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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 0-23006
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DSP GROUP, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 94-2683643
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation and organization)
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3120 SCOTT BOULEVARD, SANTA CLARA, CA 95054
(Address of principal executive offices, including zip code)
(408) 986-4300
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PER SHARE
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price of the Common Stock on March 2, 1998, as
reported on the Nasdaq National Market, was approximately $231,228,988. Shares
of Common Stock held by each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded from this computation
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 2, 1998 the Registrant had outstanding 10,086,095 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended December 31, 1997 are incorporated by reference into Part II of
this Form 10-K Report. With the exception of those portions which are
incorporated by reference, the Registrant's 1997 Annual Report is not
deemed filed as part of this Report.
2. Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 19, 1998 are incorporated by reference into
Part III of this Form 10-K Report.
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INDEX
DSP GROUP, INC.
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PAGE
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PART I
Item 1. BUSINESS.................................................................. 3
Item 2. PROPERTIES................................................................ 19
Item 3. LEGAL PROCEEDINGS......................................................... 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................... 19
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..... 20
Item 6. SELECTED FINANCIAL DATA................................................... 20
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAL AND RESULTS
OF OPERATIONS............................................................. 20
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................... 20
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE................................................................ 20
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................ 21
Item 11. EXECUTIVE COMPENSATION.................................................... 21
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 21
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 21
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.......... 22
SIGNATURES................................................................ 27
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PART I
ITEM 1. BUSINESS.
FOR A DISCUSSION OF VARIOUS RISKS AND UNCERTAINTIES AFFECTING THE COMPANY'S
FUTURE OPERATIONS SEE "FACTORS AFFECTING FUTURE OPERATING RESULTS" BEGINNING ON
PAGE 16 BELOW. THIS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1997 CONTAINS TRADEMARKS OF THE COMPANY.
DSP Group develops and markets digital signal processing integrated circuits
and software for use in digital speech products targeted at the consumer
telephone and computer telephony markets. Digital speech technology provides
several advantages over analog speech technology, including higher attainable
levels of compression, greater ability to process and manipulate data, and
faster development of products through use of a programmable digital signal
processor ("DSP") rather than dedicated analog hardware. As a result, digital
speech technology is incorporated today in the digital telephone answering
device ("TAD") market and enables the implementation of many new applications in
computer telephony such as voice mail messaging, digital simultaneous voice and
data ("DSVD") transmission and video conferencing.
The Company has developed digital signal processing and digital speech
technologies, including proprietary algorithms, software, system designs and
VLSI circuit designs that have enabled the introduction of three synergistic
product families: speech and telephony digital signal processing integrated
circuits, proprietary architectures for digital signal processors ("DSP core
designs") and proprietary TrueSpeech-Registered Trademark- digital speech
compression algorithms.
SPEECH AND TELEPHONY PROCESSORS
The Company has developed two series of speech and telephony processors for
use in the consumer telephone and computer telephony markets. Both series are
based on the Company's DSP core designs, incorporate several of its digital
telephony signal processing algorithms and provide TrueSpeech compression
capabilities. In 1989, the Company introduced the first cost effective speech
processor for use in digital TADs and today the Company is the leading
independent supplier of DSPs to digital TAD suppliers. The Company's TAD speech
processors are incorporated in the products of leading digital TAD suppliers
such as Alcatel, British Telecom, L.G. Electronics, Panasonic, Philips, Sagem,
Samsung, Sanyo, Siemens, Sony and Uniden.
DSP Group has also developed a series of speech co-processors for use in
conjunction with microprocessors in personal computers and in many standalone
applications to enhance the microprocessors' speech and telephony capabilities.
The Company's speech co-processors utilize many of the same technologies used in
its TAD speech processors. These speech co-processors provide a variety of
real-time speech applications for personal computers, standalone videophones,
portable dictation devices and Internet telephony applications, such as voice
mail messaging, DSVD transmission and video conferencing.
DSP CORE DESIGNS
DSP Group has also developed proprietary, low power DSP core designs--the
PineDSPCore-Registered Trademark- and OakDSPCore-Registered Trademark---which
represent low cost solutions for current and emerging digital signal processing
applications. The Company's DSP core designs are incorporated in its own family
of speech and telephony processors and are also licensed to more than
twenty-five entities, including Adaptec, Fujitsu, Kawaski, LSI Logic, NEC,
Samsung, Siemens, Temic and VLSI Technology. These licensees are able to use the
Company's DSP core designs to develop their own DSPs for various products,
including cellular telephones, modems, audio boards and cordless telephones. In
the fourth quarter of 1995, the first shipment of products utilizing the
Company's PineDSPCore-Registered Trademark- technology occurred. Royalties from
two DSP Core licensees have started to become meaningful in 1997.
3
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DSP Group is in the process of developing a new generation of DSP core--the
TeakDSPCore-TM-. In order to enhance versatility, efficiency and ease of use,
the TeakDSPCore is offered in two complementary versions: the TeakLite-TM- and
the Teak-TM-. Each version is designed to provide effective solutions for
different segments of the DSP market. The Company's developers have designed the
TeakLite to improve the performance of the existing
OakDSPCore-Registered Trademark- in three areas: lower power consumption, higher
frequency and greater portability. The TeakLite is now available for licensing.
The Teak will possess the TeakLite features as well as improved DSP
architectural features such as dual arithmetic units, larger addressing space
and support for DSP algorithm. The Teak will be available in the second half of
1998.
TRUESPEECH
The Company has developed TrueSpeech, a family of proprietary speech
compression algorithms which it incorporates in its TAD speech processors and
personal computer speech co-processors and also licenses to various companies in
the computer telephony and personal computer industries. The Company believes
that TrueSpeech offers several advantages over other currently available speech
compression technologies, including a combination of high compression ratios,
high quality speech playback and cost effectiveness. The proliferation of speech
applications in the computer telephony, personal computer and consumer markets
requires standardized digital speech compression technologies. The Company seeks
to establish industry standards for its target markets based on TrueSpeech
algorithms. However, the establishment of industry standards depends upon the
acts of third parties, which are not within the control of the Company. The
development of industry standards utilizing TrueSpeech algorithms would create
an opportunity for the Company to develop and market speech co-processors that
provide complete TrueSpeech solutions and enhance the performance and
functionality of products incorporating these speech co-processors. For example,
in the personal computer market, Microsoft has incorporated a TrueSpeech
algorithm in Windows 95. In addition, in the video conferencing market, the
International Telecommunications Union ("ITU") in February 1995 established
G.723.1, which is predominantly composed of a TrueSpeech algorithm, as the
standard speech compression technology for use in video conferencing over public
telephone lines.
PRODUCT FAMILIES, TECHNOLOGY AND CUSTOMERS
The Company has incorporated its proprietary algorithms and technologies in
three product families--speech and telephony processors, DSP core designs and
TrueSpeech software--for use in the consumer telephone and computer telephony
markets.
SPEECH AND TELEPHONY PROCESSORS
The Company has developed and introduced two series of DSPs--speech
processors for digital TADs, telephony applications, modems, disk controllers
and other communication applications, which were first introduced in 1989 for
digital TADs, and personal computer speech co-processors, which were first
introduced in late 1994, to maximize the benefits of TrueSpeech compression in
personal computer applications. Both series are based upon the Company's cost
effective, low power DSP core designs and incorporate its TrueSpeech algorithms.
4
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The following chart describes some of the Company's other speech and
telephony technologies that may be incorporated in various combinations in its
products.
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TECHNOLOGY DESCRIPTION
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Triple Rate Coder-TM- Instructs the system to decide automatically between
better voice quality and longer recording time.
G.723.1 Provides thespeech compression algorithm for video
conferencing over POTs lines (H.324 video
conferencing standard)
Caller ID and Call Waiting Caller Identifies the telephone number being used by the
ID calling party, when the line is not engaged and when
the receiving party is already engaged on another
call
Call Progress Tone Detection Detects standard telephony signals during the
progress of the telephone call
DTMF Signaling Detects and generates DTMF signals ("touch tones")
that comply with telephone requirements
Full Duplex Speakerphone Allows simultaneous two-way (full-duplex), hands-free
operation of the telephone and incorporates
acoustical echo cancellation for suppression of room
echoes and electrical echo cancellation for
elimination of electrical echoes
Speech Prompts Provides time-date stamp capabilities and allows the
user to access operating instructions
Variable Speed Playback Permits playback of distortion-free, natural sounding
(FlexiSpeech-Registered Trademark-) speech at variable speeds
Voice Operated Switch ("VOX") Detects human speech and stops recording during
(Smart-Vox-Registered Trademark-) periods of silence, thereby conserving available
memory
Alpha Least Cost Routing Executes telephone calls automatically via a
("LCR")/Super LCR telephone provider with the lowest available rates.
Voice Recognition Allows voice command operation of functions
</TABLE>
These technologies enable the Company's speech and telephony processors to
provide a variety of speech capabilities for digital TAD, telephony and computer
telephony products.
TAD SPEECH PROCESSORS. DSP Group's TAD speech processors are currently
incorporated in over 90 models of digital TADs from more than 40 different
companies. These models include standalone digital TADs, integrated digital
TADs, facsimile machines with integrated digital TADs, standalone speaker phones
with integrated digital TADs, hand-held devices and digital cordless telephones
with integrated digital TADs. To date, the Company has shipped approximately 22
million speech processors to digital TAD suppliers, including approximately 9.0
million TAD speech processors in 1997. TAD speech processor product sales
accounted for 79% of the Company's total revenues in 1997.
The Company's TAD speech processors use TrueSpeech to provide high quality
speech recording and playback. All of the Company's TAD speech processors are
based on the Company's PineDSPCore-Registered Trademark- and incorporate certain
of the Company's technologies, including VOX, caller ID, call waiting, DTMF
signaling and call progress tone detection. Some of the Company's TAD speech
processors feature additional technologies, including speech prompt
capabilities, variable speed playback and full duplex speakerphone.
5
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The following table sets forth certain characteristics of the primary TAD
speech processors currently offered by the Company:
DSP GROUP'S TAD SPEECH PROCESSORS
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D6305 D6365 D6455 D6386 D6471 D6301
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<S> <C> <C> <C> <C> <C> <C>
Process Geometry (microns)........................... 0.5 0.6 0.8 0.8 0.5 0.5
Minutes Record, 4 Mbit Memory........................ 15-17 15-17 25-27 15-17 25-27 15
Memory Type.......................................... ARAM ARAM ARAM ARAM Flash Flash
Advanced Features:
Speech Prompts..................................... Yes Yes Yes Yes Yes Yes
Variable Speed Playback............................ -- Yes -- Yes Yes Yes
Full Duplex Speakerphone........................... -- Yes Yes Yes Yes --
Caller ID and Call Waiting Caller ID............... -- -- -- -- Yes Yes
Voice Recognition.................................. -- -- -- Yes -- --
Other Required Components:
Microcontroller.................................... Yes Yes Yes Yes Yes Yes
Codec.............................................. Yes Yes Yes Yes Yes Yes
EPROM.............................................. Yes Yes Yes Yes -- --
Battery............................................ Yes Yes Yes Yes -- --
</TABLE>
DSP Group's D6301 and D6471 interface directly with a new flash memory chip
introduced by Samsung and facilitate lower overall system costs for digital
TADs. The new Samsung flash memory chip is designed for speech recording and is
less expensive than other currently available flash memories. The D6301 and
D6471 eliminate the need for audio-grade random access memories ("ARAMs"), which
from time to time have constrained the growth of the digital TAD market due to
supply shortages. By allowing substitution of a flash memory for an ARAM, the
D6301 and D6471 also eliminate the need for battery circuitry to maintain the
data in the ARAM during power failures and an EPROM to store pre-recorded voice
prompts and time-date stamps.
In 1997, the Company developed an advanced compression technology called
Triple Rate Coder-TM-. The new technology provides for tradeoffs between quality
and recording time. The Triple Rate Coder-TM- provides three compression rates
as follows:
- Long recording time--22 to 25 minutes recording time (on a four megabit
flash memory).
- Quality recording--the technology provides approximately 10 recording
minutes (on a four megabit flash memory). The speech quality equals that
of a line telephone conversation. This technology overcomes one of the
disadvantages of digital speech, i.e., the inferior clarity of digitized
speech.
- Tradeoff between long recording time and high quality recording is enabled
through another compression rate. The technology allows approximately 15
recording minutes with a quality that matches G.723.1 standard (Part of
H.324, video conferencing standard).
ADVANCED VOICE-ACTIVATED DIGITAL TAD. In 1997, the Company announced that
it had attained the capability of voice recognition, a technology that the
Company believes may become well sought after for speech and telephony
processors. The Company believes that this new voice recognition capability,
combined with the Company's TrueSpeech-Registered Trademark- low bit rate voice
compression and full duplex SpeakerPhone-Registered Trademark-, provides the
Company with an advantage over competitors in the field. Also contained in the
voice recognition processor are: caller ID, caller ID on call waiting, and other
key telephony algorithms. This voice recognition processor provides for hands
free operation of an answering machine either locally or from a remote location.
6
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VOICE ACTIVATED CAR KIT. The Company has expanded its products line to
include a hands free digital speech processor, which the Company believes will
be highly in demand in the cellular telephone and automotive markets. The
product line provides a unique combination of functions such as voice
recognition, echo suppression, noise reduction, and True
Speech-Registered Trademark- voice compression. The combination of voice
recognition and full duplex speaker phone, enables free hand operation of a car
phone for example, thus contributing to the driver's safety. The voice
recognition processor with its unique integration of full duplex Speaker
Phone-Registered Trademark- makes it possible for the Company to enter the
market of car phones and hand held devices.
The following is a list of TAD manufacturers and resellers whose products
incorporate the Company's TAD speech processors:
TAD MANUFACTURERS AND RESELLERS
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TAD MANUFACTURERS TAD RESELLERS
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<S> <C> <C>
Alcatel Maxon Bell South
Ascom National Telecom Bosch Telecom
CCT Telecom Panasonic British Telecom
Daewoo Philips France Telecom
D&B Electronics Sagem GE
Giant Samsung German Telecom
Hagenuk Sanyo Loewe-Binatone
Hanchang Siemens Radio Shack
Hanwha Telecom Smoothline Southwestern Bell
HPF Ascom Sony Swiss Telecom
Hyundai Thomson
I.N.T. Corp. Tiptel
Kinpo Uniden
L.G. Electronics Yupiteru
Matra
</TABLE>
PERSONAL COMPUTER SPEECH CO-PROCESSORS. The Company has developed its
personal computer speech co-processors as complementary application-specific
DSPs to enhance the performance and functionality of personal computer, computer
telephony and consumer products using TrueSpeech. While the current generation
of microprocessors contained in personal computers can compress and record
speech in real-time, the microprocessors are not specifically designed to run
digital speech processing algorithms and, therefore, require a substantial
amount of the personal computer's computing power to do so. As a result, the use
of speech co-processors that incorporate TrueSpeech in personal computers
provides a more efficient utilization of the personal computer's computing
power. The Company believes personal computer users will demand real-time speech
compression capability and manufacturers will begin to provide real-time speech
compression by including application-specific DSPs on personal computer products
such as modems, audio boards, PCMCIA cards and personal computer based
videophone and video conferencing products.
To date, the Company has announced and begun shipments of three speech
co-processors--the CT8005, CT8015 and CT8020--for use in personal computers,
voice-over-data modems, video telephones and video conferencing equipment.
These speech co-processors are based on the Company's DSP core designs,
incorporate TrueSpeech and many of its other proprietary algorithms and
technologies, and are fully controlled by the personal computer's host
processor. All of the Company's speech co-processors contain the TrueSpeech
algorithm incorporated in Windows 95. The CT8005 provides telephone and
speech recording and playback functions in personal computers and in digital
voice recorders, while the CT8015 is designed as a low-cost solution for use
in voice-over-data modems, in wireless voice and in Internet telephony
products. The CT8020 is designed for use in video telephones and video
conferencing equipment and also implements all the specifications of the
G.723.1 speech compression standard for video telephony. The CT8020 also is
being utilized in many Internet-based telephone applications.
7
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The following table sets forth the features of the personal computer speech
co-processors currently offered by the Company:
DSP GROUP'S PERSONAL COMPUTER SPEECH CO-PROCESSORS
<TABLE>
<CAPTION>
CT8005 CT8015 CT8020
--------------- --------------- ---------------
<S> <C> <C> <C>
DSP Core Design............................... PineDSPCore PineDSPCore OakDSPCore
Process Geometry (microns).................... 0.8 0.8 0.6
TrueSpeech Algorithm Data Rate, Kilobits Per 8.5, 6.3, 5.3,
Second...................................... 8.5 8.5 4.8 & 4.1
Features:
Voice Mail Messaging........................ Yes -- Yes
Telephone Answering......................... Yes -- Yes
Full Duplex Speakerphone.................... Yes Yes Yes
Variable Speed Message Playback............. Yes -- --
Full Duplex DSVD............................ -- Yes Yes
Video Conferencing.......................... -- -- Yes
Internet Telephony.......................... Yes (HDX) Yes Yes
</TABLE>
FUTURE SPEECH AND TELEPHONY PROCESSORS. The Company is developing its next
generation of TAD speech processors based on 0.35 micron technology to reduce
its manufacturing costs and increase its competitiveness in the price sensitive
TAD business. In addition, the Company intends to continue to enhance its
existing speech and telephony processors through the addition of advanced
capabilities and to develop new speech and telephony processors for emerging
applications. For example, the Company intends to enhance its TAD speech
processors through the addition of capabilities such as improved speech quality,
full duplex speakerphone, advanced voice recognition algorithm, integrated micro
processor, and integrated analog functions.
The Company believes that emerging applications for its personal computer
speech co-processors may include other personal computer products such as laptop
computers, personal digital assistants ("PDAs"), personal communications systems
and other mobile computing devices. In addition, DSP Group believes that its
digital signal processing and digital speech expertise will also be applicable
to emerging digital speech applications for consumer electronics. For example,
one manufacturer has introduced and is shipping a personal digital voice
recorder with one hour of recording time based on a DSP Group TAD speech
processor. This recorder utilizes the Company's variable speed playback
algorithm and provides the capability of editing a stored speech file. The
recorder also provides memory storage in a detachable module with a PCMCIA
connector, allowing transfer of the recorded speech file to a computer with a
PCMCIA interface for storage, playback or transmittal over a modem. The Company
intends to develop additional speech co-processors for the personal digital
voice recorder market, and intends to pursue the use of its technologies for
other speech applications in the computer telephony, personal consumer and
consumer electronics market.
DSP CORE DESIGNS
The Company's DSP core designs--PineDSPCore-Registered Trademark- and
OakDSPCore-Registered Trademark---are low power, low voltage and low cost
digital signal processing integrated circuit architectures with associated
advanced software development tools. The Company's DSP cores and associated
instruction sets are designed for general purpose applications including
speech processing, speakerphone, telephony algorithms and cellular, which
enables efficient processing for digital speech applications. The DSP core
designs operate at both 3 volts and 5 volts and incorporate power management
features for low power consumption. As digital signal processing and software
migrate into high volume communication and computing products, the Company
believes there will be a significant demand for low cost, low power DSP
platforms. The efficient processing, flexible design and scaleable memories
of the Company's DSP core designs allow the development of smaller and lower
cost DSP solutions and shorten time to market for new products and product
enhancements.
8
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The Company's DSP core designs are small, highly efficient, 16-bit, general
purpose DSPs with adjacent modular RAM and ROM and general I/O blocks for
flexible layout and design. Universal design rules are used in the DSP core
designs to allow easy implementation across multiple semiconductor process
technologies. The DSP cores, initially implemented in 1.0 micron CMOS
technology, were converted into 0.8 micron CMOS technology and then were further
redesigned for 0.6 micron CMOS technology to reduce cost and increase
performance. The Company is currently in the process of converting the DSP cores
into 0.35 micron CMOS technology. These successive cost reductions in
manufacturing are aimed at reducing the product cost and increasing product
performance.
The PineDSPCore-Registered Trademark-, first introduced in 1992, was
developed by the Company's VLSI designers and its software developers to
efficiently process speech and telephony algorithms. During 1994, the Company
announced its OakDSPCore-Registered Trademark-, an enhanced version of the
PineDSPCore-Registered Trademark- that achieves a higher processing speed
through improved architecture and is specifically suited for use in personal
communication products and higher level processing applications, such as digital
cellular telephones, high bit rate modems, DSVD modems and video telephone
conferencing applications. The OakDSPCore-Registered Trademark- offers
significantly improved processing features compared to the
PineDSPCore-Registered Trademark-, including a higher processing speed of 80
MIPS and an advanced, more efficient instruction set. Algorithms implemented on
the PineDSPCore-Registered Trademark- instruction set may also be run on the
OakDSPCore-Registered Trademark-. The Company recently has started developing
the next generation DSP core--the TeakDSPCore-TM-. This core will contain two
arithmetic units, which will both function in parallel. This will improve the
performance of a notable portion of the application. The Company is targeting
this DSP core to the new cellular application standards (e.g., half rate GSM and
wide band CDMA) and for advanced wire line modems (e.g., 56kbit/ second) as well
as for multimedia applications (e.g., AC3, MPEG2).
