percentage of total revenues were 8% in both the first three and six months of
1998, compared to 7% and 8% in the first three and six months of 1997,
respectively.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased slightly to $1.2 million in the second quarter of 1998 from $1.1
million in the second quarter of 1997. In the first six months of 1998 general
and administrative expenses were $2.3 million compared to $2.2 million in the
comparable period of 1997. These expenses as a percentage of total revenues
slightly decreased to 7% in both the first three and six months of 1998,
13
<PAGE>
compared to 8% in both comparable periods of 1997. The decline was due to an
increase in total revenues in 1998 compared to 1997.
OTHER INCOME (EXPENSE), NET. Interest and other income (expense), net was $1.7
million for the six months ended June 30, 1998, compared to $1.1 million for the
six months ended June 30, 1997. The increase was primarily the result of higher
levels of cash equivalents and marketable securities in 1998 as compared with
1997, as well as higher yield of financial investments.
EQUITY IN LOSS OF EQUITY METHOD INVESTEES, NET. Equity in loss of equity method
investees was a $49,000 and a $115,000 loss for the three and six months ended
June 30, 1998 as compared to a $313,000 and a $517,000 loss in the comparable
periods ended June 30, 1997. 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 for the Company's equity basis in AudioCodes. In December 1997, Aptel's
shareholders, including the Company, exchanged their shares in Aptel for common
shares of Nexus. The Company's investment in Nexus was accounted for using the
cost method. As a result, the Company's results of operations for the first and
second quarters of 1998 do not include any equity earnings (losses) pertaining
to Aptel or Nexus.
GAIN ON SALE OF MARKETABLE EQUITY SECURITY. In April 1998, the Company sold all
of its Nexus shares in a private transaction and realized a pre-tax one time
gain on marketable equity securities of approximately $1.1 million, which is
included under "Other income (expense)" in the Company's condensed consolidated
statements of income for the three months ended June 30, 1998. See also Note G -
Other Investments.
PROVISION FOR INCOME TAXES. In 1998 and 1997, the Company benefited for federal
and state tax purposes from foreign tax holiday and tax exempt income in Israel.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the six months ended June 30, 1998, the Company
generated $6.3 million of cash and cash equivalents from its operating
activities as compared to $6.4 million during the six months ended June 30,
1997. This slight decrease, even though the Company experienced an increase in
net income, was attributable primarily to the non-cash effects of recognizing
deferred revenue, gain on sale of marketable equity securities, and the cash
provided by the increase in income taxes payable, which was offset by the
increase in accounts receivable in the first half of 1998.
INVESTING ACTIVITIES. The Company invests excess cash in marketable securities
of varying maturity, depending on its projected cash needs for operations,
capital expenditures and other business purposes. In the first six months of
1998, the Company purchased $36.1 million and sold $38.6 million of investments
classified as marketable securities. Capital equipment additions in the first
six months of 1998 totaled $1.2 million, primarily for computer equipment and
software.
14
<PAGE>
FINANCING ACTIVITIES. During the three and six months ended June 30, 1998, the
Company received $131,000 and $700,000, respectively upon the exercise of
employee stock options and through purchases pursuant to the employee stock
purchase plan. In the first half of fiscal 1998, the Company repurchased
approximately 379,000 shares of its Common Stock at an average purchase price of
$21.25 per share, for an aggregate purchase price of $8.1 million. In the three
months ended June 30, 1998, the Company repurchased approximately 280,000 shares
at an average purchase price of $20.24 per share.
At June 30, 1998, the Company's principal source of liquidity consisted of cash
and cash equivalents totaling $8.7 million and marketable securities with an
aggregate value of $56.2 million. The Company's working capital at June 30, 1998
was $66.9 million.
The Company believes that its current cash, cash equivalent and marketable
securities will be sufficient to meet its cash requirements through at least the
next twelve months. In January 1998, the Company announced a stock repurchase
program pursuant to which up to 1,000,000 shares of its Common Stock may be
acquired in the open market or in privately negotiated transactions.
Accordingly, the Company will use part of its available cash for this purpose.
As part of its business strategy, the Company occasionally evaluates potential
acquisitions of businesses, products and technologies. Accordingly, a portion of
its available cash may be used for the acquisition of complementary products or
businesses. Such potential transactions may require substantial capital
resources, which may require the Company to seek additional debt or equity
financing. There can be no assurance that the Company will consummate any such
transactions. See "Factors Affecting Future Operating Results -- Acquisition
Strategy."
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FACTORS AFFECTING FUTURE OPERATING RESULTS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING THE COMPANY'S
FUTURE PRODUCTS, EXPENSES, REVENUE, LIQUIDITY AND CASH NEEDS AS WELL AS THE
COMPANY'S PLANS AND STRATEGIES. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON
CURRENT EXPECTATIONS AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THIS
INFORMATION. NUMEROUS FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER
SIGNIFICANTLY FROM THE RESULTS DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS,
INCLUDING THE FOLLOWING RISK FACTORS.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's revenues
are derived predominantly from product sales and accordingly vary significantly
depending on the volume and timing of product orders. In addition, the Company's
quarterly operating results depend on the timing of the recognition of license
fees and the level of per unit royalties. Through 1998, the Company expects
that revenues from its DSP core designs and TrueSpeech will be derived primarily
from license fees rather than by per unit royalties. The uncertain timing of
such license fees has caused, and may continue to cause, quarterly fluctuations
in the Company's operating results. The Company's per unit royalties from
licensees are completely 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. Royalties
from two DSP Core licensees have started to become meaningful in 1997.
The Company's quarterly operating results may also fluctuate significantly as
demand for TADs varies during the year due to seasonal customer buying patterns,
and as a result of other factors, such as the mix of products sold; fluctuations
in the level of sales by OEMs and other vendors of products incorporating the
Company's products; the timing of new product introductions by the Company or
its customers, licensees or competitors; changes in general economic conditions,
including the changing economics conditions in Southeast Asia and other factors,
including those documented elsewhere in this quarterly report.
RECENT DEVELOPMENTS - REVENUES FROM ASIA. In 1997, the Company generated
approximately 39% of its total product sales, from sales to customers located in
South Korea, Taiwan, Singapore and Hong Kong. While economic activity in some of
these countries, most notably South Korea, has been adversely affected by recent
developments in local currency and banking markets, the Company believes that
the effect of these developments on the Company's business is somewhat mitigated
by the financial condition of many of the Company's customers in these markets,
such as Daewoo, L.G. Electronics and Maxon. Many of these customers are leaders
in their respective industries and conduct their business on a multinational
basis. In addition, management estimates that approximately 70% of the Company's
product sales generated from Asia in 1997 were used in end-products subsequently
exported to non-Asian markets such as the United States and Europe, which
represent an important source of foreign currency for these customers. The
Company continues to believe that the geographic diversity of its customers and
the diverse end-markets for its customers' products will continue to benefit the
Company. In the first half of 1998, the Company experienced a decline in the
flow of orders from Southeast Asia, primarily South Korea, mainly due to the
general economic uncertainty in that region, which was primarily offset by
increased orders from Japan and Europe, resulting in a decrease in the Company's
backlog. If
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this trend in the Asian economic market continues, it may result in a further
decrease of the Company's backlog at the end of the third quarter. There can
be no assurance that continued negative developments in Asia will not have a
material adverse effect on the Company's future operating performance.
PRICE COMPETITION. The Company has experienced and is experiencing a continued
decrease in the average selling prices of its TAD speech processors. During
1997, the Company was able to offset this decrease on an annual basis through
manufacturing cost reductions. However, any inability of the Company to respond
to increased price competition for these and other products through the
continuing and frequent introduction of new products or continued reductions of
manufacturing costs would have a material adverse effect on the Company's
business, financial condition and results of operations. The markets for the
Company's products are extremely competitive and the Company expects that
competition will increase. The Company's existing and potential competitors in
each of its markets include large and emerging domestic and foreign companies,
many of which have significantly greater financial, technical, manufacturing,
marketing, selling and distribution resources and management expertise than the
Company. Sales of TAD products comprise a substantial part of the Company's
product sales. Any adverse change in the digital TAD market or the Company's
ability to compete and maintain its position in that market would have 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, on June 30, 1998, 87 of the Company's 114 employees were located in
Israel, including 100% of the Company's research and development personnel. In
addition, although the Company is incorporated in Delaware, a majority 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 the risks of 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 facilities. 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 six months of 1998 and 1997, respectively, was
2.2% and 4.9%. There can be no assurance that currency fluctuations, changes in
the rate of inflation in Israel or any of the other aforementioned factors will
not have a material adverse effect on the Company's business, financial
condition and results of operations.
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ACQUISITION STRATEGY. The Company has pursued, and will continue to pursue,
growth opportunities through internal development and acquisition of
complementary businesses, products and technologies. The Company is unable to
predict whether or when any prospective acquisition will be completed. The
process of integrating an acquired business may be prolonged due to unforeseen
difficulties and may require a disproportionate amount of resources and
management's attention. There can be no assurance that the Company will be able
to successfully identify suitable acquisition candidates, complete acquisitions,
integrate acquired businesses into its operations, or expand into new markets.
Once integrated, acquisitions may not achieve comparable levels of revenues,
profitability or productivity as the existing business of the Company or
otherwise perform as expected. The occurrence of any of these events could have
a material adverse effect on the Company's business, financial condition or
results of operations. Future acquisitions may require substantial capital
resources, which may require the Company to seek additional debt or equity
financing.
DEPENDENCE 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, quality levels and costs, and to allocate to
the Company a sufficient portion of foundry capacity to meet the Company's needs
in a timely manner. The Company believes that it now has sufficient foundry
capacity through 1998. Revenues could be materially and adversely affected,
however, should any of these foundries fail to meet the Company's request for
products due to a shortage of production capacity, process difficulties or low
yield rates.
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. Supply disruptions, shortages or
termination of certain of these sources could have an adverse effect on the
Company's business and results of operations due to the delay or discontinuance
of orders for the Company's products by customers until such components are
available.
INTELLECTUAL PROPERTY. As is typical in the semiconductor industry, the Company
has been and may from time to time be notified of claims that it may be
infringing patents or intellectual property rights owned by third parties. For
example, AT&T has asserted that G.723.1, which is primarily composed of a
TrueSpeech algorithm, includes certain elements covered by patents held by AT&T
and has requested that video conferencing manufacturers license such technology
from AT&T. Other organizations including Lucent Microelectronics, NTT and
VoiceCraft recently have raised public claims that they also have patents
related to the G.723.1 technology. If it appears necessary or desirable, the
Company may seek licenses under such patents or intellectual property rights
that it is allegedly infringing. Although holders of such intellectual property
rights commonly offer such licenses, no assurances can be given that licenses
will be offered or that terms of any offered licenses will be acceptable to the
Company. The failure to obtain a license for key intellectual property rights
from a third party for technology used by the Company could cause the Company to
incur substantial liabilities and to suspend the manufacture of products
utilizing the technology. The Company
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believes that the ultimate resolution of these matters will not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
YEAR 2000 COMPLIANCE. The Company is aware of the issues associated with the
programming code in existing computer systems as the Year 2000 approaches. The
"Year 2000" problem is concerned with whether computer systems will properly
recognize date sensitive information when the year changes to 2000. Systems
that do not properly recognize such information could generate erroneous data or
cause a system to fail. The Year 2000 problem is pervasive and complex as the
computer operation of virtually every company will be affected in some way.