The following table shows a comparison of the Company's DSP core designs:
DSP GROUP'S DSP CORE DESIGNS
<TABLE>
<CAPTION>
PINEDSPCORE OAKDSPCORE
------------ ------------
<S> <C> <C>
Word Length...................................................... 16 bit 16 bit
Process Geometry (microns)....................................... 0.5 0.35
Performance...................................................... 40 MIPS 65 MIPS
Voltage.......................................................... 5.0 V 3.3V
Advanced Instruction Set......................................... -- Yes
</TABLE>
The Company incorporates its DSP core designs in its speech and telephony
processors and also licenses them to original equipment manufacturers ("OEMs").
The Company's licensing program, introduced in 1992, enables OEMs to incorporate
the Company's DSP core designs in the OEMs' products. Licensing revenues are
generally recognized on shipment by the Company provided that no significant
vendor or post contract support obligations remain outstanding and that
collection of the resulting receivable is deemed probable. In addition, most
licenses require the licensee to pay the Company ongoing per-unit royalties
based on the unit shipments of the licensee's products and a monthly support
fee. The timing and amount of royalties from licensing of the DSP core designs
will depend on the timing of each licensee's product development and the degree
of market acceptance of such licensee's product, both of which are not within
the Company's control. Royalties from two DSP Core licensees have started to
become meaningful in 1997.
9
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The following is a partial list of companies who have licensed the Company's
DSP core designs and representative applications for which they are able to use
the DSP core designs:
DSP CORE DESIGN LICENSES
<TABLE>
<CAPTION>
LICENSEES REPRESENTATIVE APPLICATIONS
- ------------------------------------------ --------------------------------------------------
<S> <C>
Adaptec................................... Disk Drives
Asahi Kasei Microsystems.................. Cordless Telephones
Atmel..................................... ASIC, Communications
DSP Communications, Inc................... Digital Cellular Telephones
Fujitsu................................... ADSL, Communications
GEC Plessey............................... Communications
Harris Semiconductor...................... Video Conferencing
Hyundai................................... Communications
Integrated Circuit Systems................ Multimedia Boards
Kawasaki.................................. ASIC, Communications
Kenwood................................... Audio Products
LSI Logic................................. ASIC, Communications, DBA
NEC....................................... Communications and Consumer Products
ROHM...................................... ASIC, Communications
Samsung................................... ASIC, Communications and Multimedia
Siemens................................... Digital Cellular Telephones, Communications
TDK Semiconductor......................... Modems
TEMIC (Daimler-Benz)...................... DBA, Communications
TSMC...................................... ASIC Library
VLSI Technology........................... ASIC, Communications
Xicor..................................... Programmable DSP
</TABLE>
The Alta Group of Cadence, Mentor Graphics and Synopsys have announced the
development of electronic design automation ("EDA") tools, system level design
kits and software co-design and co-simulation products for systems designers
that use the PineDSPCore-Registered Trademark- and
OakDSPCore-Registered Trademark-. In addition, a number of independent software
vendors, including VoCal Technologies and Ensigma, have announced the
development of digital signal processing algorithms that operate on the
PineDSPCore-Registered Trademark- and OakDSPCore-Registered Trademark- for a
variety of communications and multimedia applications. The Company believes that
these developments make its DSP core designs more attractive to potential OEM
licensees. In addition, the Company believes that these software tools assist in
the creation of the PineDSPCore-Registered Trademark- and the
OakDSPCore-Registered Trademark- as industry standards, much as most ASIC
vendors worldwide are in fact DSP Group licensees.
RISC CORE
The Company has entered into an agreement with National Semiconductors
Corporation ("NSC") to become the worldwide exclusive distributor for general
licensing and support of the CompactRISC core technology. The Company decided to
enter the RISC market because it believes that customers use RISC cores along
with DSP cores in their applications to implement control functions efficiently.
The Company established this relationship with NSC to shorten the time to market
for the Company's products and to make use of already proven and established
technology.
Currently, Advanced RISC Machines ("ARM") controls the RISC market. The
Company estimates that the CompactRISC technology is better suited for the
embedded market than ARM's products because CompactRISC is a true 16-bit
machine, whereas the ARM core is a 32-bit machine with a wrapper. As such, the
CompactRISC consumes less power and is less expensive in die size and memory
consumption. However, ARM's brand name is prevailing and there is no assurance
that the CompactRISC technology will be able to compete effectively in the
market.
10
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The following table sets forth the key features of the CompactRISC core
design:
<TABLE>
<CAPTION>
CR16B
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<S> <C>
Word Length.......................................................... 16 bit
Process Geometry (microns)........................................... 0.35
Performance.......................................................... 50 MIPS
Voltage.............................................................. 3.0 to 5.0 V
</TABLE>
TRUESPEECH PRODUCTS
TrueSpeech is a high-quality, cost effective speech compression technology
based on complex mathematical algorithms that are derived from the way airflow
from the lungs is shaped by the throat, mouth and tongue during speech. This
shaping of bursts of air is what the ear interprets as speech. TrueSpeech
converts this speech into digital data and then selectively eliminates and
enhances certain sound data to replicate human speech. Originally developed for
consumer telephone applications, such as the Company's TAD speech processors,
the Company has since enhanced TrueSpeech for use in the computer telephony and
personal computer markets.
The Company seeks to establish industry standards for digital speech
compression technology based on its TrueSpeech algorithms for emerging speech
applications in the consumer telephone and computer telephony markets. However,
the establishment of industry standards depends upon the acts of third parties,
which are not within the control of the Company. The development of industry
standards utilizing TrueSpeech algorithms would create an opportunity for the
Company to develop and market speech co-processors that would serve as
complementary application-specific DSPs to enhance the performance and
functionality of personal computers using TrueSpeech. In the personal computer
market, Microsoft has incorporated a TrueSpeech algorithm in Windows 95. In the
video telephone market, the ITU in February 1995 established G.723.1, which is
predominantly composed of a TrueSpeech algorithm, as the standard speech
compression technology for video conferencing over public telephone lines. In
addition to the Company's TrueSpeech algorithm, G.723.1 incorporates elements of
algorithms developed by France Telecom and the University of Sherbrooke. In
addition, although the ITU committee has approved the G.723.1 standard for
analog telephone line, there is no assurance that the video conference market in
analog line will be widely accepted, mainly due to quality of the current
implementations and price issues. Furthermore, in March 1997, the International
Multimedia Teleconferencing Consortium ("IMTC"), a nonprofit industry group,
recommended the use of G.723.1 as the default audio coder for all voice
transmissions over the Internet or for Internet Protocol ("IP") applications for
H.323 conferencing products. The IMTC membership approved this recommendation in
1997.
The Company believes that the principal advantages of TrueSpeech compared
with other currently available digital speech compression technologies are as
follows:
HIGH COMPRESSION RATIO. The three versions of TrueSpeech currently
offered for license by DSP Group compress digital speech at ratios ranging
from 15:1 to 26:1. These compression ratios are between seven and twelve
times greater than the compression provided by Pulse Code Modulation ("PCM")
used in current generation telephone speech transmissions and four to six
times greater than compression using Adaptive Differential PCM ("ADPCM")
currently used in personal computer audio cards. As a result, a standard 1.4
megabyte floppy diskette can hold approximately 37 minutes of speech using
the most advanced version of TrueSpeech commercially available, compared to
approximately three minutes using PCM and six minutes using ADPCM.
Competitors have introduced other advanced speech compression algorithms
that offer compression ratios comparable to the most advanced TrueSpeech
algorithms, including competing algorithms that were submitted by several
companies to the ITU standards committee evaluating speech compression
algorithms for video telephones. The ITU testing showed that TrueSpeech
provides superior quality playback and requires lower computational
complexity than these competing algorithms.
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HIGH QUALITY SPEECH. Another advantage of TrueSpeech is that it
reproduces high quality speech playback with minimum distortion by
selectively eliminating nonessential and background sound data without
significant loss of speech quality. TrueSpeech has received high scores for
speech quality from a number of independent evaluators. For example,
TrueSpeech scored the highest on the ITU's intricately structured test used
to numerically rate the quality of the five competing speech compression
algorithms submitted for adoption as the G.723.1 standard for video
telephones.
COST EFFECTIVENESS. TrueSpeech's ability to achieve high speech
compression with lower computational complexity provides it with a
competitive cost advantage. As an example, competing speech compression
algorithms evaluated by the ITU use 20% to 50% more computing power for the
same compression and transmission rates, and more RAM and ROM for storage
and operation. Consequently, competing speech compression algorithms require
larger, more expensive DSPs and result in higher cost solutions.
The Company incorporates its TrueSpeech technology in its speech and
telephony processors and also licenses TrueSpeech to computer telephony and
personal computer companies for inclusion in their products. The Company's
TrueSpeech licensees include Analog Devices, Cirrus Logic, Creative Labs,
Dialogic, IBM, Integrated Circuit Systems, Intel, LSI Logic, Lucent, Microsoft,
Netspeak, Philips, Phylon, Prodigy, Siemens, Sierra Semiconductor, Silicon
Systems, Smith Micro, Texas Instruments ("TI"), Unisys, US Robotics, VDOnet and
VLSI Technology. In addition, the Company has ported its TrueSpeech algorithms
to certain DSP platforms offered by Analog Devices, Lucent, Motorola and TI,
four leading merchant vendors of programmable DSPs. To date, the Company's
royalties from TrueSpeech licenses have not been significant.
SALES, MARKETING AND DISTRIBUTION
The Company markets and distributes its products through a direct sales and
marketing organization, consisting of 22 employees, as well as through a network
of distributors and independent manufacturers' representatives. A marketing and
sales team located in the Company's headquarters in Santa Clara, California and
in Israel pursues business with the Company's customers in North America,
closely monitor new markets, trends and customer needs to shape the Company's
strategic decisions. In Japan, the Company operates from a marketing and support
office in Tokyo and through Tomen Electronics, a local distributor. In the rest
of Asia, the Company operates through DSP Solutions Ltd., a distributor and
sales representative in Hong Kong, and through manufacturers' representatives in
Singapore, South Korea and Taiwan. To handle sales and distribution in Europe,
the Company operates a marketing and support office located in France and has
manufacturers' representatives in Denmark, Germany, Spain and Sweden. The
Company's distributors are not subject to minimum purchase requirements and can
cease marketing the Company's products at any time. The loss of one or more
representatives or the failure of such parties to renew agreements with the
Company upon expiration could have an adverse effect on the Company's business,
financial condition and results of operations.
In 1997, 1996 and 1995 sales to Tomen Electronics comprised 33%, 17% and 25%
of total revenues respectively. In 1996, sales to Samsung comprised 11% of total
revenues.
Export sales accounted for 92%, 91% and 81% of total revenue in 1997, 1996
and 1995, respectively. Due to its export sales, the Company is subject to the
risks of conducting business internationally, including unexpected changes in
regulatory requirements, fluctuations in exchange rates that could increase the
price of the Company's products in foreign markets, delays resulting from
difficulty in obtaining export licenses for certain technology, tariffs, other
barriers and restrictions, and the burden of complying with a variety of foreign
laws. All of the Company's export sales are denominated in United States
dollars. See Note 3 of the Notes to Consolidated Financial Statements of the
Company's Annual Report to Stockholders for the year ended December 31, 1997,
for a summary of the Company's operations within various geographic areas.
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MANUFACTURING AND DESIGN METHODOLOGY
Since the Company's products are based on its proprietary DSP core designs,
which are not dependent upon a particular foundry's library cells, these
products can be manufactured at a number of independent foundries. Accordingly
all of the Company's manufacturing occurs at independent foundries. The Company
contracts fabrication services for speech and telephony processors from Taiwan
Semiconductor Manufacturing Company ("TSMC"), Tower Semiconductor ("Tower") and
Samsung Semiconductor, Inc. ("Samsung"). Under non-exclusive agreements, these
independent foundries normally provide the Company with finished, packaged and
tested speech processors at variable prices depending on the volume of units
purchased. The Company customarily pays for fully-tested products meeting
predetermined specifications. To ensure the integrity of quality assurance
procedures, the Company develops detailed test procedures and specifications for
each product and requires each foundry to use such procedures and specifications
before shipping finished products.
The Company plans to continue to use independent foundries to manufacture
digital speech processors and other products for the consumer telephone and
computer telephony markets. To obtain an adequate supply of wafers, the Company
is considering various alternative production sites. The Company's reliance on
independent foundries involves a number of risks such as the foundries'
achievement of acceptable manufacturing yields and allocation of capacity to the
Company.
In addition to the Company's speech processors, digital TADs include various
other components such as ARAMs, codecs and flash memories that are supplied by
third party manufacturers. Temporary fluctuations in the pricing and
availability of these components could have a material adverse effect on sales
of the Company's speech processors for digital TADs and other computer telephony
products, which could in turn have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION
The markets in which the Company operates are extremely competitive and the
Company expects that competition will increase. In each of the Company's
business activities it faces current and potential competition from competitors
that have significantly greater financial, technical, manufacturing, marketing,
sales and distribution resources and management expertise than the Company. The
Company's future prospects will be highly dependent upon the successful
development and introduction of new products that are responsive to market
needs. There can be no assurance that the Company will be able to successfully
develop or market any such products.
The principal competitive factors in the digital TAD speech processor market
include price, speech quality, compression ratio, value-added features such as
variable speed message playback and speakerphone, customer support and the
timing of product introductions by the Company and its competitors. The Company
believes that it is competitive with respect to each of these factors.
Currently, the key competitive challenge for digital TADs is the relative lower
cost of analog tape-based machines. The Company believes that the continuing
decline in prices of digital speech processors and silicon memory devices will
close the cost gap between the analog and digital solution. The Company's
principal competitors in the TAD speech processor market include ISD, Lucent
Microelectronics, Macronix, TI, Toshiba, Siemens and Zilog.
The principal competitive factors in the DSP core designs market for high
volume, low cost applications include such features as small size, low power,
flexible I/O blocks and associated development tools. The Company's DSP core
designs compete with companies such as Analog Devices, Atmel, Clarkspur Designs,
SGS Thompson and Tensleep, which license DSP platforms, and Analog Devices,
Lucent Microelectronics, Motorola, and TI, which sell their own complete DSP
solutions (general purpose DSPs).
Several digital speech compression technologies exist and are currently
being developed that may be promoted by competitors as industry standards for
the computer telephony and personal computer markets. The Company's TrueSpeech
algorithms compete with ADPCM, and the speech compression technologies used in
GSM and VSELP, each of which is available in the public domain. There are many
versions of these algorithms that have been developed by different parties,
including AT&T (which has been actively involved in the development of GSM) and
Motorola (which developed the original VSELP). Although TrueSpeech has achieved
a degree of acceptance in the computer telephony and personal computer markets,
ADPCM and the speech compression technologies for GSM and VSELP are widely used
in the
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development and implementation of new products in the telephony industry. In
addition, other advanced speech compression algorithms have been introduced
by competitors which offer compression ratios comparable to the TrueSpeech
algorithms, including a competing algorithm sponsored by the University of
Sherbrooke that the ITU standards committee has adopted as the speech
compression standard for DSVD modems. Large companies, such as AT&T, Creative
Labs, Motorola and Rockwell, have speech processing technologies that can be
applied to speech compression for use in the markets for which the Company's
products are targeted.
Price competition in the markets in which the Company currently competes and
proposes to compete is intense and may increase, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company has experienced and expects to continue to experience
increased competitive pricing pressures for its TAD speech processors. During
1997, the Company was able to completely offset this decrease on an annual basis
through manufacturing cost reductions. There can be no assurance that the
Company will be able to further reduce product costs or be able to compete
successfully as to price or any other of the key competitive factors.
RESEARCH AND DEVELOPMENT
The Company believes that continued timely development and introduction of
new products are essential to maintaining its competitive position. The Company
currently conducts most of its product development effort in-house and at
December 31, 1997 had a staff of 56 research and development personnel located
in Israel. The Company also employs independent contractors to assist with
certain product development and testing activities. During the years 1997, 1996
and 1995, the Company spent approximately $8.4 million, $8.5 million and $8.4
million, respectively, on research and development activities.
RELATIONSHIPS WITH AFFILIATED COMPANIES
The Company has a $1.7 million equity investment in, and has entered into
technology arrangements with, AudioCodes Ltd. ("AudioCodes"), an Israeli
corporation primarily engaged in DSP-related contract engineering in connection
with speech and speech algorithm technologies. The Company currently owns 29% of
the capital stock of AudioCodes, a company formed in April 1993 by two former
employees of DSP Group. Pursuant to an agreement between the Company and
AudioCodes, the Company and AudioCodes have joint ownership of any speech
compression technology developed by AudioCodes. The Company has established this
relationship to complement its in-house product development efforts.
In July 1996, the Company invested $2.0 million of cash for approximately
40% of the equity interests in Aptel Ltd. ("Aptel"), an emerging company in
its product development stage located in Israel. Aptel has expertise in
spread spectrum direct sequence modulation technology, which is applicable to
the development of products for two-way paging systems and telemetry
applications. In 1996, 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 and Aptel's shareholders
(including the Company) exchanged their shares in Aptel for shares in Nexus
Telecommunications Systems Ltd. ("Nexus"), an Israeli company registered and
traded on the Nasdaq SmallCap Market. The Nexus shares received in the
transaction are restricted from being traded until December 1998 and are
presented in the Company's balance sheet at $1,226,000, which is the market
value of such shares on December 31, 1997.
LICENSES, PATENTS AND TRADEMARKS
The Company has been granted seven United States patents and has one
patent pending in the United States. The Company actively pursues foreign
patent protection in other countries of interest to the Company. The policy
of the Company is to apply for patents or for other appropriate statutory
protection when it develops valuable new or improved technology. The status
of patents involves complex legal and factual questions and the breadth of
claims allowed is
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uncertain. Accordingly, there can be no assurance that any patent application
filed by the Company will result in patents being issued, or that its
patents, and any patents that may be issued in the future, will afford
protection against competitors with similar technology; nor can there be any
assurance that patents issued to the Company will not be infringed or
designed around by others. In addition, the laws of certain countries in
which the Company's products are or may be developed, manufactured or sold,
including Hong Kong, Japan and Taiwan, may not protect the Company's products
and intellectual property rights to the same extent as the laws of the United
States.
The Company attempts to protect its trade secrets and other proprietary
information through agreements with its customers, suppliers, employees and
consultants, and through other security measures. Although the Company
intends to protect its rights vigorously, there can be no assurance that
these measures will be successful.
The semiconductor and software industries are subject to frequent litigation
regarding patent and other intellectual property rights. While the Company has
not been involved in any material patent or other intellectual property rights
litigation to date, there can be no assurance that third parties will not assert
claims against the Company with respect to existing or future products or that
the Company will not need to assert claims against third parties to protect its
proprietary technology. For example, AT&T has asserted that G.723.1, which is
primarily composed of a TrueSpeech algorithm, includes certain elements covered
by patents held by AT&T and has requested that video conferencing equipment
manufacturers license this technology from AT&T. In the event of litigation to
determine the validity of any third party claims or to protect its proprietary
technology, such litigation could result in significant expense to the Company
and could divert the efforts of the Company's technical and management
personnel, whether or not such litigation is determined in favor of the Company.
In the event of an adverse result in any such litigation, the Company could be
required to expend significant resources to develop non-infringing technology or
to obtain licenses to the technology that is the subject of the litigation.
There can be no assurance that the Company would be successful in such
development or that any such licenses would be available on commercially
reasonable terms.
The Company has been issued registered trademarks for the use of the
PineDSPCore-Registered Trademark-, OakDSPCore-Registered Trademark- and
TrueSpeech trademarks. In addition the Company applied for trademarks for
TeakDSPCore and PalmDSPCore.
While the Company's ability to compete may be affected by its ability to
protect its intellectual property, the Company believes that, because of the
rapid pace of technological change in the industry, its technical expertise and
ability to innovate on a timely basis will be more important in maintaining its
competitive position than protection of its intellectual property. The Company
believes that, because of the rapid pace of technological change in the consumer
telephone, computer telephony and personal computer industries, patents and
trade secret protection are important but must be supported by other factors
such as the expanding knowledge, ability and experience of the Company's
personnel, new product introductions and frequent product enhancements. Although
the Company continues to implement protective measures and intends to defend its
intellectual property rights, there can be no assurance that these measures will
be successful.
BACKLOG
At December 31, 1997, the Company's backlog was approximately $16.8 million
compared with approximately $15.1 million at December 31, 1996. The Company
includes in its backlog all accepted product purchase orders with respect to
which a delivery schedule has been specified for product shipment within one
year and fees specified in executed licensing contracts. The Company's business
in TAD speech processors is characterized by short-term order and shipment
schedules. Product orders in the Company's current backlog are subject to
changes in delivery schedules or to cancellation at the option of the purchaser
without significant penalty. Accordingly, although useful for scheduling
production, backlog as of any particular date may not be a reliable measure of
sales for any future period.