During 1997 and going forward in 1998, the Company is utilizing both
internal and external resources to identify, correct or reprogram, and test the
Company's systems for Year 2000 compliance. The Company anticipates that all
reprogramming efforts will be completed by December 31, 1998 to allow the
Company adequate time for testing. The Company's efforts include the evaluation
of both information technology ("IT") and non-IT systems. Non-IT systems
include systems or hardware containing embedded technology such as
microcontrollers. To date the costs incurred by the Company with respect to
this project are not material nor does the Company believe that future costs for
the completion of this project will be material. However, if systems material
to the Company's operations have not been made Year 2000 compliant by the
completion of the project, the Year 2000 issue could have a material adverse
effect on the Company's financial statements. The Company has not yet developed
a contingency plan to operate in the event that any noncompliant critical
systems are not remedied by January 1, 2000, but the Company intends to develop
such a plan in the near future.
The Company currently is taking steps to ensure that its products and
services will continue to operate on and after January 1, 2000. The Company
believes that its products being shipped today are Year 2000 compliant. In
addition, to date, confirmations have been received from the Company's primary
processing vendors that plans are being developed to address the processing of
transactions in the Year 2000. The Company also has been communicating with
suppliers and other third parties that it does business with to coordinate
Year 2000 readiness. The responses received by the Company to date indicate
that such third parties are taking steps to address this concern.
Based upon the steps being taken to address this issue and the progress to
date, the Company's management believes that Year 2000 compliance expenses will
not have a material adverse effect on the Company's earnings. However, there
can be no assurance that Year 2000 problems will not occur with respect to the
Company's computer systems. Furthermore, the Year 2000 problem may impact other
entities with which the Company transacts business, and the Company cannot
predict the effect of the Year 2000 problem on such entities or the resulting
effect on the Company. As a result, if preventative and/or corrective actions
by the Company or those the Company does business with are not made in a timely
manner, the Year 2000 issue could have a material adverse effect on the
Company's business, financial condition and results of operations.
EURO CONVERSION. Beginning in January 1999, a new currency called the "euro" is
scheduled to be introduced in certain Economic and Monetary Union ("EMU")
countries. During 2002,
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all EMU countries are expected to be operating with the euro as their single
currency. Uncertainty exists as to the effect the euro currency will have on
the marketplace. Additionally, all of the final rules and regulations have
not yet been defined and finalized by the European Commission with regard to
the euro currency. The Company is assessing the effect the euro formation
will have on its internal systems and the sale of its products. The Company
expects to take appropriate actions based on the results of such assessment.
The Company has not yet determined the cost related to addressing this issue
and there can be no assurance that this issue and its related costs will not
have a material adverse effect on the Company's business, financial condition
and 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 allowed plaintiffs to proceed with their claims regarding
statements the Company allegedly made to securities analysts. The Court also
permitted plaintiffs to amend their complaint as to their claim that the Company
is responsible for the statements contained in analysts' reports, but the
plaintiffs have chosen not to amend their complaint. 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.
POSSIBLE VOLATILITY OF STOCK PRICE. The variety and uncertainty of the factors
affecting the Company's operating results, and the fact that the Company
participates in a highly dynamic industry, may result in significant volatility
in the Company's Common Stock price.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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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 permitted
plaintiffs to amend their complaint as to their claim that the Company is
responsible for the statements contained in analysts' reports, but the
plaintiffs chose not to amend this complaint. On November 5, 1997, the parties
reached an agreement in principle to settle this litigation and have executed a
stipulation of settlement, which has been preliminarily approved. The final
court approval hearing for such settlement has been set for September 4, 1998.
The settlement is being funded by insurance proceeds except for $50,000 funded
by the Company in order to fulfill the retention amounts under the Company's
insurance policy. The Company continues to deny all allegations in the law suit.
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 completed nonbinding mediation in May 1998, but were unable
to settle the case. Discovery in the case is ongoing and no date has been set
for trial. Given the current court docket, the Company believes it is unlikely
that the case will be tried before Spring 1999. The Company believes the lawsuit
to be without merit and intends to defend itself vigorously.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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 19,
1998. The following matters were voted upon at the annual
meeting:
1. Election of one Class I Director to serve for a three
year term until the annual meeting of stockholders in 2001.
The results of the voting were as follows:
Eliyahu Ayalon
Number of shares voted FOR 8,614,752
Number of shares WITHHELD 283,743
2. Ratification and approval of the amendment and restatement
of the DSP Group, Inc. 1991 Employee and Consultant Stock
Plan to increase the number of shares of Common Stock
reserved for issuance thereunder from 2,800,000 to
3,800,000. The results of the voting were as follows:
Number of shares voted FOR 4,268,552
Number of shares voted AGAINST 1,658,891
Number of shares voted ABSTAINING 23,851
Number of broker non-votes 2,947,201
3. Ratification of the appointment of Ernst & Young LLP as the
independent auditors of the Company for fiscal 1998.
The results of the voting were as follows:
Number of shares voted FOR 8,858,594
Number of shares voted AGAINST 26,796
Number of shares voted ABSTAINING 13,105
Number of broker non-votes --
ITEM 5. OTHER INFORMATION
Effective as of June 29, 1998, the Securities and Exchange
Commission has amended Rule 14a-4 of the Securities Exchange Act
of 1934, as amended (the "Act"), so that any stockholder proposal
submitted with respect to DSP Group Inc.'s 1999 Annual Meeting of
Stockholders, which proposal is submitted outside the
requirements of
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Rule 14a-8 under the Act will be considered untimely for
purposes of Rule 14a-4 and 14a-5 if notice thereof is received
by DSP Group Inc. after February 28, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Separation and Consulting Agreement between the Company
and Martin M. Skowron, dated May 31, 1998.