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EMPLOYEES
As of December 31, 1997, the Company had 105 employees, including 56 in
research and development, 22 in marketing and sales, and 27 in corporate and
administration and manufacturing coordination. Competition for personnel in the
semiconductor, software and personal computer industries in general is intense.
The Company believes that its future prospects will depend, in part, on its
ability to continue to attract and retain highly skilled technical, marketing
and management personnel, who are in great demand. In particular, there is a
limited supply of highly qualified engineers with digital signal processing
experience. None of the Company's employees is represented by a collective
bargaining agreement, nor has the Company ever experienced any work stoppage.
The Company believes that its employee relations are good.
FACTORS AFFECTING FUTURE OPERATING RESULTS
THIS FORM 10-K CONTAINS FORWARD LOOKING STATEMENTS CONCERNING THE COMPANY'S
FUTURE PRODUCTS, EXPENSES, REVENUE, LIQUIDITY AND CASH NEEDS AS WELL AS THE
COMPANY'S PLANS AND STRATEGIES. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON
CURRENT EXPECTATIONS AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THIS
INFORMATION. NUMEROUS FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER SIGNIFICANTLY
FROM THE RESULTS DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS, INCLUDING THE
FOLLOWING RISK FACTORS.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's
revenues are derived predominately from product sales and accordingly vary
significantly depending on the volume and timing of product orders. The
Company's quarterly operating results also depend on the timing of recognition
of license fees and the level of per unit royalties. Through 1998, the Company
expects that revenues from its DSP core designs and TrueSpeech will be derived
primarily from license fees rather than per unit royalties. The uncertain timing
of these license fees has caused, and may continue to cause, quarterly
fluctuations in the Company's operating results. The Company's per unit
royalties from licenses are totally dependent upon the success of its OEM
licensees in introducing products utilizing the Company's technology and the
success of those OEM products in the marketplace. Per unit royalties from
TrueSpeech licensees have not been significant to date. 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 timing of new product
introductions by the Company or its customers, licensees or competitors; market
acceptance of new products and technologies; the mix of products sold;
fluctuations in the level of sales by OEMs and other vendors of products
incorporating the Company's products; and changes in general economic
conditions.
DECLINING AVERAGE SELLING PRICES AND GROSS MARGINS; DEPENDENCE ON DIGITAL
TAD MARKET. The Company has experienced a decrease in the average selling
prices of its TAD speech processors, but has to date been able to offset this
decrease on an annual basis through manufacturing cost reductions and the
introduction of new products with higher performance. The Company experienced a
significant decline in the gross margin on TADs in the second and third quarters
of 1996 due to competitive market pricing pressures and delays in ongoing cost
reduction efforts. Although significant cost reductions were achieved in the
fourth quarter of 1996 and throughout 1997, there is no guarantee that such
on-going efforts will be successful or that they will keep pace with the
anticipated, continuing decline in average selling prices. The markets for the
Company's products are extremely competitive, and the Company expects that
competition will increase. The Company's existing and potential competitors in
each of its markets include large and emerging domestic and foreign companies,
many of which have significantly greater financial, technical, manufacturing,
marketing, sale and distribution resources and management expertise than the
Company. Any inability of the Company to respond to increased price competition
for its TAD speech processors or its other products through the continuing and
frequent introduction of new products or reductions of manufacturing costs, or
any significant delays by the Company in developing, manufacturing or shipping
new or enhanced products would have a material adverse effect on the Company's
business, financial condition and results of operations. Sales of TAD products
comprise a substantial portion of the Company's product sales. Any adverse
change in the digital TAD market or the Company's ability to compete and
maintain its position in that market would have a material adverse effect on the
Company's business, financial condition and results of operations.
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REVENUES FROM ASIA. In 1997, the Company generated approximately $19.9
million, or 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 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 the Asian region 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 does not believe that economic conditions in Asia had a material effect
on its 1997 revenue. 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. However, in the first quarter of
1998, the Company has been experiencing a decline in the flows of orders from
Southeast Asia, specifically South Korea mainly due to the general economic
atmosphere in that region. If this trend continues, it may result in a decrease
of the Company's backlog at the end of the first quarter of 1998. There can be
no assurance that continued negative developments in the Asian region will not
have an adverse effect on the Company's future operating performance.
RELIANCE ON INDEPENDENT FOUNDRIES. All of the Company's integrated circuit
products are manufactured by independent foundries. While these foundries have
been able to adequately meet the demands of the Company's increasing business,
the Company is and will continue to be dependent upon these foundries to achieve
acceptable manufacturing yields and quality levels, and to allocate to the
Company a sufficient portion of foundry capacity to meet the Company's needs in
a timely manner. To meet its increased wafer requirements, the Company has added
additional independent foundries to manufacture its TAD speech processors.
Revenues could be materially and adversely affected should any of these
foundries fail to meet the Company's request for products due to a shortage of
production capacity, process difficulties or low yield rates.
RELIANCE ON INTERNATIONAL OPERATIONS; RISK OF OPERATIONS IN ISRAEL. The
Company is subject to the risks of doing business internationally, including
unexpected changes in regulatory requirements; fluctuations in the exchange
rate for the United States dollar; imposition of tariffs and other barriers
and restrictions; and the burdens of complying with a variety of foreign
laws. The Company is also subject to general geopolitical risks, such as
political and economic instability and changes in diplomatic and trade
relationships, in connection with its international operations. In
particular, the Company's principal research and development facilities are
located in the State of Israel and, as a result, at December 31, 1997, 76 of
the Company's 105 employees were located in Israel, including all 56 research
and development personnel. In addition, although the Company is incorporated
in Delaware, the 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 that
country is subject. In addition, many of the Company's expenses in Israel are
paid in Israeli currency, thereby also subjecting the Company to foreign
currency fluctuations and to economic pressures resulting from Israel's
generally high rate of inflation. The rate of inflation in Israel for 1996
and 1997 was 10.6% and 7.0%, respectively. While substantially all of the
Company's sales and expenses are denominated in United States dollars, a
portion of the Company's expenses are denominated in Israeli shekels. The
Company's primary expenses paid in Israeli currency are employee salaries and
lease payments on the Israeli facility. As a result, an increase in the value
of Israeli currency in comparison to the United States dollar could increase
the cost of technology development, research and development expenses and
general and administrative expenses. There can be no assurance that currency
fluctuations, changes in the rate of inflation in Israel or any of the other
aforementioned factors will not have a material adverse effect on the
Company's business, financial condition and results of operations.
RELIANCE ON OEMS TO OBTAIN REQUIRED COMPLEMENTARY COMPONENTS. Certain of
the raw materials, components and subassemblies included in the products
manufactured by the Company's OEM customers, which also incorporate the
Company's products, are obtained from a limited group of suppliers. Disruptions,
shortages or termination of certain of these sources of supply could occur.
Supply disruptions, shortages or termination could have an adverse effect on the
Company's business and results of operations due to its customers delay or
discontinuance of orders for the Company's products until such components are
available.
DEPENDENCE UPON ADOPTION OF INDUSTRY STANDARDS BASED ON TRUESPEECH. The
Company's prospects are partially dependent upon the establishment of industry
standards for digital speech compression based on TrueSpeech algorithms in
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the computer telephony and personal computer markets. The development of
industry standards utilizing TrueSpeech algorithms would create an
opportunity for the Company to develop and market speech co-processors that
provide TrueSpeech solutions and enhance the performance and functionality of
products incorporating these co-processors. In February 1995, the ITU
established G.723.1, which is predominately composed of a TrueSpeech
algorithm, as the standard speech compression technology for use in video
conferencing over public telephone lines.
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, Lucent Microelectronics, NTT and VoiceCraft have
recently asserted that G.723.1, which is primarily composed of a TrueSpeech
algorithm, includes certain elements covered by patents held by these entities
and have requested that video conferencing equipment manufacturers license such
technology from them. 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.
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 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
virtually every company's computer operation will be affected in some way. The
Company is utilizing both internal and external resources to identify, correct
or reprogram, and test the systems for Year 2000 compliance. It is anticipated
that all reprogramming efforts will be completed by December 31, 1998, allowing
adequate time for testing. To date, confirmations have been received from the
Company's primary processing vendors that plans are being developed to address
processing of transactions in the year 2000. Management believes that Year 2000
compliance expenses will not have an 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. 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.
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, and also
permitted plaintiffs to amend their complaint as to their claim that the Company
is responsible for the statements contained in analysts' reports. Plaintiffs
chose not to amend their complaint after the March 7, 1997 order. 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.
18
<PAGE>
ITEM 2. PROPERTIES.
The Company's operations in the United States are located in an
approximately 15,700 square foot leased facility in Santa Clara, California.
This facility houses the Company's marketing and support, North American sales,
operations, manufacturing coordination and administrative personnel. This
facility is leased through December 1999. In August 1997, the Company's
subsidiary, DSP Semiconductors (Israel), Ltd. moved to a facility in Herzlia
Pituach, Israel with approximately 27,000 square feet pursuant to a lease ending
in May 2002. In August 1997, DSP Semiconductors (Israel), Ltd. signed an
additional lease agreement for office space in Omer (located in the south of
Israel), for 840 square feet through September 1999.
ITEM 3. LEGAL PROCEEDINGS.
In November 1995, after the Company's stock price declined, several
lawsuits were filed in the United States District Court for the Northern
District of California accusing the Company, its former Chief Executive
Officer, and its former Chief Financial Officer of issuing materially false
and misleading statements in violation of the federal securities laws. These
lawsuits were consolidated into a single amended complaint in February 1996.
In the amended complaint, plaintiffs sought unspecified damages on behalf of
all persons who purchased shares of the Company's Common Stock during the
period June 6, 1995 through November 10, 1995. On June 11, 1996, the Court
granted the Company's motion to dismiss the lawsuit, with leave to amend. The
plaintiffs filed an amended complaint on July 11, 1996. On March 7, 1997, the
Court issued an order dismissing with prejudice all claims based on
statements issued by the Company. The Court permitted plaintiffs to proceed
with their claims regarding statements the Company allegedly made to
securities analysts, and also permitted plaintiffs to amend their complaint
as to their claim that the Company was responsible for the statements
contained in analysts' reports. Plaintiffs chose not amend their complaint
after the March 7, 1997 order. On November 5, 1997, the parties reached an
agreement in principle to settle this litigation. The proposed settlement
requires that the Company fund approximately $50,000 of the settlement amount
to fulfill the retention amounts under the Company's insurance policy. The
proposed settlement is subject to the execution of a stipulation of
settlement and court approval.
On February 12, 1997, BEKA Electronic GmbH ("BEKA") commenced an action in
the United States District Court for the Northern District of California against
the Company. The action alleges breach of contract, breach of implied covenant
of good faith and fair dealing and requests an accounting by the Company in
connection with the Company's termination of the Sales Representative Agreement
between BEKA and the Company. The complaint seeks an unspecified amount of
damages. The Company filed an answer to the complaint on April 14, 1997, denying
all causes of action. The Company believes the lawsuit to be without merit and
intends to defend itself vigorously.
In February 1997, a lawsuit between the Company and Elk Industries, Inc.
("Elk") was settled. The litigation had been pending since April 1996 in the
United States District Court for the Southern District of Florida. Elk had
alleged patent infringement by the Company in connection with the Company's
making, selling and using an audio storage and distribution system allegedly
covered under a patent held by Elk.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
19
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The section labeled "Price Range of Common Stock" appearing on page 18 of
the Registrant's Annual Report to Stockholders for the year ended December 31,
1997 is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The section labeled "Selected Consolidated Financial Data" appearing on page
17 of the Registrant's Annual Report to Stockholders for the year ended December
31, 1997 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The section labeled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing on pages 19 through 24 of the
Registrant's Annual Report to Stockholders for the year ended December 31, 1997
is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and related notes and independent
auditors report appearing on pages 25 through 46 of the Registrant's Annual
Report to Stockholders for the year ended December 31, 1997 are incorporated
herein by reference.
The section labeled "Quarterly Data" appearing on page 17 of the
Registrant's Annual Report to Stockholders for the years ended December 31, 1996
and 1997 is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The section labeled "Directors, Executive Officers and Key Personnel" of the
Registrant's definitive Proxy Statement to be filed shortly hereafter for the
annual meeting of stockholders to be held on May 19, 1998 is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The section labeled "Executive Compensation and Other Information" of the
Registrant's definitive Proxy Statement to be filed shortly hereafter for the
annual meeting of stockholders to be held on May 19, 1998 is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The section labeled "Security Ownership of Certain Beneficial Owners and
Management" of the Registrant's definitive Proxy Statement to be filed shortly
hereafter for the annual meeting of stockholders to be held on May 19, 1998 is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section labeled "Certain Relationships and Related Transactions" of the
Registrant's definitive Proxy Statement to be filed shortly hereafter for the
annual meeting of stockholders to be held on May 19, 1998 is incorporated herein
by reference.
21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents have been filed as a part of this Annual Report on
Form 10-K.
1. INDEX TO FINANCIAL STATEMENTS.
The following financial statements and related notes and auditor's report
are included in the Registrant's Annual Report to Stockholders for the year
ended December 31, 1997 and are incorporated herein by reference pursuant to
Item 8.
<TABLE>
<CAPTION>
PAGE IN 1997
ANNUAL REPORT
DESCRIPTION TO STOCKHOLDERS
- -------------------------------------------------------------------------------------------------- ---------------
<S> <C>
Consolidated Balance Sheets as of December 31, 1997 and 1996...................................... 26-27
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995............ 25
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and
1995............................................................................................. 28-29
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995........ 30-31
Notes to Consolidated Financial Statements........................................................ 32-46
Report of Ernst & Young LLP, Independent Auditors................................................. 47
</TABLE>
2. INDEX TO FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedules and related auditor(1)s report
are filed as part of this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
PAGE IN THIS
ANNUAL REPORT
DESCRIPTION ON FORM 10-K
- --------------------------------------------------------------------------------------- -------------------------
<S> <C>
Schedule II: Valuation and Qualifying Accounts......................................... (included at page 32)
Consent of Ernst & Young LLP, Independent Auditors..................................... Exhibit 23.1
(included at page 30)
Consent of Almagor & Co., Independent Auditors......................................... Exhibit 23.2
(included at page 31)
</TABLE>
All other schedules are omitted because they are not applicable or not
required or because the required information is included in the Consolidated
Financial Statements or the Notes thereto.
22
<PAGE>
3. LIST OF EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1B
to the Registrant's Registration Statement on Form S-1, file no.
33-73482, as declared effective on February 11, 1994 and incorporated
herein by reference).
3.2 Bylaws (filed as Exhibit 3.2B to the Registrant's Registration Statement
on Form S-1, file no. 33-73482, as declared effective on February 11,
1994 and incorporated herein by reference).
3.3 Amendment to Registrant's Bylaws, dated March 30, 1995 (filed as Exhibit
3.2.c to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995, and incorporated herein by reference).
3.4 Certificate of Determination of Preference of Series A Preferred Stock of
the Registrant, filed with the Secretary of State of the State of
Delaware on June 6, 1997 (filed as Exhibit 3.1 to the Registrant's
Current Report on Form 8-K filed on June 6, 1997).
3.5 Rights Agreement, dated as of June 5, 1997, between the Registrant and
Norwest Bank Minnesota, N.A., as Rights Agent (filed as Exhibit 2.1 to
the Registrant's Current Report on Form 8-K filed on June 6, 1997).
3.6 Specimen Rights Certificate (filed as Exhibit 1.1 to the Registrant's
Current Report on Form 8-K filed on June 6, 1997).
3.7 Amendment to Registrant's Bylaws, dated November 3, 1997.
10.1 1991 Employee and Consultant Stock Plan and forms of option agreements
thereunder (filed as Exhibit 10.2 to the Registrant's Registration
Statement on Form S-1, file no. 33-73482, as declared effective on
February 11, 1994 and incorporated herein by reference).
10.2 Israeli Stock Option Plan and form of option agreement thereunder (filed
as Exhibit 10.3 to the Registrant's Registration Statement on Form S-1,
file no. 33-73482, as declared effective on February 11, 1994 and
incorporated herein by reference).
10.3 1993 Directors Stock Option Plan (filed as Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1, file no. 33-73482, as
declared effective on February 11, 1994 and incorporated herein by
reference).
10.4 1993 Employee Stock Purchase Plan and form of subscription agreement
thereunder (filed as Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1, file no. 33-73482, as declared effective on
February 11, 1994 and incorporated herein by reference).
10.5 Registration Rights Agreement, dated August 30, 1993, by and among the
Registrant and certain shareholders of the Registrant (filed as Exhibit
10.9 to the Registrant's Registration Statement on Form S-1, file no.
33-73482, as declared effective on February 11, 1994 and incorporated
herein by reference).
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.6 Technology Assignment and License Agreement, dated January 7, 1994, by and
between the Registrant and DSP Telecommunications, Ltd. (filed as
Exhibit 10.24 to the Registrant's Registration Statement on Form S-1,
file no. 33-73482, as declared effective on February 11, 1994 and
incorporated herein by reference).
10.7 ACL Technology License Agreement, dated June 24, 1994, by and between the
Registrant and AudioCodes, Ltd. (filed as Exhibit 10.12 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1994, and incorporated herein by reference).
10.8 Investment Agreement, dated June 16, 1994, by and between the Registrant
and AudioCodes Ltd. (see Exhibit 10.30 for Appendix B to Investment
Agreement) (filed as Exhibit 10.39 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994, and incorporated herein
by reference).
10.9 Form of Indemnification Agreement for directors and executive officers
(filed as Exhibit 10.1 to the Registrant's Registration Statement on
Form S-1, file no. 33-73482, as declared effective on February 11, 1994,
and incorporated herein by reference).
10.10 Severance and Consulting Agreement, dated as of May 6, 1996, by and
between the Registrant and Eli Porat (filed as Exhibit 10.36 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996, and incorporated herein by reference).
10.11 Severance Agreement, dated June 8, 1996, by and between the Registrant and
Karin Pitcock (filed as Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, and
incorporated herein by reference).
10.12 Share Purchase and Shareholders Agreement, dated July 4, 1996, by and
among Aptel Ltd., the shareholders named therein, and DSP Semiconductors
Ltd. (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996, and incorporated herein by
reference).
10.13 Employment Agreement, dated April 22, 1996, by and between the Registrant
and Eli Ayalon (filed as Exhibit 10.3 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, and
incorporated herein by reference).
10.14 Severance and Consulting Agreement, dated as of October 25, 1996, by and
between the Registrant and John Goldsberry (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, and incorporated herein by reference).
10.15 Employment Severance and Consulting Agreement, dated as of December 2,
1996, by and between the Registrant and Mike Hoberg (filed as Exhibit
10.23 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference).
10.16 Assignment and Assumption Agreement, dated October 9, 1996, by and between
the Registrant and Dialogic Corporation, relating to the Registrant's
facility located at 3120 Scott Boulevard in Santa Clara, California
(filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996, and incorporated herein by
reference).
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.17 Sublease, dated October 18, 1996, as amended on December 4, 1996, by and
between Dialogic Corporation and the Registrant, relating to the
Registrant's facility located at 3120 Scott Boulevard in Santa Clara,
California (filed as Exhibit 10.25 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996, and incorporated herein
by reference).
10.18 Employment Agreement, dated February 24, 1997, by and between the
Registrant and Avi Basher (filed as Exhibit 10.26 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996, and
incorporated herein by reference).
10.19 Employment Agreement, dated June 1, 1996, by and between the Registrant
and Moshe Shahaf (filed as Exhibit 10.27 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996, and
incorporated herein by reference).
10.20 Rescission Agreement, dated as of August 15, 1996, by and between the
Registrant and Igal Kohavi (filed as Exhibit 10.28 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996, and
incorporated herein by reference).
10.21 Service Agreement, dated as of August 15, 1996, by and between DSP
Semiconductors, Ltd. and Niko Consulting and Management (1995) Ltd.
(filed as Exhibit 10.29 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996, and incorporated herein by
reference).
10.22 Lease, dated November 28, 1996, by and between DSP Semiconductors Ltd. and
Gav-Yam Lands Company Ltd., relating to the property located on Shenkar
Street, Herzlia Pituach, Israel (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, and incorporated herein by reference).
10.23 Agreement, dated August 18, 1997, by and between DSP Semiconductors Ltd.
and Aptel Ltd (filed as Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997, and
incorporated herein by reference).
10.24 Employment Agreement with Igal Kohavi, dated as of June 1, 1997.
10.25 CompactRISC Technology License Agreement, dated as of September 29, 1997,
by and between DSP Semiconductors Ltd. and National Semiconductor
Corporation.
10.26 Amendment to Employment Agreement with Eliyahu Ayalon,
dated as of November 3, 1997.
10.27 Amendment to Employment Agreement with Igal Kohavi, dated
as of November 3, 1997.
10.28 Amendment to 1993 Directors Stock Option Plan, as adopted November 3,
1997.
11 Statements regarding computation of per share earnings (included at page
28).