10.2 Consulting Agreement between the Company and Millard
Phelps, dated as of June 29, 1998.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on June 26, 1998, relating
to the change in accountants of DSP Semiconductors Ltd., a wholly
owned subsidiary of the Company.
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, Chief Financial Officer
and Secretary (Principal Financial Officer and Principal Accounting Officer)
Date: Aug. 14, 1998
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EXHIBIT 10.1
SEPARATION AND CONSULTING AGREEMENT
This Agreement, which is dated May 31, 1998, is between DSP Group, Inc.
(the "Company") and Martin M. Skowron ("Consultant"). It is hereby mutually
agreed as follows:
1. EMPLOYMENT TERMINATION.
a) TRANSITION PERIOD. Prior to the Effective Date of this Agreement,
the existing terms and conditions of Consultant's employment with
the Company, as defined in the offer letter signed by Consultant
on March 1, 1991, continue to apply, and Consultant shall be
responsible for the services required by his position as well as
the transition of his duties to his replacements as directed by
the Company.
b) CONSULTING PERIOD. On May 31, 1998 (the "Effective Date"), this
Agreement will govern the terms and conditions of Consultant's
employment with the Company. The offer letter and all other
agreements between Consultant and the Company will have no further
effect after the Effective Date except as expressly provided in
this Agreement.
c) GENERAL RELEASE. This Agreement shall constitute the "Separation
Agreement" referenced in the General Release, which is attached to
this Agreement. The General Release shall be incorporated into
this Agreement and shall be considered a material part of this
Agreement. The Consultant shall sign the General Release on the
Effective Date. This Agreement shall terminate automatically if
the General Release does not become effective.
2. CONSULTANT'S SERVICES. In response to specific requests by the
President of the Company, the Consultant will provide to the Company
advisory services with respect to the transition of his position and any
questions the President may have. Consultant's duties will include the
following:
a) Providing advice to the Company as the Company deems desirable in
connection with these advisory services in an efficient,
trustworthy and businesslike manner;
b) Reviewing such documents as may appropriately be submitted to him by
the Company and give the Company, in writing, his professional
opinions and suggestions regarding them; and
c) Performing such other services as may reasonably requested by the
Company in connection with these advisory services.
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3. COMPENSATION.
a) CONSULTING FEE. The Company will compensate the Consultant at a
rate of $70,000 annually less applicable taxes ("Consulting Fee").
The Consulting Fee will be earned on a daily basis and will be
paid in accordance with the Company's standard payroll practices.
Consultant shall not be entitled to any other compensation.
b) STOCK OPTIONS. The stock options that were previously granted to
Consultant will continue to vest during the term of this
Agreement, pursuant to the Company's Employee Stock Option Plan
and any stock option agreements between the parties.
c) BENEFITS. The Company will provide Consultant with its standard
medical insurance benefits, and Consultant will be eligible to
participate in the Company's standard 401(k) plan. Consultant
shall not be entitled to participate in any other benefit policies
or plans provided by the Company.
d) EXPENSES. The Company will reimburse Consultant for reasonable travel
and other business expenses incurred by Consultant in the
performance of his duties in accordance with the Company's general
policies. All travel, travel expenses and other business expenses
must be approved in advance by the President of the Company.
4. CONSULTANT'S OBLIGATIONS.
a) HOURS OF WORK. This consulting position is intended to be a half-time
position. Consultant will be expected to devote the amount of
time necessary to complete the services requested pursuant to this
Agreement.
b) CONFLICTS OF INTEREST. Consultant may accept other consulting
assignments, and engage in other business activities, so long as
they do not interfere with his obligations under this Agreement.
c) LACK OF AUTHORITY. Consultant does not have the right or authority
to incur any liability or expense to or on behalf of the Company
unless specifically authorized in writing by the President.
5. PROPRIETARY INFORMATION. "Proprietary Information" is all information and
any idea pertaining in any manner to the business of the Company (or any
affiliate of the Company), its employees, clients, consultants, or
business associates, which was produced by any employee or consultant of
the Company in the course of his or her employment or consulting
relationship or otherwise produced or acquired by or on behalf of the
Company. Proprietary Information shall include, without limitation,
trade secrets, product ideas, inventions, processes, formulas, data,
know-how, software and other computer programs, copyrightable material,
2
<PAGE>
marketing plans, strategies, sales, financial reports, forecasts, sales
prospects and customer lists. All Proprietary Information not generally
known outside of the Company's organization, and all Proprietary
Information so known only through improper means, shall be deemed
"Confidential Information." Consultant shall use Proprietary
Information, and shall disclose Confidential Information, only for the
benefit of the Company and as is necessary to perform his obligations
under this Agreement. Following termination of this Agreement,
Consultant shall not use Proprietary Information and shall not disclose
Confidential Information except with express written consent of the
Company. By way of illustration and not in limitation of the foregoing,
following termination, Consultant shall not use any Confidential
Information to solicit the Company's employees or customers or to
compete against the Company. Consultant's obligations under this Section
shall survive the termination of his consulting relationship with the
Company and the expiration of this Agreement.
6. EMPLOYEE STATUS. The Consultant shall be an employee of the Company.
7. TERM. This Agreement shall be effective for one year after the Effective
Date. Before the end of this term, the Agreement may be renewed in
writing signed by both parties. If the Agreement is not renewed before
the end of the term, the Agreement shall terminate without any action by
either party, and the Company shall owe no further obligation or
liability to Consultant after the date of termination.