13 Portions of the Annual Report to Stockholders for the year ended December
31, 1997.
21 Subsidiaries of the Registrant (included at page 29).
23.1 Consent of Ernst & Young LLP, Independent Auditors (included at page 30).
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
23.2 Consent of Almagor & Co., Independent Auditors (included at page 31).
27.1 Financial Data Schedule for the fiscal year ended December 31, 1997.
27.2 Restated Financial Data Schedule for the quarter ended September 30, 1997.
27.3 Restated Financial Data Schedule for the quarter ended June 30, 1997.
27.4 Restated Financial Data Schedule for the quarter ended March 31, 1997.
27.5 Restated Financial Data Schedule for the fiscal year ended December 31, 1996.
27.6 Restated Financial Data Schedule for the quarter ended September 30, 1996.
27.7 Restated Financial Data Schedule for the quarter ended June 30, 1996.
27.8 Restated Financial Data Schedule for the quarter ended March 31, 1996.
27.9 Restated Financial Data Schedule for the fiscal year ended December 31, 1995.
99.1 Auditor's Report of Almagor & Co., Certified Public Accountants (Israel)
</TABLE>
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated June 5, 1997, relating
to the adoption of the Stockholder's Rights Agreement, pursuant to which one
preferred share purchase right was distributed for each outstanding share of
Common Stock of the Company.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
DSP GROUP, INC.
By: /s/ ELIYAHU AYALON
---------------------------------------
Eliyahu Ayalon
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date: March 31, 1998
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<S> <C> <C>
/s/ IGAL KOHAVI
- ------------------------------ Chairman of the Board March 31, 1998
Igal Kohavi
President, Chief Executive
/s/ ELIYAHU AYALON Officer and Director
- ------------------------------ (Principal Executive March 31, 1998
Eliyahu Ayalon Officer)
Vice President of Finance,
Chief Financial Officer
/s/ AVI BASHER and Secretary (Principal
- ------------------------------ Financial Officer and March 31, 1998
Avi Basher Principal Accounting
Officer)
/s/ SAMUEL L. KAPLAN
- ------------------------------ Director March 31, 1998
Samuel L. Kaplan
/s/ MILLARD PHELPS
- ------------------------------ Director March 31, 1998
Millard Phelps
/s/ YAIR SHAMIR
- ------------------------------ Director March 31, 1998
Yair Shamir
</TABLE>
27
<PAGE>
EXHIBIT 11
DSP GROUP, INC.
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Net income . . . . . . . . . . . . . $11,034 $5,979 $7,211
-------- ------- -------
-------- ------- -------
Denominator:
Weighted average number of common
shares outstanding during the
period used to compute basic
earnings per share . . . . . . 9,736 9,510 9,352
Incremental shares attributable to
exercise of outstanding options
(assuming proceeds would be used
to purchase treasury stock) . . 467 71 306
-------- ------- -------
Weighted average number of shares of
common stock used to compute
diluted earnings per share . . . . 10,203 9,581 9,658
-------- ------- -------
-------- ------- -------
Net income per share -- basic . . . . . . $1.13 $0.63 $0.77
-------- ------- -------
-------- ------- -------
Net income per share -- diluted . . . . . $1.08 $0.62 $0.75
-------- ------- -------
-------- ------- -------
</TABLE>
28
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
--------------------------- -----------------------------
<S> <C>
1. Nihon DSP K.K. Japan
2. DSP Semiconductors Ltd. Israel
3. DSP Group Europe SARL France
</TABLE>
29
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of DSP Group, Inc. of our report dated January 23, 1998 (except for Note
9, as to which the date is January 27, 1998), included in the 1997 Annual Report
to Stockholders of DSP Group, Inc.
Our audits also included the consolidated financial statement schedule of
DSP Group, Inc. listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the consolidated financial statement schedule referred
to above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 33-83456 and 33-87390) pertaining to the 1991 Employee
and Consultant Stock Plan, the 1991 DSP Group, Inc. Israeli Stock Option Plan,
the 1993 Director Stock Option Plan, and the 1993 Employee Stock Purchase Plan
of our report dated January 23, 1998 (except for Note 9, as to which the date is
January 27, 1998), with respect to the consolidated financial statements and
schedules incorporated herein by reference or included in this Annual Report
(Form 10-K) for the year ended December 31, 1997.
/s/ ERNST & YOUNG LLP
San Jose, California
March 27, 1998
30
<PAGE>
EXHIBIT 23.2
CONSENT OF ALMAGOR & CO. CPA (ISR), INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of DSP Group, Inc., of our report dated January 22, 1998 on the financial
statements of DSP Semiconductors, Ltd. as of December 31, 1997 and for the year
then ended, not included in the 1997 Annual Report to Stockholders of DSP Group,
Inc.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 33-83456 and 33-87390) pertaining to the 1991 Employee and
Consultant Stock Plan, the 1991 DSP Group, Inc. and Israeli Stock Option Plan,
the 1993 Directors Stock Option Plan, and the 1993 Employee Stock Purchase Plan
of our report dated January 22, 1998 on the financial statements of DSP
Semiconductors Ltd. as of December 31, 1997 and for the year ended, not included
in the 1997m Annual Report and Stockholders of DSP Group, Inc.
/s/ ALMAGOR & CO.
Certified Public Accountants (Israel)
Tel Aviv, Israel
March 27, 1998
31
<PAGE>
SCHEDULE II
DSP GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED TO
BALANCE AT (DEDUCTED FROM)
BEGINNING OF COSTS BALANCE AT
DESCRIPTION PERIOD AND EXPENSES DEDUCTION END OF PERIOD
- ---------------------------------------------------------- --------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Allowance for doubtful accounts......................... $ 150 $ 15 $ 3 $ 162
Sales returns reserve................................... 254 296 269 281
Year ended December 31, 1996:
Allowance for doubtful accounts......................... 162 60 151 71
Sales returns reserve................................... 281 245 149 377
Year ended December 31, 1997:
Allowance for doubtful accounts......................... 71 60 61 70
Sales returns reserve................................... 377 345 600 122
</TABLE>
32
<PAGE>
EXHIBIT 3.7
DSP GROUP, INC.
RESOLUTIONS FROM THE REGULAR MEETING
OF
THE BOARD OF DIRECTORS
November 3, 1997
AMENDMENT OF BYLAWS AND APPOINTMENT OF DIRECTOR
On motion duly made and seconded, the following resolution was
unanimously adopted:
RESOLVED, that Section 3.2 of the Bylaws of the corporation be and it is
hereby amended to fix the exact number of directors at five (5) until changed
pursuant to such section.
<PAGE>
EXHIBIT 10.24
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into this 1st day of June, 1997 by and
between DSP Semiconductors, Ltd., of Givat Shmuel, a company existing under
the laws of the State of Israel (hereinafter the "Company"), and Igal Kohavi
of 7 Simtat Hagderot, Savyon, Israel (hereinafter "Kohavi"), effective as of
the 1st day of June, 1997, (the "Effective Date").
RECITAL
The Company agreed to employ Kohavi as Chairman of the Board, in the
framework of which Kohavi shall serve as Chairman of the Board of its US
parent company, DSP Group, Inc. and Kohavi agrees to such employment, on the
terms and subject to the conditions set forth herein.
AGREEMENT
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. EMPLOYMENT DUTIES
1.1. KOHAVI DUTIES
1.1.1. Kohavi shall perform the responsibilities of the Chairman
of the Board of the Company, as well as those as Chairman
of the Board of its US parent company, DSP Group, Inc.,
and any responsibilities incidental thereto, all such, as
stated, to be commensurate with his background, education,
experience and professional standing. It is acknowledged
that Kohavi will continue to have some certain outside
activities, but those activities should not consume more
than 10% of his traditional working time.
1.1.2. Kohavi acknowledges that his employment with the Company
will require frequent travel spanning extended periods
outside Israel. Furthermore, Kohavi agrees to extensive
world-wide travel under his employment with the Company.
1.1.3. Kohavi understands and acknowledges that as his position
is a senior managerial position in substance, as defined
in the Work and Rest Hours Law, 1951, and requires a high
level of trust, the provisions of said law shall not apply
to Kohavi and Kohavi agrees that he may be required to
work beyond the regular working hours of the Company, for
no additional compensation other than as specified in this
Agreement.
1.1.4. Kohai agrees and undertakes throughout the Employment Term
not to receive any payment, compensation or any other
benefit from any third party directly or indirectly
related to his employment hereunder or to the Company or
its parent company, DSP Group, Inc.
1.1.5. Kohavi agrees and undertakes not to perform any act or to
omit to perform any act which may breach his fiduciary
duty to the Company or its parent
1
<PAGE>
company, DSP Group, Inc. or which may place him in a
position of conflict of interest with the objectives of
the Company or its parent company, as the case may be. In
addition, Kohavi agrees and undertakes to promptly inform
the Company and its parent company, DSP Group, Inc., of
any such matter which may place him in such a situation of
potential conflict of interest.
2. TERM
This Employment Agreement commenced as of the Effective Date and shall
continue indefinitely, unless sooner terminated under the terms of this
Agreement. As used herein, the term "Employment Term" refers to the
entire period of employment of Kohavi under this Agreement, beginning
June 1, 1997.
3. COMPENSATION
Kohavi shall be compensated as follows:
3.1. FIXED SALARY
3.1.1. Kohavi shall receive a fixed monthly Gross Salary of NIS
69,295 (the "Gross Salary"), payable on a monthly basis.
The Gross Salary shall be adjusted monthly to the Consumer
Price Index (the "Index"). The Gross Salary shall be
adjusted to the monthly increase of the last published
Index, in comparison to the last published Index Known at
the time of execution of this Agreement.
3.1.2. It is hereby agreed by the parties that the Gross Salary
adjustments according to the Index, shall be deemed to
include any adjustments for Cost of Living Increase
("Tosefet Yoker") that apply to Kohavi as an employee,
unless such adjustment to the Cost of Living Increase
shall be higher than the adjustment to the last published
Index in any given month, in which case the Index
adjustments shall be in respect of the Tosefet Yoker alone.
3.2. BONUS
During the Employment Term, Kohavi shall be entitled to receive an
annual bonus, at the sole discretion of the Board of Directors.
3.3. VACATION
Kohavi shall accrued paid vacation at the rate of 26 business days
for each twelve (12) months of employment. Kohavi may not
accumulate his vacation days for more than thirty-six (36) months
of employment.
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3.4. SICK LEAVE
Kohavi shall accrue sick leave at the rate of up to 30 days for
each twelve (12) months of employment and subject to Kohavi
producing medical certificates as shall be required by the
Company. Such sick days may be accumulated to up to 180 days, but
Kohavi shall not be entitled to receive any remuneration in
respect of any such days that are not actually used. Any payment
received by Kohavi from the Manager's Insurance under disability
payments shall be set off from the Gross Salary, and Kohavi hereby
irrevocably waive any claim or demand in relation to such
deduction including any claim or demand or suit that such
deduction has worsened in any way his terms of employment.
3.5. BENEFITS
3.5.1. During the term of Kohavi employment, Kohavi shall be
entitled to Manager's Insurance (Bituach Minhalim) in an
amount equal to 15.83% of the Gross Salary, which shall be
paid monthly to said Manager's Insurance Plan directly by
the Company. The insurance shall be allocated as follows:
(i) 8.33% in respect of severance compensation, (ii) 5% in
respect of pension and (iii) 2.5% of the Gross Salary in
respect of disability. An additional 5% of the Gross
Salary shall be deducted by the Company from the monthly
payment of Kohavi Salary as Kohavi contribution to said
Manager's Insurance.
3.5.2. The Manager's Insurance policy provided for Kohavi benefit
of shall be registered in Company's name. The
contributions to the Manager's Insurance Policy shall be
paid by the Company in lieu of any other legal obligation
to make payments or account of severance or pension in
respect of Kohavi employment during the Employment Term.
Should the provisions made for severance pay not cover the
amount owed by the Company to Kohavi by law, then the
Company shall pay Kohavi the difference, all in accordance
with Israeli law. Kohavi agreement to the last two
sentences shall exempt the Company from the requirement to
apply to the Minister of Labor and Welfare for an approval
under Section 14 of the Severance Pay Law; however, should
such application be deemed necessary, Kohavi signature
hereupon shall be deemed his consent to the Company's
application in Kohavi name in such matter.
3.5.3. The sums accumulated in the Manager's Insurance policy
shall be transferred to Kohavi upon termination of his
employment hereunder, unless Kohavi has committed an act
in breach of Kohavi's fiduciary duty towards the Company
or its parent company, DSP Group, Inc.
3.5.4. The Company shall provide and pay Kohavi Recreation Funds
(Dmai Havra'ah) at the rate required by law and
regulations.
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3.5.5. The Company shall contribute to a Continuing Education
Fund Chosen by it for the benefit of Kohavi in an amount
equal to 7.5% of his Gross Salary per month subject to
Kohavi's contribution of an additional 2.5% of his Gross
Salary per month.
3.5.6. The Company shall provide Kohavi with a car similar to
which he is driving today for use in connection with his
employment and for personal reasonable use. The Company
shall bear all expenses due to use and maintenance of the
car, in the same fashion as is customary with the Company.
3.5.7. The Company shall provide Kohavi with a telephone in his
private residence solely for use in connection with his
employment with the Company, and shall bear the expense of
the telephone bills, subject to timely presentation of
such bill by Kohavi to the Company.
4. EXPENSES
The Company shall reimburse Kohavi for his normal and reasonable
expenses incurred for travel, entertainment and similar items in
promoting and carrying out the business of the Company in accordance
with the Company's general policy, in effect from time to time. As a
condition of reimbursement, Kohavi agrees to provide the Company with
copies of all available invoices and receipts, and otherwise account to
the Company in sufficient detail to allow the Company to claim and
income tax deduction for such paid item, if item is deductible.
Reimbursement shall be made on a monthly, or more frequent, basis.
5. COVENANT NOT TO COMPETE
Kohavi agrees that during the Employment Term as Chairman of the Board
of the Company, he is and shall be in a position of special trust and
confidence and will have access to confidential and proprietary
information about the Company's business plan. Kohavi agrees that he
will not directly or indirectly, either as an employee, employer,
consultant, agent, principal, partner, stockholder, corporate officer,
director, or in any similar individual or representative capacity,
engage or participate in any business and any future Company's business
during the term of employment, including projects under consideration by
the Company at the time of termination during the term of his
employment, or in the event of a termination of employment for any
reason whatsoever for a period of two (2) years thereafter.
For the purposes of this section 5, the term "Company" shall also mean
any subsidiaries, any other affiliates or its parent company.
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6. CONFIDENTIALITY AND TRADE SECRETS
6.1. KNOW-HOW AND INTELLECTUAL PROPERTY
It is understood that the Company has developed or acquired and
will continue to develop or acquire certain products, technology,
unique or special methods, manufacturing and assembly processes
and techniques, trade secrets, written marketing plans and
customer arrangements, and other proprietary rights and
confidential information which are not in the public domain, and
shall during the Employment Term continue to develop, compile and
acquire said items (all hereinafter collectively referred to as
the "Company's Property"). It is expected that Kohavi will gain
knowledge of and utilize the Company's Property during the course
and scope of his employment with the Company, and will be in a
position of trust with respect to the Company's Property.
6.2. COMPANY'S PROPERTY
It is hereby stipulated and agreed that the Company's Property
shall remain the Company's sole property. It is further stipulated
and agreed by the parties, as a material inducement for the
Company having entered into this Agreement and remaining a party
hereto (subject to any early termination hereof by the Company),
that Kohavi shall be bound by the Confidential Disclosure and
Non-Use Agreement appended hereto as APPENDIX A.
In the event that Kohavi's employment is terminated, for whatever
reason, Kohavi agrees not to copy, make known, disclosure or use,
any of the Company's Property. Without derogating from the
Company's rights under the law of torts, Kohavi further agrees not
to endeavor or attempt in any way to interfere with or induce a
breach of any prior contractual relationship that the Company may
have with any employee, customer, contractor, supplier,
representative, or distributor for a period of two (2) years from
the date of any termination of Kohavi's employment with the
Company for any reason whatsoever. Kohavi agrees, upon termination
of employment, to deliver to the Company all confidential papers,
documents, records, lists and notes (whether prepared by Kohavi or
others) comprising or containing the Company's Property, without
retaining any copies thereof, and any other property of the
Company.
It is hereby agreed that a breach of sections 5 and 6 including
Appendix A hereto shall be considered as a material breach of this
Agreement
For the purposes of this section 6, the term "Company" shall also
mean any subsidiaries, any other affiliates or its parent company.
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7. TERMINATION
7.1. GENERAL
Either party may terminate this agreement, without cause, upon six
(6) months' advance written notice to the other party.
7.2. TERMINATION FOR CAUSE
The Company may immediately terminate Kohavi's employment at any
time for Cause. Termination for Cause shall be effective from the
receipt of written notice thereof to Kohavi. "Cause" shall be
deemed to include: (i) material neglect of his duties or a
material violation of any of the provisions of this Agreement,
which continues after written notice and a reasonable opportunity
(not to exceed seven (7) days) in which to cure; (ii) conviction
of any felonious offense; (iii) intentionally imparting
confidential information relating to the Company or its business
to third parties, other than in the course of carrying out his
duties hereunder. The Company's exercise of its rights to
terminate with Cause shall be without prejudice to any other
remedy it may be entitled at law, in equity, or under this
Agreement.
8. CORPORATE OPPORTUNITIES
In the event that during the Employment Term, any business opportunity
related to the Company's business shall come to Kohavi's knowledge,
Kohavi shall promptly notify the Company's Board of Directors of such
opportunity. Kohavi shall not appropriate for himself or for any other
person other that the Company, any such opportunity, except the express
written consent of the Board of Directors, in advance. Kohavi's duty to
notify the Company and to refrain from appropriating all such
opportunities shall neither be limited by, nor shall such duty limit,
the application of the general law of Israel relating to the fiduciary
duties of an agent or employee.
9. MISCELLANEOUS
9.1. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement and understanding
between the parties with respect to the subject matters herein,
and supersedes and replaces any prior agreements and
understandings, whether oral or written between them with respect
to such matters. The provisions of this Agreement may be waived,
altered, amended or repealed in whole or in part only upon the
written consent of both parties to this Agreement.
9.2. NO IMPLIED WAIVERS
The failure of either party at any time to require performance by
the other party of any provision hereof shall not affect in any
way the right to require such performance at any time thereafter,
nor shall the waiver by either party of a
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breach of any provision hereof be taken to be a waiver of any
subsequent breach of the same provision or any other provision.
9.3. PERSONAL SERVICES
It is understood that the services to be preformed by Kohavi
hereunder are personal in nature and the obligations to perform
such services and the conditions and covenants of this Agreement
cannot be assigned by Kohavi. Subject to the foregoing, and except
as otherwise provided herein, this Agreement shall inure to the
benefit of and bind the successors and assigns of the Company.
9.4. SEVERABILITY
If for any reason any provision of this Agreement shall be
determined to be invalid or inoperative, the validity and effect
of the other provisions hereof shall not be affected thereby,
provided that no such severability shall be effective if it causes
a material detriment to any party.
9.5. APPLICABLE LAW
This Agreement shall be governed by and construed in accordance
with the laws of the State of Israel.
9.6. NOTICES
All notices, requests, demands, instructions, or other
communications required or permitted to be given under this
Agreement or related to it shall be in writing and shall be deemed
to have been duly given upon delivery, if delivered personally, or
if given by prepaid telegram, or mailed first-class postage
prepaid, registered or certified mail, return receipt requested,
shall be deemed to have been given three (3) days after such
delivery, if addressed to the other party at the addresses as set
forth on the signature page below. Either party hereto may change
the address to which such communications are to be directed by
giving written notice o the other party hereto of such change in
the manner above provided.
9.7. MERGER, TRANSFER OF ASSETS, OR DISSOLUTION OF THE COMPANY
This Agreement shall not be terminated by any dissolution of the
Company resulting from either merger or consolidation in which the
Company is not the consolidated or surviving Company or a transfer
of all or substantially all of the assets of the Company. In such
even, the rights, benefits and obligations herein shall
automatically be assigned to the surviving or resulting company or
to the transferee of the assets.
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9.8. NO CONFLICTING AGREEMENTS
Kohavi declares that he is not bound by any agreement,
understanding or arrangement according to which the execution of
and compliance with this Agreement may constitute a breach or
default.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
DSP Semiconductors Ltd.
By: /s/ ELI AYALON /s/ IGAL KOHAVI
----------------------------------- -----------------------------------
Eli Ayalon Igal Kohavi
Title: President and CEO Israeli I.D. No. 06195705
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Exhibit 10.25
CompactRISC Technology License Agreement
This CompactRISC Technology License Agreement ("Agreement") is made and is
effective as of September 29, 1997 ("Effective Date") by and between, as one
party, National Semiconductor Corporation, a Delaware corporation with a place
of business at 2900 Semiconductor Drive, Santa Clara, CA 95051 ("National") and
as the other party, DSP Group, Inc., a Delaware corporation with a place of
business at 3120 Scott Boulevard, Santa Clara, CA 95054 and DSP Semiconductors
Ltd., an Israeli corporation having a principal place of business at 5 Shenkar
Street, Herzelia pituach 46120, Israel (collectively "DSP"). Either National or
DSP may be referred to herein as a Party of the Parties, as the case may
require.