8. TERMINATION DURING TERM.
a) CONSULTANT'S RIGHT TO TERMINATE UPON NOTICE. At any time during the
term of this Agreement, Consultant may terminate the Agreement by
giving the Company written notice at least fourteen (14) days
prior to the effective date of such termination. Upon such
termination of this Agreement, the Company shall pay to Consultant
the Consulting Fee that was earned prior to the date of
termination and thereafter shall owe no further obligation or
liability to Consultant.
b) TERMINATION UPON BREACH. At any time during the term of this
Agreement, either party may terminate the Agreement without prior
notice if the other party breaches this Agreement. Except as
provided in the next paragraph (Section 8(c)), if the Company
terminates this Agreement pursuant to this paragraph (Section
8(b)), (1) the Company shall pay to Consultant the Consulting Fee
that was earned prior to the date of termination; (2) the Company
shall pay to Consultant a lump sum equal to the Consulting Fee
that would have been earned through the remainder of the term of
this Agreement; (3) the stock options discussed in Section 3(b)
will cease vesting on the date of termination; and (4) the Company
shall
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<PAGE>
owe no further obligation or liability to Consultant after the date
of termination.
c) TERMINATE UPON BREACH OF GENERAL RELEASE OR PROPRIETARY INFORMATION
OBLIGATIONS. At any time during the term of this Agreement, the
Company may terminate the Agreement without prior notice and
without any obligation to pay any unearned portions of the
Consulting Fee to the Employee if the Employee breaches the
General Release or Section 5 (Proprietary Information). Upon such
termination of this Agreement, the Company shall pay to Consultant
the Consulting Fee that was earned prior to the date of
termination and thereafter shall owe no further obligation or
liability to Consultant.
9. TERMINATION OBLIGATIONS. Upon termination of this Agreement, the Company
shall owe no further obligation or liability to Consultant (except as
explicitly provided in this Agreement). Upon termination of this
Agreement, Consultant shall promptly return to the Company all property
of the Company, including, without limitation, all equipment, tangible
proprietary information, documents, books, notes, records, reports,
contracts, lists, computer disks (or other computer-generated files or
data), or copies thereof, created on any medium, prepared or obtained by
Consultant in the course of or incident to his employment and consulting
relationships with the Company. Consultant understands that Consultant
has obligations under Sections 5 and 10 of this Agreement that survive
the termination of this Agreement.
10. ARBITRATION. All claims that Consultant and the Company may have against
each other in any way related to the subject matter, interpretation,
application, validity, effect or breach of this Agreement ("Arbitrable
Claims") shall be resolved by arbitration. Arbitration shall be final
and binding upon the parties and shall be the exclusive remedy for all
Arbitrable Claims. Arbitration of Arbitrable Claims shall be in
accordance with the rules of the American Arbitration Association, as
amended, and as augmented by this Agreement. Either party may bring an
action in court to compel arbitration under this Agreement and to
enforce an arbitration award. Otherwise, neither party shall initiate
or prosecute any lawsuit or administrative action in any way related to
any Arbitrable Claim. The Federal Arbitration Act shall govern the
interpretation and enforcement of this section. If a court or
arbitrator finds the Federal Arbitration Act does not govern, then
California law shall govern the interpretation and enforcement of this
section. THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO TRIAL BY
JURY IN REGARD TO ARBITRABLE CLAIMS, INCLUDING WITHOUT LIMITATION ANY
RIGHT TO TRIAL BY JURY AS TO THE MAKING, EXISTENCE, VALIDITY, OR
ENFORCEABILITY OF THIS AGREEMENT.
11. MISCELLANEOUS PROVISIONS.
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a) NOTICES. Any notice under this Agreement must be in writing and
shall be effective upon delivery by hand or three (3) business days
after deposit in the United States mail, postage prepaid, certified or
registered, and addressed to the Company or to Consultant at the
corresponding address below. Consultant shall be obligated to notify
the Company in writing of any change in his address. Notice of change
of address shall be effective only when done in accordance with this
Section.
The Company's Notice Address:
DSP Group, Inc.
3120 Scott Blvd.
Santa Clara, CA 95014
Attn: Michael Cohen
Consultant's Notice Address:
Martin M. Skowron
[INSERT ADDRESS]
b) INTEGRATION. The parties understand and agree that the preceding
Sections (including the General Release) recite the sole
consideration for this Agreement; that no representation or
promise has been made by Consultant or the Company concerning the
subject matter of this Agreement, except as expressly set forth in
this Agreement; and that all agreements and understandings between
the parties concerning the subject matter of this Agreement are
embodied and expressed in this Agreement. This Agreement shall
supersede all prior or contemporaneous agreements and
understandings among Consultant and the Company, whether written
or oral, express or implied, with respect to any subject covered
by this Agreement, except to the extent that the provisions of any
such agreement or plan have been expressly referred to in this
Agreement as having continued effect.
c) AMENDMENTS; WAIVERS. This Agreement may not be amended except by
an instrument in writing, signed by each of the parties. No
failure to exercise and no delay in exercising any right, remedy,
or power under this Agreement shall operate as a waiver thereof,
nor shall any single or partial exercise of any right, remedy, or
power under this Agreement preclude any other or further exercise
thereof, or the exercise of any other right, remedy, or power
provided herein or by law or in equity.
d) ASSIGNMENT; SUCCESSORS AND ASSIGNS. Consultant agrees that he will
not assign, sell, transfer, delegate, or otherwise dispose of,
whether voluntarily or involuntarily, or by operation of law, any
rights or obligations under this Agreement. Any such purported
assignment, transfer, or delegation shall be null and void.