RECITALS
WHEREAS, National has developed and owns certain rights, title and interest
in and to, or has the legal right to license, the Licensed Technology as that
term is defined below; and
WHEREAS, DSP has established considerable technical expertise in the licensing
of core technologies;
WHEREAS, DSP desires and intends to develop the technologies and development
tools for DSP's own cores and integrate such technologies and development tools
with the Licensed Technology;
WHEREAS, National desires to provide DSP and DSP's desires to acquire from
National a license permitting DSP to license third parties to use such Licensed
Technology solely in the design, manufacture and sale of silicon chip devices;
WHEREAS, National desires to grant, and DSP desires to receive, an option to
obtain a license permitting DSP to use such Licensed Technology in the design,
manufacture and sale of its own silicon chip devices; and
NOW THEREFORE, in consideration of the mutual covenants set forth hereinbelow
and other good and valuable consideration, the Parties hereto agree as follows:
1.0 DEFINITIONS
For all purposes under and in furtherance of this Agreement, the following terms
shall have the meanings set forth adjacent to them:
1.1. Average Sales Price or "ASP" shall mean the gross sales amount in U.S.
dollars invoiced or otherwise charged on an arm's length basis, by DSP
Sublicensees during a DSP fiscal quarter, or by National Sublicensees
during a National fiscal quarter, as applicable, for all Compliant Products
containing the same CompactRISC Core,[*].
- -------------------
[*] Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
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[*]The prototypes referenced in Section 4.1B shall not be
included in the calculation of the ASP. For the purpose of
calculating the Average Sales Price, Sales of Compliant Products
in other currencies shall be converted to United States dollars
according to the official rate of exchange for that currency, as
published in the Wall Street Journal (Western Edition) on the
last day of the fiscal quarter in which the Royalty accrued (or,
if not published on that day, the last publication day for the
Wall Street Journal (Western Edition) during that month).
1.2. Base Megacell Modules: The support modules which interface with the
CompactRISC Core, provided in synthesizable Verilog - XL HDL, which are
described in the Base Megacell Modules Specifications for the applicable
CompactRISC Core identified in Exhibit A attached hereto. Additional
Base Megacell Modules may be included hereunder as part of the Licensed
Technology under this Agreement by adding supplemental Exhibits numbered
A-1, A-2, A-3, etc. which have been signed and dated by the parties and
attached hereto.
1.3. CompactRISC (or "CR"): A National proprietary processor technology which
is based on Reduced Instruction Set Computer (RISC) architecture and has
the compact code generation of Complex Instruction Set Computer (CISC)
and [*].
1.4. CompactRISC Core: Each core described in the applicable architecture
specification identified in the attached Exhibit A and any supplements
thereto, synthesized from the Licensed Technology and provided in
synthesizable Verilog - XL HDL. As of the Effective Date, the
CompactRISC core designated by National as the CR16B is the only
CompactRISC Core licensed hereunder. [*] Additional CompactRISC Cores
developed or offered by National for general licensing purposes shall be
included hereunder as part of the Licensed Technology under this
Agreement upon their completion. For each such additional core, the
Parties shall negotiate in good faith and attach to this Agreement
supplemental sequential Exhibits for Exhibit A, as well as supplemental
sequential Exhibits for Exhibits C, D, F, M (if applicable) and Q which
shall contain reasonable terms and shall be signed and dated by the
Parties. The Parties agree that for any supplemental Exhibits D and F,
the numbers and percentages relating to DSP's payments to National and
the numbers and percentages relating to National's payments to DSP shall
be in the same [*] ratio currently reflected in Exhibit D and Exhibit F
attached hereto.
- -------------------
[*] Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
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1.5. Compliant Core: An implementation of a CompactRISC Core, which:
A. executes each and every instruction contained in the Instruction Set
for the applicable CompactRISC Core and no other additional
instructions;
B. implements the programmer's model as identified in the Programmer's
Reference Manual for the applicable CompactRISC Core;
C. is cycle by cycle compatible with the applicable supplied Verilog XL
model;
D. passes the Verification Program for the applicable CompactRISC Core;
and
E. has been verified in accordance with the provisions of Section 10.0.
1.6. Compliant Product: Any single silicon chip which contains one or more
Compliant Cores.
1.7. "Confidential Information" shall mean any information designated in
writing by either Party, by appropriate legend, as confidential and
any oral information disclosed by one Party to another under this
Agreement, provided that such information is designated as
confidential at the time of disclosure and is thereafter reduced to
writing for confirmation and sent to the other Party within thirty
(30) days after its oral disclosure and designated, by appropriate
legend, as confidential. Notwithstanding any failure to so identify
it, however, (i) the Licensed Technology; (ii) the Test Boards; and
(iii) the terms and conditions of this Agreement shall be deemed
Confidential Information.
1.8. DSP Sublicensee: Any third party to whom DSP has granted a license to
the Licensed Technology to design, manufacture and Sell Compliant
Products pursuant to this Agreement.
1.9. "End User License" shall mean a license agreement substantially
conforming to that agreement set forth in Exhibit N.
1.10. "Error" shall mean a problem with the Licensed Technology reported by
DSP to National or otherwise learned by National which causes the
Licensed Technology to malfunction or otherwise fail to perform in
accordance with the applicable Licensed Technology's documentation and
which can be demonstrated or duplicated by or for National.
1.11. "Fees" shall mean Sublicense Fees, Support Fees, Royalties and license
fees for Tools under Section 5.1B collectively.
1.12. Instruction Set: The instruction set for the applicable CompactRISC
Core defined in the Programmer's Reference Manual.
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1.13. License Charges: All fees (gross) payable to the licensing Party by
its Sublicensee for each license to the Licensed Technology per
licensed CompactRISC Core (with a one-seat Tools license), but
excluding fees for maintenance, support and royalties.
1.14. Licensed Technology: The CompactRISC Core(s), Base Megacell Module(s),
and Software, collectively, set forth in the attached Exhibit A and
any supplements thereto. The Parties may mutually agree to include
additional Licensed Technology under this Agreement by adding
appropriate signed and dated supplemental Exhibits (e.g. A-1, C-1,
D-1, F-1, etc.) which shall be attached hereto and incorporated herein
by reference.
1.15. National Intellectual Property Rights: Those patents, patent
applications, and copyrights identified in Exhibit M which will be
supplemented from time to time by National as needed as determined by
National.
1.16. National Sublicensee: Any third party to whom National has granted a
license to the Licensed Technology to design, manufacture and Sell
Compliant Products, but excluding (a) any third party who is licensed
under a broad cross-licensing agreement with National; and (b) those
parties set forth on Exhibit L attached hereto.
1.17. Port: A non-proprietary layout of a Compliant Core design created by
or for a Party, a DSP Sublicensee or a National Sublicensee and
targeted for a specific manufacturing process.
1.18. Programmer's Reference Manual: The document referenced in Exhibit A or
any supplements thereto for the applicable CompactRISC Core.
1.19. Sell: To sell, lease or otherwise transfer or dispose of the Compliant
Product, or to commence internal productive use thereof. ("Sold",
"Sale" and other forms of "Sell" shall have the same meaning.)
1.20. Software: The Tools and Test Suite collectively.
1.21. Sublicensee: A DSP Sublicensee or National Sublicensee, as applicable.
1.22. Subsidiary: A corporation or other entity of which more than fifty
percent (50%) of the stock or other equity interests entitled to vote
for election of directors or equivalent governing body is owned by a
party during the term of this Agreement, but such corporation or other
entity shall be deemed to be a Subsidiary only so long as such
ownership exists.
1.23. Support Charges: All fees (gross) payable to the licensing Party by
its Sublicensee for support and maintenance for each licensed
CompactRISC Core.
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1.24. Test Board: The hardware identified in Exhibit B and any supplements
thereto.
1.25. Test Chip: A device which complies with the Test Chip Specification
for the applicable CompactRISC Core identified in Exhibit B.
1.26. Test Program: The source code of the program and documentation for the
applicable CompactRISC Core identified in the attached Exhibit A and
any supplements thereto.
1.27. Test Suite: The Test Program and the Verification Program for the
applicable CompactRISC Core identified in the attached Exhibit A and
any supplements thereto. Additional Test Suites may be included
hereunder as part of the Licensed Technology under this Agreement by
adding supplemental Exhibits numbered A-1, A-2, A-3, etc. which have
been signed and dated by the parties and attached hereto.
1.28. Tools: The binary code of the programs and documentation for the
applicable CompactRISC Core identified in the attached Exhibit A and
any supplements thereto. To the extent that DSP is authorized to
distribute Tools, such Tools may be distributed as integrated, in part
or in whole, with DSP's own software tools. Additional Tools may be
included hereunder as part of the Licensed Technology under this
Agreement by adding supplemental Exhibits numbered A-1, A-2, A-3, etc.
which have been signed and dated by the parties and attached hereto.
1.29. Trademarks: The trademarks, service marks and logos set forth in
Exhibit O, as amended by National from time to time.
1.30. Translation: A direct translation of the Licensed Technology into an
alternate hardware description language made by or on behalf of a
Party, a DSP Sublicensee or a National Sublicensee [*]
1.31. Verification Program: The source code of the program and documentation
for the applicable CompactRISC Core identified in the attached Exhibit
A and any supplements thereto.
2.0 APPOINTMENT OF LICENSING REPRESENTATIVE
2.1. National hereby appoints DSP as its worldwide representative during
the term of this Agreement for the purpose of licensing the Licensed
Technology in accordance with the terms and conditions of this
Agreement. DSP hereby accepts the appointment by National as its
licensing representative of the Licensed Technology and agrees that it
will use commercially reasonable
- -------------------
[*] Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
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<PAGE>
efforts to license the Licensed Technology to DSP Sublicensees in
accordance with the terms and conditions of this Agreement.
2.2. DSP's appointment set forth in Section 2.1 above shall be exclusive,
provided that it shall not restrict in any way the right of National
and its Subsidiaries to use the Licensed Technology, including but not
limited to the rights to design, manufacture and Sell Compliant
Products, or to license the Licensed Technology to third parties.
2.3. DSP agrees and acknowledges that [*]
- -------------------
[*] Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
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[*]
2.4. DSP agrees that it will license the Licensed Technology to a DSP
Sublicensee in a written agreement consistent with the terms and
conditions set forth in this Agreement. DSP agrees that all licenses
granted to DSP Sublicensees to the Licensed Technology will include a
CompactRISC Core at a minimum, and except for granting additional
licenses to the Tools to such DSP Sublicensees, DSP will not license a
Base Megacell Module without a CompactRISC Core. Except as expressly
provided in Section 5.0, DSP itself, shall have no rights to use the
Licensed Technology or to make, use or Sell Compliant Products.
3.0 LICENSE TO DSP SUBLICENSEES
3.1. CompactRISC Core License.
A. Subject to the terms and conditions of this Agreement, National
hereby grants to DSP the right and license to grant to DSP
Sublicensees, under the National Intellectual Property Rights, a
worldwide, non-exclusive, nontransferable license, without right
of sublicense, to use the Test Boards, Development Boards, to use
and copy the Licensed Technology, to modify the Base Megacell
Modules and to use and develop (or have developed subject to
Section 3.1B) Translations and Ports to design, have designed
(subject to the Section 3.1B below), make, have made (subject to
Section 3.1B and except as provided in Section 3.1C below) use,
import, offer to Sell and Sell Compliant Products. DSP's license
grant to a DSP Sublicensee shall also include the right to
translate, reproduce and distribute, subject to the
confidentiality obligations set forth in Section 17.0, the
architecture specifications for the applicable CompactRISC
Core(s) and modify same in accordance with the guidelines set
forth in Exhibit A.
B. A DSP Sublicensee may exercise its right to have developed
Translations and Ports and to have designed and/or have made
Compliant Products provided that:
- the DSP Sublicensee notifies DSP of the identity of each
subcontracted designer or manufacturer within thirty (30) days of
appointment of such designer or manufacturer;
- the DSP Sublicensee shall provide each subcontracted manufacturer
with mask sets or data bases and only in hard macro format (GDSII
format or comparable);
- the DSP Sublicensee may provide each subcontracted manufacturer
with a Development Board provided to such DSP Sublicensee by DSP; and
- -------------------
[*] Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
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<PAGE>
- the DSP Sublicensee shall ensure that any subcontracted designer
or manufacturer agree in writing (i) to be bound by obligations of
confidentiality no less restrictive than those contained in Section
17; (ii) to use the materials provided by the DSP Sublicensee for the
sole purpose of providing the subcontract services and supplying
Compliant Products solely to the DSP Sublicensee. The DSP Sublicensee
shall remain responsible for any misuse by the subcontracted designer
or manufacturer of such materials.
C. Notwithstanding anything to the contrary contained herein, any
DSP Sublicensee which is a foundry or provides foundry services
shall not have any right to have Compliant Products manufactured
by any third party unless approved in advance by National. As of
the Effective Date, National has approved those companies set
forth in Exhibit V to have Compliant Products manufactured by a
third party should they become DSP Sublicensees. Upon DSP's
written request and National's approval, additional DSP
Sublicensees which are foundries or provide foundry services
shall be added to the approved list in Exhibit V by adding
supplemental sequential Exhibits V-1, V-2, etc. which shall be
signed and dated by the parties.
3.2. TOOLS LICENSE. National hereby grants to DSP the right and license to
grant DSP Sublicensees, under the National Intellectual Property
Rights, a non-exclusive, nontransferable license to:
- copy and use the Tools internally; As provided in Sections 3.2
and 3.3, "use" shall mean copying the Tools onto a number of computers
no greater than the number of seats licensed by such DSP Sublicensee,
and processing the instructions or statements contained therein, but
excluding disassembly, reverse assembly, or reverse compiling except
to the extent necessary to achieve inter-operability of an
independently created program with other programs. Disassembly,
reverse assembly, or reverse compiling of the Tools for the purpose of
Error correction is specifically prohibited;
- copy and distribute, and sublicense (provided that the end user
agrees to be bound by terms and conditions substantially similar to
those of the End User License) the use of the binary code of the
programs identified in Exhibit A;
- modify, copy, distribute, and sublicense (provided that the end
user agrees to be bound by the terms and conditions substantially
similar to those of the End User License) the use, modification and
compiling of, the source code of the programs identified in Exhibit A;
- modify the documentation identified in Exhibit A in accordance
with the guidelines attached hereto as Exhibit O and translate,
reproduce, use and distribute the documentation including any
modifications made thereto in accordance with this Section.
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3.3. TEST SUITE LICENSE. National hereby grants to DSP the right and
license to grant to DSP Sublicensees, under the National Intellectual
Property Rights, a non-exclusive, nontransferable license, without
right of sublicense, to reproduce and use internally only, the Test
Suite and applicable Test Suite documentation.
3.4. TRADEMARK LICENSE. National hereby grants to DSP the right and
license to grant to DSP Sublicensees, under the Trademarks, a
non-exclusive, nontransferable, royalty-free, paid-up, worldwide
license, without right of sublicense, to mark with the Trademarks all
data sheets and other collateral materials for Compliant Products in
accordance with the guidelines set forth in Exhibit O or such other
guidelines as National may issue to DSP from time to time. DSP shall
have no right or license to grant any DSP Sublicensee a right or
license to mark Compliant Products or the die packaging thereof with
the Trademarks. DSP is granted no other right, title or license to
the Trademarks or any other National trademark.
4.0 ADDITIONAL AGREEMENT OF PARTIES
4.1. DSP shall include the following provisions in each license agreement
with a DSP Sublicensee:
A. National has developed and owns certain right, title and interest
in and to the Licensed Technology. As between National, DSP and
the DSP Sublicensee, the Licensed Technology will at all time be
the property of National and National is an intended third party
beneficiary of such agreement.
B. A DSP Sublicensee may not distribute any Compliant Product prior
to verification in accordance with Section 10.0 of this
Agreement. DSP shall reserve the right to immediately terminate
each license agreement with a DSP Sublicensee for a breach of
this provision by a DSP Sublicensee, and shall terminate such
agreement upon National's written request if, within seven (7)
days of receiving written notice from DSP regarding such breach,
such DSP Sublicensee does not cease distribution of the
non-Compliant Product and perform verification in accordance with
Section 10.0 of this Agreement. Notwithstanding the foregoing, a
DSP Sublicensee may distribute a maximum of [*] prototype or
non-verified units of such device in connection with the
verification process of such device provided that (i) the DSP
Sublicensee and the recipient of such prototype have agreed in
writing that the prototype shall be used for internal evaluation
purposes only and that the recipient shall keep the recipient's
use of the prototype device as confidential; and (ii) the DSP
Sublicensee has provided DSP with a copy of the above-referenced
agreement.
C. Any questions from a DSP Sublicensee with respect to the Licensed
Technology shall be directed to DSP.
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[*] Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
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D. Each DSP Sublicensee must notify DSP in writing in the event that
any subcontracted designer or manufacturer breaches the
provisions referenced in Section 3.1(B). If such breach is not
capable of cure, or remains uncured within thirty (30) days, DSP
shall have the right to terminate the right of such designer or
manufacturer to design or manufacture Compliant Products as
applicable and shall so terminate such designer or manufacturer
upon National's written request.
E. DSP shall require each DSP Sublicensee to notify DSP in writing
of the number of copies of the Tools made by such DSP Sublicensee
during each DSP fiscal quarter in excess of a one (1) workgroup
seat license.
F. On the data sheets or other collateral materials for each
Compliant Product, each DSP Sublicensee must duplicate and apply
National's patent and other proprietary notices which National
shall provide to DSP from time to time in accordance with
Exhibits O and U. On any data sheets, collateral materials or
sales and support documentation, DSP and DSP Sublicensees may
substitute references to National with reference to themselves
and may otherwise delete references to National in accordance
with the guidelines set forth in Exhibit U. The Parties shall
reasonably agree to amend such guidelines as necessary or
desirable to protect the rights of National and its licensors in
and to the CompactRISC technology, the National Intellectual
Property Rights and the Trademarks.
G. Each DSP Sublicensee must reproduce and agree not TO remove or
obscure any notice incorporated in the Software or related
documentation provided to DSP by National to protect the National
Intellectual Property Rights or to acknowledge the copyright
and/or contribution of any third party developer. Each DSP
Sublicensee must incorporate corresponding notices and/or such
other markings and notifications as National may reasonably
require on all copies of Software and related documentation used
or distributed by each DSP Sublicensee.
H. Each DSP Sublicensee must provide to DSP from time to time and in
any event, within thirty (30) days from the date of National's
written request to DSP, (i) samples of data sheets and other
collateral materials of the DSP Sublicensee bearing the
Trademarks; (ii) copies of the Software and related documentation
and (iii) copies of the Tools documentation modified by the DSP
Sublicensee in order to verify compliance with the terms of this
Agreement. DSP shall provide such samples and copies to National
promptly after its receipt of same from the DSP Sublicensee. In
the event that such materials fail to comply with the terms set
forth in this Agreement, DSP shall so notify the DSP Sublicensee
who shall be required to cease use any such non-compliant
materials within thirty (30) days of the date that such materials
were determined by National or DSP, as applicable, to be
non-compliant, provided that if such materials were determined by
National to be non-compliant, National promptly informs DSP of
such determination.
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I. DSP shall have the right to provide National with a copy of the
following information, documents and/or samples sent by DSP or a
DSP Sublicensee: all documents regarding or in connection with an
event of default, the verification process referenced under
Section 10.0, Translations, Ports, and upon National's written
request, lists of all subcontracted designers and manufacturers,
Log Results (as defined below) and Test Chip Samples.
J. DSP shall have the right to immediately terminate any license
granted to a DSP Sublicensee, and will terminate any such license
upon National's written request, in the event such DSP
Sublicensee (i) challenges National's rights in the Trademarks,
or attempts to register the Trademarks or any other name or mark
owned by National or substantially similar thereto; or (ii)
brings any action against National or a National Sublicensee
claiming that the Licensed Technology as distributed by National
infringes a patent of such DSP Sublicensee, or that an
implementation of the Licensed Technology by National or a
National Sublicensee infringes a patent of such DSP Sublicensee;
provided that such license will not be terminated if such DSP
Sublicensee ceases such challenge or action within fifteen (15)
days of DSP's notice of its intent to terminate such license.
K. With respect to the Licensed Technology and any direct product
thereof, each DSP Sublicensee shall comply with i) any and all
export regulations and rules now in effect or as may be issued
from time to time by the Bureau of Export Administration of the
United States Department of Commerce or any other federal
governmental authority which has jurisdiction relating to the
export of technology from the United States of America; and ii)
any and all classification and export/reexport requirements of
the U.S. Export Administration Regulations. The obligations
under this Section 4.1K shall survive any expiration or
termination of each license agreement with a DSP Sublicensee.
4.2. Within forty-five (45) days after the end of each Party's fiscal
quarter, each Party shall provide the other Party with a list of the
license agreements entered into during the previous fiscal quarter by
such Party, setting forth the information in the form attached hereto
as Exhibit I.
4.3. Each licensing Party shall include a provision in its license
agreements with its Sublicensees which permits the licensing Party to
audit the books and records of its Sublicensees containing information
bearing upon the amount of fees payable to the licensing Party under
such agreement, under terms and conditions substantially similar to
those set forth in Section 16.4, and each licensing Party shall have
the right to disclose such information to the other Party.
4.4. Each licensing Party shall include a provision in its license
agreements with its Sublicensees which (i) provides the Licensing
Party with a copy of any Translations created by or on behalf of each
such Sublicensee; and (ii) grants
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<PAGE>
to the licensing Party a worldwide, non-exclusive, unrestricted
license with right of sublicense to such Translations. However, if
the licensing Party reasonably deems the obligations of this Section
4.4 to be a material obstacle to entering into such license agreement,
upon written request from the licensing Party, the other Party may
waive the requirements herein by submitting a written waiver to the
licensing Party.
4.5. DSP shall be required to provide [*]. DSP acknowledges, and National
agrees however, that [*] shall have the right to receive [*].
National shall provide DSP with [*]. DSP shall provide support and
maintenance services to National Sublicensees in accordance with the
terms set forth in Exhibit T. National has no obligation to provide
[*]. National may, at National's sole discretion, from time to time,
agree to provide [*].
4.6. Sale of Licensed Technology.
A. [*]
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[*]
B. [*]
[*]
4.7. [*]
4.8. DSP may contract with National for National to perform the testing and
verification of Test Chips at National's then current rates pursuant
to a separate written agreement executed by the Parties. National's
current rates are set forth in Exhibit P
4.9. National shall not directly enforce its rights as a third party
beneficiary for any breach under a license agreement between DSP and a
DSP Sublicensee without first providing DSP an opportunity to do so
within a reasonable period of time, such period to be determined at
National's reasonable discretion in light of the seriousness and
nature of the particular breach. In the event that the licensing Party
does not pursue collection of fees owed to it by its own Sublicensee,
the licensing Party shall cooperate with the other Party and take all
action required, including without limitation, executing and
delivering any documents, to assign to the other Party its rights to
collect from such Sublicensee the amount of fees that the other Party
would be entitled to receive hereunder had same been collected by the
licensing Party.
4.10. Each Party agrees that it will not knowingly solicit any party as a
potential Sublicensee which it knows to be substantially engaged in
negotiations with the other Party for a license to the Licensed
Technology.
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5.0 LICENSE TO DSP
5.1. Until such time as DSP has been granted a license to the Licensed
Technology pursuant to Section 5.2 or Section 5.3, DSP shall have no
rights to use the Licensed Technology for its own behalf except as
provided below:
A. DSP may itself install, use and copy the Test Suite and
documentation solely for the purpose of providing support to DSP
Sublicensees and National Sublicensees; and
B. DSP may itself exercise the license rights DSP may grant to DSP
Sublicensees under Section 3.2 and may use the Test Board and
Development Boards for the purpose of providing support to DSP
Sublicensees and National Sublicensees. Such license rights
under Section 3.2 are provided free of charge to DSP for a one
(1) workgroup seat license (which provides the right to make,
install and use five (5) separate copies of the Tools). DSP
shall notify National in writing of (i) each Tools license
granted by DSP to a DSP Sublicensee which provides such DSP
Sublicensee with more than a one (1) workgroup seat per license
(which provide each DSP Sublicensee with the right to make,
install and use five separate copies of the Tools); and (ii) the
number of copies of Tools made by DSP and each DSP Sublicensee in
excess of a one (1) workgroup seat license. DSP agrees to pay to
National, within forty-five (45) days after the end of DSP's
fiscal quarter, a license fee equal to National's then current
fees charged by National for such Tools, multiplied by the number
of copies of Tools made by DSP and DSP Sublicensees in excess of
the one(1) workgroup seat license allowance set forth above.
National's current fees are set forth in Exhibit Q.
5.2. National grants to DSP, under the National Intellectual Property
Rights, a worldwide, non-exclusive, nontransferable license, without
right of sublicense (except as permitted under Section 5.5 or as
permitted of DSP Sublicensees under Section 3.2), to those rights and
licenses which DSP is entitled to license or otherwise grant to DSP
Sublicensees under this Agreement with respect to each CompactRISC
Core selected in writing by DSP and to be set forth in the attached
Exhibit R on or after one of the following has occurred:
(i) National's receipt of DSP's payment to National in the
amount of the [*] sublicense fee set forth in Section I.A of
Exhibit D for applicable CompactRISC Core;
(ii) DSP's remittance of the [*] Sublicense Fee set forth in
Section I of Exhibit D for the applicable CompactRISC Core;
or
(iii) in the event DSP has remitted to National less than [*]
Sublicense Fees set forth in Section I of Exhibit C for the
applicable CompactRISC Core, upon DSP's payment in the
amount of the [*] sublicense fee set forth in Section I.A of
Exhibit D for the applicable CompactRISC Core,
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[*] Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
14
<PAGE>
less [*] percent ([*]%) for each such Sublicense Fee for the
applicable CompactRISC Core previously remitted.
5.3. [*] such that each Party shall be required to pay the applicable
percentage of Sublicense Fees, Support Fees and Royalties otherwise
due as set forth in the table below:
<TABLE>
<CAPTION>
Sublicense Fees
Date & Support Fees Royalties
<S> <C> <C>
Trigger Date plus 12 months [*]% [*]%
First Anniversary of Trigger Date [*]% [*]%
Second Anniversary of Trigger Date [*]% [*]%
Third Anniversary of Trigger Date [*]% [*]%
Fourth Anniversary of Trigger Date [*]% [*]%
Fifth Anniversary of Trigger Date [*]% [*]%
Sixth Anniversary of Trigger Date [*]% [*]%
Seventh Anniversary of Trigger Date [*]%
Eighth Anniversary of Trigger Date [*]%
Ninth Anniversary of Trigger Date [*]%
</TABLE>
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[*] Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
15
<PAGE>
<TABLE>
<S> <C> <C>
Tenth Anniversary of Trigger Date [*]%
Eleventh Anniversary of Trigger Date [*]%
</TABLE>
5.4. As of such effective date of the licenses set forth in Sections 5.2 or
5.3, DSP accepts all of the rights and assumes all of the obligations
and duties of a DSP Sublicensee as set forth under this Agreement.
DSP shall not be deemed a DSP Sublicensee for the purposes of
calculating (i) the Sublicense Fee and Support Fee due to National
pursuant to Section 13.2 and 14.2 below; (ii) the Sublicense Fee and
Support Fee due to DSP pursuant to Section 13.3 and 14.3 below; or
(iii) the number of license agreements pursuant to Section 2.3 above.
DSP shall pay Royalties on Compliant Products Sold by DSP in
accordance with Section 15.2.
5.5. Except as otherwise specified, DSP shall have the right to grant
sublicenses of the rights and licenses granted in Section 5.2 and 5.3
above only to Subsidiaries of DSP; provided, that (i) DSP shall cause
each Subsidiary to accept all of the rights and assume all of the
obligations and duties of a DSP Sublicensee provided under this
Agreement; and (ii) such sublicense will terminate upon the
termination of this Agreement for any reason. DSP shall itself pay
Royalties accrued by sublicensed DSP Subsidiaries (at the rate set
forth for DSP in Section 15.2). National's audit rights pursuant to
Section 16.3 shall apply to all DSP sublicensed Subsidiaries. DSP
shall be responsible for the performance by each such sublicensed
Subsidiary of all obligations contained herein.
6.0 PORTS LICENSE
6.1. Each Party hereby grants to the other Party an irrevocable, royalty
free, paid-up, non-exclusive, worldwide license, with right of
sublicense, to use, modify, have modified, make, have made, license,
sell or otherwise distribute Ports. Each Party agrees to provide to
the other Party Ports owned by such Party or licensed to such party
with the right to grant sublicense without the payment of royalties
within thirty (30) days following the verification of a Test Chip made
using such Port pursuant to Section 10.4.
7.0 TRANSLATIONS LICENSE
7.1. Each Party hereby grants to the other Party a royalty free, paid-up,
non-exclusive, worldwide license, with right of sublicense, to use,
modify, have modified, make, have made, license, sell or otherwise
distribute Translations. Each Party shall be required to provide to
the other Party any Translations owned by such Party or licensed to
such Party with the right to grant sublicenses without the payment of
royalties within thirty (30) days of each Party's receipt of same.
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[*] Omitted pursuant to a confidential treatment request. The material has
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16
<PAGE>
8.0 INTELLECTUAL PROPERTY RIGHTS
8.1. No license or other right is granted, by implication, estoppel or
otherwise, to DSP or any DSP Sublicensee under any patents,
Confidential Information, National Intellectual Property Rights,
Trademarks or other intellectual property rights now or hereafter
owned or controlled by National except for the licenses and rights
expressly granted in this Agreement. Except as expressly provided
above, DSP Sublicensees shall have no right to sell, supply, license
or otherwise distribute the Tools or the Test Suite.
8.2. Except as provided in this Agreement, all right, title and interest in
and to the Licensed Technology and Trademarks shall remain vested in
National.
9.0 DELIVERY OF LICENSED TECHNOLOGY; SALE OF TEST BOARDS AND
DEVELOPMENT BOARDS
9.1. National shall deliver to DSP the Licensed Technology in accordance
with the schedule set forth in Exhibit C attached hereto. The
Licensed Technology deliverables are the deliverables to be provided
by National, in the aggregate, for DSP, DSP's Subsidiaries and DSP
Sublicensees. In the event that National fails to meet any
deliverable date set forth in Exhibit C by more than ninety (90) days,
then thereafter the periods referenced under Section 2.3 shall be
extended on a day for day basis until National delivers such
deliverable.
9.2. National shall provide to DSP all revisions to the architecture
specification for each CompactRISC Core licensed hereunder as well as
architecture change notes ("ACN") to such specifications as they are
generally released by National.
9.3. National shall deliver to DSP five (5) Test Boards and DSP shall
deliver to National five (5) development boards in accordance with the
schedule set forth in Exhibit C attached hereto. Thereafter, upon a
Party's request, National shall sell Test Boards to DSP and DSP shall
sell development boards to National at each selling Party's then
current prices which shall be invoiced to the purchasing Party with
thirty (30) day payment terms. National shall also provide DSP with
the name of the manufacturer(s) for such Test Boards to enable DSP to
directly purchase the Test Boards under such terms and conditions as
may be negotiated between DSP and such manufacturer(s). National
shall also deliver to DSP in accordance with the schedule set forth in
Exhibit C one development board for DSP's evaluation purposes which
shall be returned to National.
9.4. Unless otherwise agreed in writing, National shall deliver the
deliverables referenced in Section 9.1, 9.2 and 9.3 to DSP at the
following address:
DSP Semiconductors
5 Shenkar Street
17
<PAGE>
Herzelia pituach 46120
ISRAEL
9.5. Neither Party shall be responsible for any costs incurred by the other
Party or the Sublicensees of the other Party in the design
translation, processing, or manufacture of masks or prototypes,
manufacture or production of silicon.
10.0 VERIFICATION OF COMPLIANT CORES
10.1. Each Compliant Core derived from the Licensed Technology on each
process to be used for volume manufacture must be verified prior to
incorporation of such Compliant Core in the manufacture, sale or
distribution of any Compliant Product. Compliant Cores shall be
verified by running a Test Chip through the applicable Verification
Program in accordance with the procedures set forth in this Section
10.0.
10.2. A DSP Sublicensee shall be required to develop and manufacture a Test
Chip for each Compliant Core derived from the Licensed Technology on
each process to be used for volume manufacture. A DSP Sublicensee
shall run each Test Chip through the applicable Verification Program
and deliver to DSP a copy of the log ("Log Results") and a minimum of
ten (10) samples of the Test Chip for verification.
10.3. DSP shall have the right to run each Test Chip through the applicable
Verification Program. National shall also have the right to run each
Test Chip through the applicable Verification Program, and upon
National's written request, DSP shall deliver the Log Results and Test
Chip samples to National for verification. Within fifteen (15) days
of DSP's receipt of the Log Results and Test Chip samples (i) from the
DSP Sublicensee; or (ii) generated by DSP or National, DSP shall
review the Log Results and Test Chip Samples and notify the DSP
Sublicensee in writing whether the Compliant Core has been verified.
The Compliant Core shall be verified upon DSP's approval or National's
approval, as applicable, of the Log Results. The Log Results will be
approved only when they indicate that no errors have been detected or
where any errors detected have been waived pursuant to a writing
signed by National.
10.4. In the event that the Test Chip fails the verification process, DSP
shall provide the DSP Sublicensee with written notice that the
Compliant Core has not been verified and shall provide the DSP
Sublicensee with details of the failure. The DSP Sublicensee shall
use reasonable efforts to correct the errors. DSP and the DSP
Sublicensee shall repeat the above process until (i) the Compliant
Core has been verified; or (ii) the DSP Sublicensee withdraws the Test
Chip from the verification process.
10.5. Provided that the Test Chip has been verified in accordance with
Section 10.3, the DSP Sublicensee may distribute Compliant Products
containing such
18
<PAGE>
Compliant Core without further verification. DSP shall provide
National with [*] ([*]) Test Chip samples for each such Compliant Core
which has been verified in accordance with the above procedure.
11.0 TRAINING
11.1. National shall provide to DSP, free of charge, a one-time standard
training program at National's facilities in Israel to a maximum of [*]
([*]) of DSP's personnel. The training program shall include [*] ([*])
hours of training to be provided over a [*] ([*]) day period on a
schedule mutually agreeable by the Parties and shall cover software
and applications training, system design, design verification and
testing.
11.2. DSP may, subject to availability of resources, contract with National
for addition training at National's standard rates then in effect
pursuant to a separate written agreement executed by the Parties. A
schedule of National's standard rates as of the Effective Date is set
forth in Exhibit J.
12.0 SUPPORT AND MAINTENANCE SERVICES
12.1. Subject to the limitations set forth below and DSP maintaining its
status as National's exclusive licensing representative of the
Licensed Technology pursuant to Section 2.0, during the term of this
Agreement, National shall provide [*] up to a maximum of [*] hours
annually of the support and maintenance services described in Sections
12.3 -12.8 to [*]([*]) individuals designated by DSP (who may be
substituted by DSP pursuant to DSP's prior written notice to
National). National shall not be obligated to respond to inquiries
from anyone other than the four designated individuals. National
shall have no obligation to provide any support or maintenance
services to DSP Sublicensees.
12.2. If DSP requests services not covered by this Agreement (including but
not limited to support and maintenance exceeding the limitations set
forth in Section 12.1 above, DSP-requested onsite services, or custom
programming services), the requested services shall be provided upon
the prior written agreement of the Parties, at National's standard
rates then in effect. A schedule of National's standard rates as of
the Effective Date is set forth in Exhibit K.
12.3. National shall provide reasonable telephone and electronic mail
support regarding the operation, design and other technical aspects of
the Licensed Technology. Telephone support will be available Monday
through Fridays (excluding National holidays) from 9:00 am to 5:00 pm
Pacific time.
12.4. National shall promptly notify DSP via electronic mail of the
existence of any positively identified Errors in the form of the
report set forth in Exhibit S ("Error Report). National shall provide
DSP with any Error corrections to the
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Licensed Technology at such time as they are generally made available
to National Sublicensees.
12.5. National shall provide DSP with all modifications, enhancements and
updates to the Licensed Technology created by National which are
generally made available to National Sublicensees or that do not
result in the creation of a new product, core or tool as determined by
National in its reasonable discretion. Such modifications shall be
provided by National to DSP at such time as they are generally made
available to National Sublicensees. For example, and not by way of
limitation, the Parties agree that the following examples constitute
the creation of new cores and tools: i) the change of a CompactRISC
Core pipeline length; ii) the making of a synthesizable CompactRISC
Core; iii) the execution of additional instructions to those contained
in the Instruction Set for the applicable CompactRISC Core; and iv)
the addition of C++ to the Tools. Error corrections and Translations
are examples of modifications or enhancements which do not constitute
a new product.
12.6. National shall correct Errors, to the extent reasonably possible, in
the Licensed Technology. DSP shall provide National with such
samples, technical information and assistance as National may
reasonably require to enable National to provide support and
maintenance services. If National reasonably determines that such
Errors are caused by mistakes or errors contained in the applicable
Licensed Technology documentation, National shall promptly issue
corrections to such documentation and shall not be required to correct
the Licensed Technology.
12.7. National shall use commercially reasonable efforts to provide a
resolution to any Error. DSP shall notify National via electronic
mail of any Errors in the Error Report form. Errors will be
preliminarily designated by DSP as follows:
"Critical". The Licensed Technology is not usable. Data
corruption or system crashes are almost certain. No procedural
work-around exists.
"Severe". The Licensed Technology is usable with severe
limitation. Data corruption or system crashes are possible. No
effective procedural work-around exists.
"Moderate". The Licensed Technology is usable with moderate
limitation because minor features are affected. There is no data
corruption, system crashes or loss of production. A procedural
work-around exists.
"Minor". The Licensed Technology is usable, but has some
(cosmetic) problems. There is no data corruption, system crashes
or loss of production. A procedural work-around exists.
12.8. Upon National's receipt of an Error Report and test case from DSP's
designated technical contact via e-mail, National will take corrective
action so as to respond and resolve the reported Error as set forth in
this Section 12.8
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<PAGE>
based upon the Error classification as determined by the mutual
agreement of the Parties. National's Error responses and resolutions
shall be classified as set forth below. For the purposes of this
section, a day refers to a working day as opposed to calendar day:
"First Level". Acknowledgement or receipt of Error Report and
verbal communication of initial plan of action to resolve
problem.
"Second Level". Patch or work-around, temporary fix, or update
or major release, including applicable document changes.
"Final Level". Official Fix, update or major release, including
applicable document changes.
<TABLE>
<CAPTION>
FIRST LEVEL SECOND LEVEL FINAL LEVEL
<S> <C> <C> <C>
Critical........................ [*] [*] [*]
Severe.......................... [*] [*] [*]
Moderate........................ [*] [*] [*]
Minor........................... [*] [*] [*]
</TABLE>
12.9. National shall be obligated to provide maintenance and support to the
extent the Licensed Technology remains unmodified, or modified only by
National, and properly maintained at the revision levels supported by
National, which shall include, at a minimum, the most recent revision
level and the revision level immediately preceding the most recent
revision level. National shall not be responsible for providing an
Error correction for a prior revision level if the Error is corrected
in the most recent revision level. If it is reasonably determined by
National that any apparent Error with the Licensed Technology is due
to alterations of the Licensed Technology by DSP or any third party,
the use of an unsupported version of the Licensed Technology, or
failure to comply with the terms and conditions of this Agreement,
National shall notify DSP, and if DSP still wishes to receive Error
corrections, the time and expenses associated with such support effort
will be billed by National at its standard rates then in effect.
13.0 SUBLICENSE FEES
13.1. SUBLICENSE FEES PAYABLE GENERALLY. Subject to the terms and
conditions set forth below and the provisions of Sections 2.3 and 5.3,
if applicable, in the event that either DSP or National grants a
license to the Licensed Technology to a DSP Sublicensee or a National
Sublicensee, respectively, the licensing Party shall pay to the other
Party a Sublicense Fee for each licensed CompactRISC Core as described
below in accordance with the payment provisions set forth in Section
16.0. In the event that the licensing Party grants a license to the
Licensed Technology containing two or more CompactRISC Cores under one
license agreement, the licensing Party shall be
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21
<PAGE>
required to pay to the other Party a separate Sublicense Fee for each
licensed CompactRISC Core. For each licensed CompactRISC Core, the
Sublicense Fee shall be equal to the greater of the applicable:
A. minimum sublicense fee for the applicable CompactRISC Core
specified in Exhibit D; or
B. percentage of the License Charges payable to the licensing Party
for the applicable CompactRISC Core specified in Exhibit D.
Each Sublicense Fee shall be paid a) within forty-five (45) days of
the end of the licensing Party's fiscal quarter in which the
applicable CompactRISC Core was licensed; or b) if, pursuant to the
terms of the license agreement for the applicable CompactRISC Core,
License Charges are paid in installments, then the licensing Party
shall pay the applicable Sublicense Fee in installments proportional
to the License Charges paid by the DSP Sublicensee or National
Sublicensee, within forty-five (45) days following the end of the
licensing Party's fiscal quarter in which the License Charges were
paid, provided however, that the total Sublicense Fee must be paid in
full by the licensing Party no later than twelve (12) months following
the date that the applicable CompactRISC Core was licensed. Each
licensing Party, prior to entering into a license agreement with a
Sublicensee, may submit to the other Party for its prior written
approval a request in writing to extend such twelve (12) month period.