Subject to the foregoing, this Agreement shall be binding
5
<PAGE>
upon and shall inure to the benefit of the parties and their
respective heirs, successors, attorneys, and permitted assigns.
This Agreement shall not benefit any other person or entity except
as specifically enumerated in this Agreement.
e) SEVERABILITY. If any provision of this Agreement, or its application
to any person, place, or circumstance, is held by an arbitrator or
a court of competent jurisdiction to be invalid, unenforceable, or
void, such provision shall be enforced to the greatest extent
permitted by law, and the remainder of this Agreement and such
provision as applied to other persons, places, and circumstances
shall remain in full force and effect.
f) ATTORNEYS' FEES. In any legal action, arbitration or other proceeding
brought to enforce or interpret the terms of this Agreement, the
prevailing party shall be entitled to recover reasonable
attorney's fees and costs.
g) GOVERNING LAW. Except as expressly provided otherwise, this Agreement
shall be governed by and construed in accordance with the law of
the State of California, excluding its laws relating to the choice
of laws.
h) INTERPRETATION. This Agreement shall be construed as a whole,
according to its fair meaning, and not in favor of or against any
party. By way of example and not in limitation, this Agreement
shall not be construed in favor of the party receiving a benefit
nor against the party responsible for any particular language in
this Agreement. Captions are used for reference purposes only and
should be ignored in the interpretation of the Agreement.
The parties have duly executed this Agreement as of the date first written
above.
/S/ MARTIN M. SKOWRON
- ------------------------------------
Martin M. Skowron
DSP Group, Inc.
/S/ ELI AYALON
- ------------------------------------
By: Eli Ayalon
Its: President and CEO
6
<PAGE>
GENERAL RELEASE
- -------------------------------------------------------------------------------
THIS RELEASE MUST BE SIGNED BETWEEN MAY 31, 1998 AND JUNE 9, 1998
(WHICH IS 21 DAYS AFTER YOU RECEIVED THE RELEASE AND SEPARATION
AGREEMENT) AND MUST BE FILED WITH AVI BASHER AT 3120 SCOTT BLVD. SANTA
CLARA CALIFORNIA BY JUNE 10, 1998. THIS RELEASE MAY BE REVOKED WITHIN
7 DAYS AFTER IT WAS SIGNED BY FILING A WRITTEN REVOCATION NOTICE WITH
AVI BASHER 3120 SCOTT BLVD. SANTA CLARA CALIFORNIA.
- -------------------------------------------------------------------------------
DSP Group Inc. (Company) and I agree as follows:
(a) BENEFITS PAYABLE
The Company promises that I will receive the benefits provided in the
Separation Agreement between me and the Company (which contains benefits to
which I otherwise would not be entitled) in exchange for this Release. I may
revoke this Release within 7 days after I sign it, in which case I will not
be entitled to receive those benefits.
(b) EMPLOYMENT TERMINATION
I agree that my employment with the Company will end effective May 31,
1999.
(c) CLAIMS RELEASED
In exchange for benefits described above, I irrevocably and
unconditionally release the Company, its current or former affiliates, and
their employees or agents (collectively, the Released Parties), from all
known or unknown claims that I presently may have arising out of my
employment with, or separation from, the Company (Claims).
The Claims I am releasing include, without limitation, any claim based
on a contract, any employment or wrongful discharge claim, any tort claim
(e.g., emotional distress, fraud, negligence or defamation), and any claim
based on a federal, state or local law including the Age Discrimination in
Employment Act, which prohibits age discrimination in employment; Title VII
of the Civil Rights Act of 1964, which prohibits discrimination based on
race, color, national origin, religion, or sex; the Equal Pay Act, which
prohibits paying men and women unequal pay for equal work; the Americans With
Disabilities Act, which prohibits discrimination based on disability, the
California Fair Employment and Housing Act, which prohibits discrimination
based on race, religion, creed, color, national origin, ancestry, disability,
medical condition, marital status, sex or age; or any other federal, state,
or local common law, statute, regulation, or law of any other type.
1
<PAGE>
The only Claims that I am not releasing are claims that arise after I
sign this Release, my rights to the benefits provided by the Separation
Agreement and this Release, my rights, if any, to government-provided
unemployment benefits, my rights, if any, to vested retirement benefits or
COBRA benefits and any previously filed workers' compensation claims. I
acknowledge that I have not sustained any physical or emotional injury within
the scope of my employment for the Company except for claims that I have
already filed with the Company's workers' compensation carrier.
(d) ACKNOWLEDGEMENT OF UNDERSTANDING
I acknowledge that I am releasing Claims I know I have and Claims I may
not know I have. I understand the significance of releasing all Claims that
I may have. I voluntarily waive all rights that I have under the terms of
Section 1542 of the California Civil Code, which provides as follows:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with
the debtor.
(e) PURSUIT OF RELEASED CLAIMS
I agree to withdraw with prejudice all complaints or charges, if any, I
have filed against any Released Party with any agency or court. I agree that
I will never file any lawsuit or complaint against them based on the Claims
released in this Release. I promise never to seek any damages, remedies, or
other relief for myself personally (any right to which I hereby waive) by
filing or prosecuting a charge with any administrative agency with respect to
any Claim released by this Release. I have not assigned or transferred any
Claim that I am releasing.
(f) NONDISCLOSURE
I understand that I will continue to be bound by the Proprietary
Information obligations in my Separation Agreement after the termination of
my employment and reaffirm my obligations under that agreement.
(g) ARBITRATION OF DISPUTES AND ENFORCEMENT OF RELEASE
The Company and I agree to resolve any Claims we may have with each
other or that I have with any other Released Party through final and binding
arbitration. This arbitration agreement applies, for example, to disputes
about the validity, interpretation, or effect of this Release or alleged
violations of it and whether a particular claim is covered by this Release.