13.2. SUBLICENSE FEES PAYABLE BY DSP TO NATIONAL. For each license to a
CompactRISC Core granted by DSP to a DSP Sublicensee, DSP shall pay to
National the Sublicense Fees for the applicable CompactRISC Core set
forth in Exhibit D.
13.3. SUBLICENSE FEES PAYABLE BY NATIONAL TO DSP. [*]
14.0 SUPPORT FEES
14.1. SUPPORT FEES PAYABLE GENERALLY. Subject to the terms and conditions
set forth below and the provisions of Sections 2.3 and 5.3, if
applicable, in the event that either DSP or National grants a license
to the Licensed Technology to a DSP Sublicensee or a National
Sublicensee, respectively, the licensing Party shall pay to the other
Party an annual Support Fee for [*] for each licensed CompactRISC Core
as described below in accordance with the payment provisions set forth
in Section 16.0. In the event that the licensing Party grants a
license to the Licensed Technology containing two or more CompactRISC
Cores under one license agreement, the licensing Party shall be
required to pay to the other Party a separate annual Support Fee for
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[*] Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
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each licensed CompactRISC Core. For each licensed CompactRISC Core
licensed to a DSP Sublicensee or a National Sublicensee, the licensing
Party shall be required to pay an annual Support Fee for [*] which
shall be equal to the greater of the applicable:
A. minimum annual support fee specified in Exhibit E; or
B. percentage of the annual Support Charges payable to the licensing
Party specified in Exhibit E.
[*]. In such event, each licensing Party shall be required to pay the
applicable percentage of the annual Support Charges payable to the
licensing Party as specified in Exhibit E. Each annual Support Fee
shall be paid a) within forty-five (45) days of the end of the
licensing Party's fiscal quarter in which the applicable CompactRISC
Core was licensed; or b) if, pursuant to the terms of the license
agreement for the applicable CompactRISC Core, Support Charges are
paid in installments, then the licensing Party shall pay the
applicable Support Fee in installments proportional to the Support
Charges paid by the DSP Sublicensee or National Sublicensee, within
forty-five (45) days following the end of the licensing Party's fiscal
quarter in which the Support Charges were paid, provided however, that
the first annual Support Fee must be paid in full by the licensing
Party no later than twelve (12) months following the date that the
applicable CompactRISC Core was licensed; and each subsequent annual
Support Fee must be paid in full by the licensing Party no later than
the end of each subsequent 12 month period. Each licensing Party,
prior to entering into a license agreement with a Sublicensee, may
submit to the other Party for its prior written approval a request in
writing to extend such twelve (12) month period.
14.2. SUPPORT FEES PAYABLE BY DSP TO NATIONAL. For each license to a
CompactRISC Core granted by DSP to a DSP Sublicensee, DSP shall pay to
National the annual Support Fee for [*] as set forth in Exhibit E.
14.3. SUPPORT FEES PAYABLE BY NATIONAL TO DSP. [*]
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[*] Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
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[*]
15.0 ROYALTIES
15.1. ROYALTIES GENERALLY. Subject to the terms and conditions set forth
below and the provisions of Sections 2.3 and 5.3, if applicable, in
the event either DSP or National grants a license to the Licensed
Technology to a DSP Sublicensee or a National Sublicensee,
respectively, the licensing Party shall pay to the other Party
Royalties for each licensed CompactRISC Core as described below in
accordance with the payment provisions set forth in Section 16.0. In
the event that the licensing Party grants a license to the Licensed
Technology containing two or more CompactRISC Cores under one license
agreement, the licensing Party shall be required to pay to the other
Party separate Royalties for each licensed CompactRISC Core. For each
licensed CompactRISC Core, the Royalty shall be equal to [*] the
amounts calculated under subparagraphs A, B and C below:
A. the applicable percentage of the actual royalty payable to the
licensing Party pursuant to such license for the applicable licensed
CompactRISC Core specified in Exhibit F;
B. the [*] of the applicable [*] royalty for the applicable licensed
CompactRISC Core specified in Exhibit F:
i. based upon the applicable [*] for the cumulative volume of
Compliant Products Sold containing the applicable licensed
CompactRISC Core, multiplied by the number of Compliant
Cores within Compliant Products Sold during the subject
fiscal quarter; or
ii. based upon the applicable [*] Dollar Cap per Compliant Core
for the cumulative volume of Compliant Products Sold
containing the applicable licensed CompactRISC Core,
multiplied by the number of Compliant Cores for the
applicable licensed CompactRISC Core within Compliant
Products Sold during the subject fiscal quarter;
[*]
C. the applicable [*] royalty for the applicable licensed
CompactRISC Core specified in Exhibit F based upon the applicable
[*] Dollar Amount per Compliant Core for the cumulative volume of
Compliant Products Sold containing the applicable licensed
CompactRISC Core, multiplied by the number of Compliant Cores
within Compliant Products Sold during the subject fiscal quarter.
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[*] Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
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Royalty payments shall be made quarterly, within forty-five (45) days
of the end of the licensing Party's fiscal quarter, and shall be paid
with respect to Compliant Products Sold in the immediately preceding
fiscal quarter.
15.2. ROYALTIES PAYABLE BY DSP TO NATIONAL. For each license to a
CompactRISC Core granted by DSP to a DSP Sublicensee, DSP shall pay to
National the Royalties for the applicable CompactRISC Core set forth
in Exhibit F. For each CompactRISC Core to which DSP obtains the
licenses set forth in Sections 5.2 or 5.3, DSP shall pay to National a
royalty equal to the amount set forth in under the "[*] Dollar Amount"
column in Exhibit F, Section I.B per Compliant Core for the highest
cumulative volume of Compliant Products Sold containing the applicable
licensed CompactRISC Core, multiplied by the number of Compliant Cores
within Compliant Products Sold during the subject fiscal quarter (e.g.
for CR16B, $[*] per Compliant CR16B Core multiplied by the number of
Compliant CR16B Cores within Compliant Products Sold during the
subject fiscal quarter).
15.3. ROYALTIES PAYABLE BY NATIONAL TO DSP. [*]
15.4. NON-MARKET DISPOSITIONS. [*]
15.5. FINISHED PRODUCTS. [*]
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[*] Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
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16.0 PAYMENTS AND ACCOUNTING
16.1. Within forty-five (45) days after the end of each Party's fiscal
quarter, each Party shall furnish to the other Party a Payment Report,
in the form attached hereto as Exhibit H, showing all Fees payable by
each Party for such fiscal quarter. If no Fees are due and payable by
each Party for such fiscal quarter, that fact shall be shown on the
applicable report.
16.2. Within such forty (45) day period, each licensing Party shall pay to
the other Party the Fees payable hereunder for such fiscal quarter.
All payments hereunder shall be in United States dollars. In the
event a licensing Party does not submit the required amount of Fees
payable for any quarter and has notified the other Party in writing
that its failure to pay specified amounts results from the non-payment
by its Sublicensee for a specified license agreement, said licensing
Party shall have until the next reporting period to remedy said
default by either i) submitting to the other Party the total amount of
Fees due with respect to such license agreement for both the previous
quarter and the current quarter; or ii) providing the other Party with
a copy of the written notice of termination of such license agreement
whereupon, subject to the assignment provisions of Section 4.9, the
other Party shall waive the Licensing Party's obligation to pay
amounts of Fees due attributable to such license agreement. In the
event the licensing Party does not remedy the non-payment as set forth
above, the other Party may exercise its rights under Section 21.2(A).
16.3. In the event that the United States and/or Israel imposes withholding
or other taxes on payments to be made hereunder, the Party making such
payment may deduct such taxes from the payments. The Party making
such payments shall send to the other Party the tax payment forms
and/or such other supporting data as may be required by the applicable
tax authority to establish that such taxes have been deducted and paid
by the Party making payment on behalf of the other Party.
Notwithstanding the foregoing, the Parties agree that any payments due
hereunder which are calculated on amounts received from each licensing
Party's Sublicensees shall be based on gross amounts due to the
licensing Party without deduction for any withholding taxes made by
such Sublicensees.
16.4. With respect to the Fees set forth herein, each licensing Party shall
keep complete and accurate records. These records shall be maintained
for a period of at least three (3) years from the date of payment,
notwithstanding the expiration or other termination of this Agreement.
Each Party shall be entitled to have an independent auditor examine
and audit not more than once a year unless the preceding audit
revealed a discrepancy, all such records and such other records and
accounts as may contain, under recognized accounting practices,
information bearing upon the amount of Fees payable hereunder. The
auditor shall be bound under an appropriate confidential disclosure
agreement to keep confidential the details of the business affairs of
the Party
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being audited and to limit disclosure of the results of any audit only
to the sufficiency of the accounts and the amount, if any, of any
additional payment or any other payment or adjustment that should be
made. Such audit shall be performed during normal business hours at a
mutually agreed upon date and, except as set forth below, shall be
paid by the Party engaging the auditor. In the event that any errors
in payment shall be determined, such errors shall be corrected by
appropriate adjustment in payment in the fiscal quarter during which
the error is discovered. Should the amount of any such error and/or
omission exceed five percent (5%) of the total amount that should have
been paid for the audited period, the party making such error shall
reimburse the amount of such underpayment and the reasonable charges
of the auditor, and interest on the overdue amount calculated using
the prime rate published by Bank of America plus two percent (2%) from
the date of accrual of such obligation until complete payment of the
underpayment plus interest.
16.5. Unless otherwise notified in writing of a change of address, each
licensing Party shall send the Payment Reports and Fees referenced
under this section to the other Party at the following addresses:
REPORTS AND PAYMENT TO NATIONAL
National Semiconductor Corporation
2900 Semiconductor Drive, M/S D3-579
Santa Clara, California 95051
Attn: Intellectual Property Group, Royalties
REPORTS AND PAYMENT TO DSP
DSP Group, Inc.
3120 Scott Boulevard
Santa Clara, California 95054
Attn: Irving Gold
17.0 CONFIDENTIAL INFORMATION
17.1. Each Party shall protect against the unauthorized use or disclosure of
Confidential Information of the other Party received hereunder with
the care and diligence generally exercised by the receiving Party with
respect to its own information of like importance but in no event
shall such care and diligence be less than a reasonable care and
diligence.
17.2. Notwithstanding any other provision of this Agreement, no information
received by a Party hereunder shall be Confidential Information if
said information is:
A. published or otherwise made available to the public other than by a
breach of this Agreement by the receiving Party,
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B. received by a Party from an independent third party without any
apparent restriction on its dissemination by said third party,
C. approved for release in writing by the Party designating said
information as Confidential Information,
D. known to or independently developed by the Party receiving
Confidential Information hereunder without reference to or use of
said Confidential Information, or
E. disclosed to a third party by the Party transferring said
information hereunder without restricting its subsequent
disclosure by said third party.
17.3. Disclosure of any Confidential Information by a Party hereunder shall
not be precluded if such disclosure is required by law or is in
response to a valid order of a court or other government body of the
United States or Israel or any political subdivision thereof;
provided, however, that the receiving Party shall: (i) immediately
notify the other Party of such order and (ii) first make a good faith
effort to obtain a protective order requiring that the Confidential
Information so disclosed be used only for the purpose for which such
order was issued.
17.4. Each Party agrees that, after the announcement referenced in Section
22.3 below, each Party shall be entitled to disclose the general
nature of this Agreement, and each Party shall be entitled to
generally discuss its contractual obligations under this Agreement,
excluding any financial terms, to prospective sublicensees, but that
the terms and conditions of this Agreement shall otherwise be treated
as Confidential Information and neither Party will disclose the terms
and conditions to any third party without the prior written consent of
the other Party, provided, however, that each Party may disclose the
terms and conditions of this Agreement and Payment Reports received
pursuant to Section 16.1, to (i) legal counsel of the Parties,
accountants, and other professional advisors; (ii) in confidence to
banks, investors and other financing sources and their advisors; (iii)
in confidence, in connection with an actual or prospective merger or
acquisition or similar transaction; or (iv) as provided in Section
17.3. In addition, National may disclose the total unit sales of
Compliant Products.
17.5. DSP acknowledges that the Licensed Technology and Test Boards are
extremely sensitive information of National. Accordingly, DSP agrees
to restrict access to and use of such materials to only those
employees, agents and consultants who require access as part of
Licensee's exercise of its rights and fulfillment of its obligations
under this Agreement and who do not constitute an unreasonable risk of
unauthorized use or disclosure of the CompactRISC technology. DSP and
DSP Sublicensees may not use any Confidential Information in the
development of any product other than the Compliant Products and DSP
shall take, and DSP shall ensure that all DSP
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Sublicensees shall take all reasonably necessary steps to ensure that
only those persons who are working on the design, development,
manufacturing or marketing of Compliant Products or otherwise have a
"need to know" in order for such DSP Sublicensee to exercise their
rights and fulfill their obligations under their license agreements
with DSP have access to or obtain any such Confidential Information.
Each Party shall, and DSP shall require all DSP Sublicensees to obtain
the execution of confidentiality agreements with its employees, agents
and consultants having access to the Confidential Information and
shall diligently enforce such agreements.
17.6. All "Confidential Information" disclosed by National pursuant to the
Confidential Disclosure Agreement executed between National and DSP
dated January 22, 1997 shall be deemed Confidential Information
pursuant to this Section 17.0.
17.7. Except as provided in Section 21.3A below, upon expiration or
termination of this Agreement, all Confidential Information and copies
thereof shall be immediately returned to the disclosing Party, except
for one archival copy which shall be used solely in the event of a
dispute concerning this Agreement.
18.0 REPRESENTATIONS AND WARRANTIES; DISCLAIMERS
18.1. The Parties hereby agree, represent and warrant to each other that
they have the full and complete right to make the license grants made
under this Agreement without the need to obtain any consents not
already obtained, and to make the transfer of information as provided
for herein. The Parties further represent and warrant that the
provisions of this Agreement and their performance thereunder do not
violate their Articles of Incorporation or their By-laws or constitute
a breach of any agreement with or contractual obligation owed to
another person.
18.2. DSP agrees, represents and warrants that [*]
18.3. National agrees, represents and warrants that [*]
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[*] Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
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[*]
18.4. National agrees, represents and warrants that [*]
18.5. [*]
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[*] Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
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19.0 INFRINGEMENT
19.1. Subject to the limitations set forth in this Section, National will
indemnify, defend and hold DSP harmless against any claim, suit or
proceeding brought against DSP, and against all damages, losses,
liabilities, and costs (including, without limitation, reasonable
attorneys' fees) arising out of or resulting from a claim that the
exercise of any right or license granted to DSP under this Agreement
(including, without limitation, the licensing of the Licensed
Technology by DSP under Section 3 and the use of the Licensed
Technology by DSP under Section 5) constitutes an infringement of any
intellectual property right enforceable in [*]. IN NO EVENT SHALL
NATIONAL'S LIABILITY UNDER THIS SECTION 19.1 WITH RESPECT TO THIRD
PARTY CLAIMS OF PATENT INFRINGEMENT EXCEED THE TOTAL AMOUNT OF FEES
PAID BY DSP TO NATIONAL UNDER THIS AGREEMENT.
19.2. Subject to the limitations set forth in this Section, National will
defend any claim, suit or proceeding brought against any DSP
Sublicensee and pay damages and costs awarded against such DSP
Sublicensee, if based on a claim that the exercise of the rights
granted to such DSP Sublicensee by DSP pursuant to this Agreement and
in accordance with the terms of this Agreement constitutes an
infringement of any intellectual property right enforceable in [*].
IN NO EVENT SHALL NATIONAL'S LIABILITY UNDER THIS SECTION 19.2 WITH
RESPECT TO THIRD PARTY CLAIMS OF PATENT INFRINGEMENT EXCEED THE TOTAL
AMOUNT OF FEES PAID BY A DSP SUBLICENSEE TO DSP AND REMITTED TO
NATIONAL PURSUANT TO THIS AGREEMENT. The Parties agree to each DSP
Sublicensee shall be an intended third party beneficiary of National's
obligations herein. In addition, upon DSP's written request, National
agrees to provide confirmation to potential DSP Sublicensees of
National's obligations to DSP Sublicensees under this section 19.2.
19.3. National's obligations under this Section 19.0 are conditioned upon
receiving prompt written notice from DSP and/or the DSP Sublicensee,
as applicable, and being given full and complete authority,
information and assistance (at National's expense) for defense of
same. National will pay damages and costs therein awarded against DSP
or the DSP Sublicensee, as applicable, but will not be responsible for
any compromise made without its written consent. In providing such
defense, or in the event that the use or sale of any Compliant Product
incorporating, embodying or based upon the Licensed Technology is held
to constitute infringement and the use or sale of such Compliant
Product is enjoined, National shall, at its sole discretion, [*]
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[*] Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
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[*]
19.4. National's defense and indemnity obligations herein do not extend to
any claim, suit or proceeding based upon an infringement or alleged
infringement of an intellectual property right by: (i) a manufacturing
process of DSP or a DSP Sublicensee; (ii) any modification of the
Licensed Technology not made by National; or (iii) the use of the
Licensed Technology or any derivatives arising out of the use of the
Licensed Technology, in combination with other equipment, technology
or software not purchased or licensed from National, provided that
such claims would not have occurred but for such process, combination,
modification or enhancement. Section 19.0 states the entire liability
of National with respect to intellectual property infringement.
20.0 LIMITATION OF LIABILITY
20.1. IN NO EVENT SHALL A PARTY BE LIABLE TO THE OTHER PARTY FOR ANY
INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES,
INCLUDING LOSS OF PROFITS, REVENUE, DATA, USE, DAMAGES FOR LOSS OF
GOODWILL, WORK STOPPAGE, OR ANY AND ALL OTHER COMMERCIAL DAMAGES OR
LOSSES, INCURRED BY THE OTHER OR ANY THIRD PARTY IN CONNECTION WITH
THIS AGREEMENT OR THE USE OF THE LICENSED TECHNOLOGY, NO MATTER WHAT
THEORY OF LIABILITY, AND EVEN IF EITHER PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OR PROBABILITY OF SUCH DAMAGES.
20.2. Excluding National's liability under Sections 19.1 and 19.2 and
excluding any liability resulting from National's breach of Section
17.0, in no event shall National's liability for claims relating to
this Agreement exceed the sum of the amount of i) Fees paid by DSP to
National hereunder; and ii) Fees due and payable by National to DSP
hereunder as of the date of such claim.
20.3. Excluding any liability resulting from DSP's breach of Section 17.0,
in no event shall DSP's liability for claims relating to this
Agreement exceed the sum of the amount of i) Fees paid by DSP to
National hereunder; and ii) Fees due and payable by DSP to National
hereunder as of the date of such claim.
20.4. The Licensed Technology is not designed or licensed for use in the
design, development, manufacture or distribution of software used in
or in connection with critical components in life support devices or
systems. National disclaims any express or implied warranty of fitness
for such uses. DSP agrees that it will not use or license the
Licensed Technology for such purposes, and that it will ensure that
DSP, DSP Sublicensees and their
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respective customers and end users of the Licensed Technology are
provided with a copy of the foregoing notice. For the purpose of this
Section 20.3, incorporation of a notice in the data sheets for
Compliant Products shall be considered adequate notice.
21.0 TERM AND TERMINATION
21.1. TERM. This Agreement shall begin on the Effective Date and shall
continue for a period of [*] ([*]) years, or until terminated as
provided below.
21.2. TERMINATION. This Agreement may be terminated for cause, in whole or
part, at any time by one Party sending a written notice to the other
Party of its election to terminate, which notice specifies the reason
for the termination. A right to terminate hereunder shall arise upon
the happening of any one or more of the following events:
A. [*] ([*]) days after receipt of written notice from a Party in the
event the licensing Party fails to [*];
B. Upon [*] ([*]) days written notice in the event either Party fails
to [*] and such failure is not corrected within the [*] ([*]) day
notice period;
C. Upon written notice upon any action by [*]; or
D. Upon written notice in the event that [*].
21.3. EFFECT OF EXPIRATION OR TERMINATION.
A. In the event of expiration or termination of this Agreement, DSP
shall promptly destroy or deliver to National all materials
comprising, incorporating or using any Licensed Technology,
Confidential Information, or National Intellectual Property
Rights except that DSP may retain one copy of the Licensed
Technology solely in order to perform its obligations to provide
support and maintenance to DSP Sublicensees and National
Sublicensees.
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[*] Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
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DSP shall provide National with a written statement certifying
that DSP has complied with the foregoing obligations.
B. Except as provided below, all rights and licenses granted by one
Party to the other shall terminate upon such expiration or
termination, except that (i) if DSP terminates this Agreement
pursuant to Section 21.2, any licenses to the Licensed Technology
and Test Boards granted to DSP itself shall survive termination;
(ii) any licenses granted by a Party to a third party pursuant to
Sections 6.0 and 7.0 prior to the effective date or expiration or
termination shall survive and continue; and (iii) any licenses
granted by DSP to DSP Sublicensees prior to the effective date of
expiration or termination and National's rights as a third party
beneficiary thereof shall survive and continue provided, however,
that DSP shall have no further right to license the Licensed
Technology upon termination or expiration. The Parties' rights
and obligations under Sections 2.3, 4.2 (for the quarter
immediately following termination or expiration), 5.1, 5.2 -5.5
if applicable, 8.0, 10.0 and 17.0 through 22.0 shall survive any
expiration or termination. In addition, with respect to Sections
6.0, 7.0, 13.0, 14.0 and 15.0, i) the rights of the Party
terminating this Agreement shall survive and its corresponding
obligations under said Sections shall terminate; ii) the rights
of the non-terminating Party under said Sections shall terminate
and its corresponding obligations under said Sections shall
survive; and iii) the rights and obligations of both Parties
under such Sections shall survive upon natural expiration of this
Agreement.