Arbitration shall be the exclusive remedy for any such claim or
2
<PAGE>
dispute. Arbitration shall be in accordance with the rules of American
Arbitration Association, as augmented by this Agreement. However, either
party may bring an action in court to compel arbitration under this Agreement
or to enforce an arbitration award. The Federal Arbitration Act shall govern
the interpretation and enforcement of this section. If a court or arbitrator
finds the Federal Arbitration Act does not govern, then California law shall
govern the interpretation and enforcement of this section.
In any arbitration, legal proceeding or other proceeding brought to
enforce or interpret the terms of this Agreement, the prevailing party shall
be entitled to recover reasonable attorneys' fees and costs. In addition,
should I or the Company attempt to resolve any claim waived by this Release
or pursue any arbitrable dispute related by any method other than
arbitration, the responding party will be entitled to recover from the
initiating party all damages, costs, expenses, and attorneys' fees incurred
as a result of that breach.
Should I attempt to challenge the enforceability of this Release, I
agree first to deliver a certified check to the Company for all amounts I
have received because I signed this Release, and to invite the Company to
cancel this Release. If the Company accepts my offer, this Release will be
canceled. If it rejects my offer, the Company will notify me and deposit the
amount I repaid in an interest-bearing account pending a determination of the
enforceability of this Release. If the Release is determined to be
enforceable, the Company will pay me the amount in the account, less any
amounts I owe the Company. If this Release is not enforceable, the Company
or its designee is to retain the account.
(h) NONADMISSION OF LIABILITY
I agree that this Release is not an admission of guilt or wrongdoing by
the Released Parties and I acknowledge that the Released Parties do not
believe or admit that they have done anything wrong. I acknowledge that I
have not suffered any discrimination or wrongful treatment by any Released
Party.
(i) CONSEQUENCES OF VIOLATING MY PROMISES
I agree to pay the reasonable attorneys' fees, costs, and any damages
Released Parties may incur as a result of my breaching a promise I made in
this Release (such as by suing Released Parties over a released Claim) or if
any representation I made in this Release is false.
(j) CONSIDERATION OF RELEASE
I acknowledge that, before signing this Release, I was given at least 21
calendar days. I waive any right I might have to additional time beyond this
consideration period
3
<PAGE>
within which to consider this Release. I acknowledge that: (a) I took
advantage of that time to consider this Release before signing it; (b) I
carefully read this Release; (c) I fully understand what this Release means;
and (d) I am entering into it voluntarily. I further acknowledge that the
Company encouraged me to discuss this Release with my attorney (at my own
expense) before signing this Release and that I did so to the extent I deemed
appropriate.
(k) MISCELLANEOUS
This Release sets forth the entire agreement between me and the Company
pertaining to the subject matter of this Release. This Release may not be
modified or canceled in any manner except by a writing signed by both me and
an authorized Company official. I acknowledge that the Company has made no
representations or promises to me other than those in this Release and the
Separation Agreement. If any provision in this Release is found to be
unenforceable, that provision will be enforced to the greatest extent
permitted by law and all other provisions will remain fully enforceable. It
is not necessary that the Company sign this Release for it to become binding
on both me and the Company. This Release binds my heirs, administrators,
representatives, executors, successors, and assigns, and will inure to the
benefit of the Released Parties and their heirs, administrators,
representatives, executors, successors, and assigns. This Release shall be
construed as a whole according to its fair meaning. It shall not be
construed strictly for or against me or the Released Parties. Unless the
context indicates otherwise, the term "or" shall be deemed to include the
term "and" and the singular or plural number shall be deemed to include the
other. This Release shall be governed by the law the State of California,
excluding its laws relating to the choice of laws.
- -------------------------------------------------------------------------------
TAKE THIS RELEASE HOME, READ IT, AND CAREFULLY CONSIDER ALL OF ITS
PROVISIONS BEFORE SIGNING IT. THIS RELEASE INCLUDES A RELEASE OF
KNOWN AND UNKNOWN CLAIMS. THIS RELEASE ALSO INCLUDES AN ARBITRATION
AGREEMENT IN WHICH BOTH PARTIES WAIVE ANY RIGHTS THEY MAY HAVE TO
TRIAL BY JURY IN REGARD TO ARBITRABLE CLAIMS, INCLUDING WITHOUT
LIMITATION ANY RIGHT TO TRIAL BY JURY AS TO THE MAKING, EXISTENCE,
VALIDITY, OR ENFORCEABILITY OF THIS AGREEMENT. IF YOU WISH, YOU
SHOULD TAKE ADVANTAGE OF THE CONSIDERATION PERIOD AFFORDED BY SECTION
(j) AND CONSULT YOUR ATTORNEY.
- -------------------------------------------------------------------------------
Date 5/31/98 /s/ MARTIN M. SKOWRON
------- ------------------------------------
Martin M. Skowron
4
<PAGE>
EXHIBIT 10.2
CONSULTING AGREEMENT
This CONSULTING AGREEMENT ("Agreement"), dated as of June 29, 1998, is
entered by and between DSP Group, Inc. (the "Company") and Millard Phelps
("Phelps").
A. Phelps is a Director of the Company and has significant knowledge
of its business. In addition, Phelps has considerable and long-standing
experience in the area of corporate finance in both public and private
financing matters.
B. Phelps is willing to consult for the Company on the terms and
subject to the conditions set forth in this Agreement.
In consideration of the mutual promises, covenants and obligations
contained herein, the parties agree as follows:
1. CONSULTING SERVICES AND COMPENSATION. The nature of the services
to be provided and the compensation of Phelps is as follows below in Sections
1(a), 1(b) and 1(c). In rendering such services to the Company, Phelps shall
act as an independent contractor and not as an employee of the Company.
a) SERVICES TO BE PROVIDED. Advice from time to time to the
Company's Chairman of the Board in connection with identifying potential
merger and acquisition candidates for the Company.
b) TIME OF SERVICE. Eight months
From May 1, 1998 to December 31, 1998
c) COMPENSATION. The Company shall pay Phelps $4,000 per month,
payable at the end of each month. In addition, the Company shall reimburse
Phelps for all reasonable expenses he incurs in connection with his duties as
a consultant pursuant to this Agreement. Class of air travel and other
expenses shall be subject to the same reimbursement policies applicable to
executive officers of the Company. Furthermore, Phelps may receive a bonus
payment, the dollar amount of which is at the discretion of the Chairman of
the Board or President of the Company, depending upon the results achieved
from his consulting services.
2. PROPRIETARY INFORMATION. The Company may provide Phelps with
certain confidential, trade secret or proprietary information concerning the
Company or its technology ("confidential information") to facilitate Phelps's
duties. Phelps agrees to hold all such information in the strictest
confidence and agrees that he will not use, or permit the use of, any
information relating to the Company in a manner or for a purpose detrimental
to the Company or otherwise than in connection with the transactions
contemplated by this Agreement. In addition, Phelps agrees not to disclose,
divulge, provide or make accessible any information relating to the Company
without the Company's prior consent, unless such information is commonly
known in the industry or
1
<PAGE>
is otherwise in the public domain. Phelps also agrees to promptly return to
the Company all original and duplicate copies of written materials containing
information relating to the Company should this Agreement be terminated for
any reason. The provisions of this Section 2 shall not affect any rights
that Phelps may have to proprietary information of the Company pursuant to
other arrangements with the Company.
3. EXPENSES. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall
be entitled to recover from the losing party all fees, costs and expenses of
such enforcement or interpretation, including without limitation, such
reasonable fees and expenses of attorneys and accountants, which shall
include, without limitation, all fees, costs and expenses of appeals.
4. MISCELLANEOUS.
(a) ASSIGNMENT. Neither this Agreement nor any interest hereunder
shall be assignable by either party.
(b) ANNOUNCEMENTS. Phelps agrees that he will not make any public
announcement concerning this Agreement without the prior written consent of
the Company.
(c) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California as applied
to agreements among California residents entered into and to be performed
entirely within California.
(d) ARBITRATION. In the event of any dispute, controversy or
claim arising out of or relating to the interpretation, enforceability,
performance, breach, termination or validity of this Agreement, including,
without limitation, this Section 4(d), which cannot be settled amicably
between the parties without undue delay, such dispute, controversy or claim
shall be solely and finally settled by binding arbitration before a single
arbitrator conducted in accordance with the commercial arbitration rules of
the American Arbitration Association. The place of arbitration shall be San
Francisco, California. The award of the arbitrator(s) shall be the sole and
exclusive remedy between the parties regarding any and all claims and
counterclaims with respect to the subject matter of the arbitrated dispute.
An award rendered in connection with an arbitration proceeding pursuant to
this Section 4(d) shall be final and binding upon the parties. The
arbitration shall be governed by the United States Arbitration Act, 9 U.S.C.
sections 1-16, and judgment upon such an award may be entered and enforced
in any court of competent jurisdiction. The arbitrator is not empowered to
award damages in excess of compensatory damages and each party hereby
irrevocably waives any damages in excess of compensatory damages.
(e) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
2
<PAGE>
(f) TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
(g) AMENDMENT AND WAIVER. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and Phelps. No
delay or omission to exercise any right, power or remedy accruing to any
party, upon any breach, default or noncompliance by another party under this
Agreement shall impair any such right, power or remedy, nor shall it be
construed to be a waiver of any such breach, default or noncompliance, or any
acquiescence therein, or in any similar breach, default or noncompliance
thereafter occurring.
(h) SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
(i) INTEGRATION. This Agreement sets forth the parties' mutual
rights and obligations and is intended to be the final, complete, and
exclusive statement of the terms of the parties' agreement. This Agreement
supersedes all other prior and contemporaneous agreements and statements
concerning the relationship between the parties and may not be contradicted
by evidence of any prior or contemporaneous statements or agreements. To the
extent that the practices, policies, or procedures of the Company, now or in
the future, apply to Phelps and are inconsistent with the terms of this
Agreement, the provisions of this Agreement shall control.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY:
DSP GROUP, INC., MILLARD PHELPS
a Delaware corporation
By: /s/ IGAL KOHAVI /s/ MILLARD PHELPS
------------------------------ ----------------------------------
Its: Chairman
ADDRESS: ADDRESS:
3120 Scott Boulevard ----------------------------------------
Santa Clara, CA 95054 ----------------------------------------
Tel.: (408) 986-4300 Tel.:
Fax: (408) 986-4442 ----------------------------------
Fax:
----------------------------------
3
<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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,690
<SECURITIES> 56,222
<RECEIVABLES> 6,908
<ALLOWANCES> 755
<INVENTORY> 3,827
<CURRENT-ASSETS> 79,462
<PP&E> 10,241
<DEPRECIATION> 6,289
<TOTAL-ASSETS> 85,793
<CURRENT-LIABILITIES> 12,555
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 73,228
<TOTAL-LIABILITY-AND-EQUITY> 85,793
<SALES> 26,446
<TOTAL-REVENUES> 32,425
<CGS> 15,588
<TOTAL-COSTS> 15,786
<OTHER-EXPENSES> 4,528
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108
<INCOME-PRETAX> 9,962
<INCOME-TAX> 2,490
<INCOME-CONTINUING> 7,472
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,472
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.73
</TABLE>