21.4. NO LIABILITY FOR LAWFUL TERMINATION. Neither Party shall have the
right to recover damages or to indemnification of any nature, whether
by way of lost profits, expenditures for promotion, payment for
goodwill or otherwise made in connection with the business
contemplated by this Agreement due to the permitted or lawful
termination of this Agreement. EACH PARTY WAIVES AND RELEASES THE
OTHER FROM ANY CLAIM TO COMPENSATION OR INDEMNITY FOR TERMINATION OF
THE BUSINESS RELATIONSHIP UNLESS TERMINATION IS IN MATERIAL BREACH OF
THIS AGREEMENT.
21.5. NO WAIVER. The failure of either Party to enforce any provision of
this Agreement shall not be deemed a waiver of that provision. The
rights of the Parties under this Section 21.0 are in addition to any
other rights and remedies permitted by law or under this Agreement.
21.6. IRREPARABLE HARM. The Parties acknowledge and agree that breach of
Sections 2.4, 4.1, 17.0, 20.4 and 22.9 may cause irreparable harm and
continuing damage to National, for which there will be no adequate
remedy at law. Accordingly, they agree that each Party will be
entitled to seek injunctive relief and/or a decree of specific
performance, and such other relief as may be proper.
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22.0 MISCELLANEOUS
22.1. NOTICES. All notices required or permitted to be given hereunder
shall be in writing and shall be valid and sufficient if dispatched by
registered or certified mail, postage prepaid, in any post office of
the country where mailed, addressed as follows. Either Party may
change its address by a notice given to the other Party in the manner
set forth above. Notices given as herein provided shall be considered
to have been given and delivered upon receipt.
If to DSP:
DSP Group, Inc.
3120 Scott Boulevard
Santa Clara, California 95054
Attn: Irving Gold
cc: DSP Semiconductors, Ltd.
5 Shenkar Street
Herzelia pituach 46120
ISRAEL
Attn: Zeev Bikowsky
If to National:
NATIONAL SEMICONDUCTOR CORPORATION
2900 Semiconductor Drive
M/S 16-135
Santa Clara, CA 95052-8090
Attn: General Counsel
cc: NATIONAL SEMICONDUCTOR CORPORATION
2900 Semiconductor Drive, M/S D-3 985
Santa Clara, CA 95052
Attn: Cores Technology Unit
22.2. ASSIGNMENT. Neither this Agreement nor any right or obligation
hereunder is assignable or delegable in whole or in part, whether by
operation of law or otherwise, by either Party without the express
written consent of other Party except that DSP acknowledges that
National may assign this Agreement to any entity which controls, is
controlled by, or is under common control with National, or to any
entity resulting from the merger or consolidation with or
reorganization of National provided that National remains the
guarantor of its obligations under this Agreement. Furthermore,
subject to DSP's right of first refusal as set forth in Section 4.5
above, National may assign this Agreement to any third which acquires
from National all or substantially all of the Licensed Technology
without DSP's written consent. This Agreement shall
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inure to the benefit of, and shall be binding upon, the Parties and
their respective permitted successors and assigns.
22.3. PUBLICITY. The Parties shall announce the existence of their
relationship and this Agreement at a time to be mutually determined,
but in any event within sixty (60) days of the Effective Date.
Neither Party shall unreasonably withhold its consent to a proposed
announcement time. The Parties further agree that after such
announcement, each Party may list DSP as a licensor of the Licensed
Technology. Any publicity regarding the subject matter of this
Agreement shall be jointly planned and coordinated by the Parties.
Except as provided in Section 17.4 or as otherwise expressly provided
in this Agreement, neither Party shall publicize or otherwise disclose
the terms of this Agreement without the prior written approval of the
other Party.
22.4. EMPLOYEES. It is understood and agreed that in no event shall an
employee of one Party be considered for any purpose an employee of the
other Party. To the extent this Agreement involves work by one Party
on the premises of the other Party, the visiting Party shall take all
necessary precautions to prevent the occurrence of any injury to
persons or property during the progress of such work and, except to
the extent that any injury is caused by negligence of the host Party,
said visiting Party shall indemnify the host Party against all losses
which are caused by any negligent act or omission of the visiting
Party, its agents, employees or subcontractors, and the visiting Party
shall maintain such public liability, property damage and employer's
liability compensation insurance as will protect the host Party from
risks and from claims under any applicable worker's compensation or
occupational disease acts. Each Party shall instruct and require
their respective visiting employees to observe and obey all rules,
policies and procedures in effect at the facilities of the other Party.
22.5. DISCLAIMER OF AGENCY. DSP is not authorized to make any
representation or warranty on behalf of National to any third party.
The relationship created hereby is that of licensor and licensee and
the Parties hereby acknowledge and agree that nothing herein shall be
deemed to constitute DSP as a franchisee of National. DSP hereby
waives the benefit of any state or federal statutes dealing with the
establishment and regulation of franchisees.
22.6. SEVERABILITY. If any provision of this Agreement is for any reason
found to be ineffective, unenforceable or illegal, such condition
shall not affect the validity or enforceability of any of the
remaining portions hereof; provided, further, that the Parties shall
negotiate in good faith to replace any ineffective, unenforceable or
illegal provision with an effective replacement as soon as is
practical.
22.7. FORCE MAJEURE. Neither Party shall be liable in damages or have the
right to cancel for any delay or default in performing hereunder if
such delay or default is caused by conditions beyond the control of
the delaying or
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defaulting Party, including but not limited to acts of God, government
restrictions, continuing domestic or international problems such as
wars or insurrections, strikes, fires, floods, work stoppages and
embargoes; provided, however, that either Party shall have the right
to terminate this Agreement upon thirty (30) days prior written notice
if the delay or default of the other Party due to any of the
above-mentioned causes continues for a period of six (6) months.
22.8. COUNTERPART ORIGINALS. This Agreement is being executed
simultaneously in two (2) counterparts, each of which shall be deemed
an original but both of which together constitute one and the same
instrument.
22.9. EXPORT CONTROL. The Parties shall comply with any and all export
regulations and rules now in effect or as may be issued from time to
time by the Bureau of Export Administration of the United States
Department of Commerce or any other federal governmental authority
which has jurisdiction relating to the export of technology from the
United States of America in connection with this Agreement. National
shall provide DSP with reasonable assistance in complying with such
regulations and rules. Without limiting the generality of the
foregoing, National agrees to use reasonable efforts to file an
application with the Bureau of Export Administration for the
classification of the Licensed Technology. National shall provide DSP
with a copy of any information received from the Office of Export
Administration regarding such application however such information is
provided solely for DSP's reference and shall not be deemed in any
respect as counsel or advice by National to DSP of any export
requirements or as a waiver of DSP's obligations under this Agreement.
It is a requirement of DSP to comply with any classification and
export/reexport requirements with respect to the Licensed Technology
and any direct product thereof. The obligations under this Section
22.9 shall survive any expiration or termination of this Agreement.
22.10. GOVERNING LAW. This Agreement and the performance of the Parties
hereunder shall be construed in accordance with and governed by the
laws of the State of California without giving effect to its choice of
law provisions. The Parties agree that California shall have
non-exclusive jurisdiction to determine the validity, construction and
performance of this Agreement and the legal relations between the
Parties.
22.11. EFFECT OF HEADINGS. The headings and sub-headings contained herein
are for information purposes only and shall have no effect upon the
intended purpose or interpretation of the provisions of this Agreement.
22.12. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and
understanding between the Parties and integrates all prior discussions
and proposals (whether oral or written) between them related to the
subject matter hereof. No modification of any of the terms of this
Agreement shall be valid unless in writing and signed by a duly
authorized officer of each Party.
37
<PAGE>
IN WITNESS WHEREOF, the Parties have had this Agreement
executed by their respective authorized officers on the date written
below.
By and on behalf of: By and on behalf of:
NATIONAL SEMICONDUCTOR CORPORATION DSP GROUP, INC.
BY: /s/ MIKE BEREZIUK BY: /s/ ELI AYALON
ITS: Senior VP & General Manager,
Personal Systems Group ITS: President & CEO
DATE: 10/3/97 DATE: 10/30/97
DSP SEMICONDUCTORS, LTD.
BY /s/ IGAL KOHAVI
ITS: Chairman of the Board
DATE 10/30/97
38
<PAGE>
EXHIBIT A
LICENSED TECHNOLOGY
The codes in the following tables shall have the meaning set forth below:
"S" Synthesizable or source item that DSP may provide to a DSP Sublicensee
in original format
"B" Binary or object only "NA" Not available
"T" Transferable by DSP to a DSP Sublicensee
"NT" Not transferable by DSP to a DSP Sublicensee
"C" Confidential
"NC" Non-confidential
CR 16B CORE
<TABLE>
<CAPTION>
ITEM CODES DESCRIPTION
<S> <C> <C> <C> <C>
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
</TABLE>
For the CR16B Core, the model will be available in SYNTHESIZEABLE VERILOG-XL HDL
on Sun/SPARC. [*] The HDL model shall include the full functionality of the
CompactRISC technology and have been validated on test patterns prior to
release.
Since cell libraries are manufacturing process specific, the verilog models and
synopsis scripts of the Licensed Technology are provided without the cell
libraries that were used to create the models. Modification is required by
customers/users for their individual processes and cell libraries.
- -------------------
[*] = Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
1
<PAGE>
CR 16B BASE MEGACELL MODULES
<TABLE>
<CAPTION>
ITEM CODES DESCRIPTION
<S> <C> <C> <C> <C>
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
</TABLE>
CR16B TEST SUITE
<TABLE>
<CAPTION>
ITEM CODES DESCRIPTION
<S> <C> <C> <C> <C>
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
</TABLE>
CR16B TOOLS
<TABLE>
<CAPTION>
ITEM CODES DESCRIPTION
<S> <C> <C> <C> <C>
CR16-SWW-XXX NC T B Workgroup License (5 seats) for Tools.
</TABLE>
The Tools are provided on CD-ROM, with a complete set of instruction manuals in
PDF format. The only manuals printed on paper are the Introduction and
Programmer's Reference Manual. All other manuals can be printed from the CD-ROM.
The Licensee is authorized to print as many copies of the manuals as required
for internal use only.
- -------------------
[*] = Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
2
<PAGE>
<TABLE>
<CAPTION>
ITEM CODES DESCRIPTION
<S> <C> <C> <C> <C>
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
</TABLE>
- -------------------
[*] = Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
3
<PAGE>
EXHIBIT B
TEST CHIP AND TEST BOARD
The codes in the following tables shall have the meaning set forth below:
"S" Synthesizable or source item that DSP may provide to a DSP Sublicensee
in original format.
"B" Binary or object only
"T" Transferable by DSP to a DSP Sublicensee
"NT" Not transferable by DSP to a DSP Sublicensee
"C" Confidential Material
"NC" NON-Confidential Material
<TABLE>
<CAPTION>
ITEM CODES DESCRIPTION
<S> <C> <C> <C> <C>
TEST CHIP C NT B CompactRISC chip that runs the Core Verification
Programs
TEST CHIP C T S Defines the features and functions required for
SPECIFICATION testing compatibility of the CompactRISC core
architecture providing examples of basic verification
environment.
TEST BOARD C T S Compliance testing board for use
in testing the accuracy of a port of CompactRISC
Technology to a specific process. Includes test
scripts to be downloaded to the Test Chip verified.
</TABLE>
4
<PAGE>
EXHIBIT C
DELIVERY SCHEDULE
The codes in the following tables shall have the meaning set forth below:
"S" Synthesizable or source item that DSP may provide to a DSP Sublicensee
in original format.
"B" Binary or object only
"NA" Not available
"T" Transferable by DSP to a DSP Sublicensee
"NT" Not transferable by DSP to a DSP Sublicensee
"LT" Shown previously in "Licensed Technology" - Exhibit A & B.
"C" Confidential Material.
"NC" NON-Confidential Material.
<TABLE>
<CAPTION>
WHO
ITEM DESCRIPTION CODES DELIVERS WHEN
<S> <C> <C> <C> <C> <C> <C>
[*] [*] [*] [*] [*] [*] [*]
[*] [*] [*] [*] [*] [*]
[*] [*] [*] [*] [*] [*] [*]
[*] [*] [*] [*] [*] [*] [*]
[*] [*] [*] [*] [*] [*] [*]
[*] [*] [*] [*] [*] [*] [*]
[*] [*] [*] [*] [*] [*] [*]
</TABLE>
- -------------------
[*] = Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
5
<PAGE>
EXHIBIT D
SUBLICENSE FEES
I. CR16B SUBLICENSE FEES PAYABLE BY DSP TO NATIONAL
Subject to the provisions set forth in Section 5.3, for each license to a CR16B
Core granted by DSP to a DSP Sublicensee, DSP shall pay to National a Sublicense
Fee, which shall be equal to [*]:
A. the [*] sublicense fee in accordance with the table set forth below:
<TABLE>
<CAPTION>
CUMULATIVE NUMBER OF [*] SUBLICENSE FEE
CR16B CORES LICENSED PER CR16B CORE SUBLICENSE
<S> <C>
[*] $[*]
[*] $[*]
[*] $[*]
[*] or more $[*]
[*]
</TABLE>
B. [*] percent ([*]%) of the License Charges payable by each DSP
Sublicensee to DSP.
II. CR16B SUBLICENSE FEES PAYABLE BY NATIONAL TO DSP
Subject to the provisions set forth in Section 2.3 and 5.3, for each license to
a CR16B Core granted by National to a National Sublicensee, National shall pay
to DSP a Sublicense Fee which shall be equal to [*]:
A. the [*] sublicense fee in accordance with the table set forth below:
<TABLE>
<CAPTION>
CUMULATIVE NUMBER OF [*] SUBLICENSE FEE
CR16B CORES LICENSED PER CR16B CORE SUBLICENSE
<S> <C>
[*] $[*]
[*] $[*]
[*] $[*]
[*] or more $[*]
[*]
</TABLE>
B. [*] percent ([*]%) of the License Charges payable by each National
Sublicensee to National.
- -------------------
[*] = Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
6
<PAGE>
EXHIBIT E
SUPPORT FEES
I. SUPPORT FEES PAYABLE BY DSP TO NATIONAL
Subject to the provisions set forth in Section 5.3, for each license to a
CompactRISC Core granted by DSP to a DSP Sublicensee, DSP shall pay to
National an annual Support Fee for [*] which shall be equal to [*]:
A. the [*] annual support fee of $[*] per licensed CompactRISC Core; [*]
B. [*] percent ([*]%) of the Support Charges payable by each DSP
Sublicensee to DSP.
Thereafter, DSP shall be required to pay an annual Support Fee only if DSP
is entitled to receive Support Charges from the applicable DSP Sublicensee.
In such event, DSP shall be required to pay [*] percent ([*]%) of the
Support Charges payable by each DSP Sublicensee to DSP on an annual basis.
II. SUPPORT FEES PAYABLE BY NATIONAL TO DSP
Subject to the provisions set forth in Section 2.3 and 5.3, for each
license to a CompactRSIC Core granted by National to a National
Sublicensee, National shall pay to DSP an annual Support Fee for [*] which
shall be equal to [*]:
A. the [*] annual support fee of $[*] per licensed CompactRISC Core; [*]
B. [*] percent ([*]%) of the Support Charges payable by each National
Sublicensee to National.
Thereafter, National shall be required to pay an annual Support Fee only if
National is entitled to receive Support Charges from the applicable
National Sublicensee. In such event, National shall be required to pay [*]
percent ([*]%) of the Support Charges payable by each National Sublicensee
to National on an annual basis.
- -------------------
[*] = Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
7
<PAGE>
EXHIBIT F
ROYALTIES
I. CR16B ROYALTIES PAYABLE BY DSP TO NATIONAL
Subject to the provisions set forth in Section 5.3, for each license to a
CR16B Core granted by DSP to a DSP Sublicensee, DSP shall pay to National
Royalties, which shall be equal to [*]:
A. [*] percent ([*]%) of the actual royalty payable to DSP pursuant to
such license; [*]
B. the [*] of the applicable [*] royalty
i) based upon the [*] for the cumulative volume of Compliant
Products Sold containing the CR16B Core, multiplied by the
number of CR16B Compliant Cores within Compliant Products Sold
during the subject fiscal quarter; [*]
ii) based upon the [*] Dollar Cap per CR16B Compliant Core for the
cumulative volume of Compliant Products Sold containing the
CR16B Core, multiplied by the number of CR16B Compliant Cores
within Compliant Products Sold during the subject fiscal
quarter.
[*]
C. the applicable [*] royalty based upon the [*] Dollar Amount per
CR16B Compliant Core for the cumulative volume of Compliant
Products Sold containing the CR16B Core, multiplied by the number
of CR16B Compliant Cores within Compliant Products Sold during the
subject fiscal quarter.
<TABLE>
<CAPTION>
Cumulative Volume
of Compliant
Products Sold Percentage of [*] Dollar
Containing CR16B ASP [*] Dollar Cap Amount
<S> <C> <C> <C>
[*] [*]% $[*] $[*]
[*] [*]% $[*] $[*]
[*] [*]% $[*] $[*]
[*] [*]% $[*] $[*]
</TABLE>
- -------------------
[*] = Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
8
<PAGE>
II. CR16B ROYALTIES PAYABLE BY NATIONAL TO DSP
Subject to the provisions set forth in Section 2.3 and 5.3, for each
license to a CR16B Core granted by National to a National Sublicensee,
National shall pay to DSP Royalties, which shall be equal to [*]:
A. [*] percent ([*]%) of the actual royalty payable to National
pursuant to such license; [*]
B. the [*] of the applicable [*] royalty
i) based upon the [*] for the cumulative volume of Compliant
Products Sold containing the CR16B Core, multiplied by the
number of CR16B Compliant Cores within Compliant Products Sold
during the subject fiscal quarter; [*]
ii) based upon the [*] Dollar Cap per CR16B Compliant Core for the
cumulative volume of Compliant Products Sold containing the
CR16B Core, multiplied by the number of CR16B Compliant Cores
within Compliant Products Sold during the subject fiscal
quarter.
[*]
C. the applicable [*] royalty based upon the [*] Dollar Amount per
CR16B Compliant Core for the cumulative volume of Compliant
Products Sold containing the CR16B Core, multiplied by the number
of CR16B Compliant Cores within Compliant Products Sold during the
subject fiscal quarter.
<TABLE>
<CAPTION>
CUMULATIVE
VOLUME OF
COMPLIANT
PRODUCTS SOLD PERCENTAGE [*] DOLLAR
CONTAINING CR16B OF ASP [*] DOLLAR CAP AMOUNT
<S> <C> <C> <C>
[*] [*]% $[*] $[*]
[*] [*]% $[*] $[*]
[*] [*]% $[*] $[*]
[*] [*]% $[*] $[*]
</TABLE>
- -------------------
[*] = Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
9
<PAGE>
EXHIBIT G
ADDITIONAL TERMS FOR LICENSING [*] CORE
SUBLICENSE FEES
I [*] SUBLICENSE FEES PAYABLE BY DSP TO NATIONAL
Subject to the provisions set forth in Section 5.3, for each license to a
[*] Core granted by DSP to a DSP Sublicensee, DSP shall pay to National a
Sublicense Fee, which shall be equal to [*]:
A. the [*] sublicense fee in accordance with the table set forth below:
<TABLE>
<CAPTION>
CUMULATIVE NUMBER OF [*] SUBLICENSE FEE
[*] CORES LICENSED PER [*] CORE SUBLICENSE
<S> <C>
[*] $[*]
[*] $[*]
[*] $[*]
[*] or more $[*]
</TABLE>
[*]
B. [*] percent ([*]%) of the License Charges payable by each DSP
Sublicensee to DSP.
II. [*]SUBLICENSE FEES PAYABLE BY NATIONAL TO DSP
Subject to the provisions set forth in Section 2.3 and 5.3, for each
license to a [*] Core granted by National to a National Sublicensee,
National shall pay to DSP a Sublicense Fee which shall be equal to [*]:
A. the [*] sublicense fee in accordance with the table set forth below:
<TABLE>
<CAPTION>
CUMULATIVE NUMBER OF [*] SUBLICENSE FEE
[*] CORES LICENSED PER [*] CORE SUBLICENSE
<S> <C>
[*] $[*]
[*] $[*]
[*] $[*]
[*] or more $[*]
</TABLE>
[*]
B. [*] percent ([*]%) of the License Charges payable by each National
Sublicensee to National.
- -------------------
[*] = Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
10
<PAGE>
ROYALTIES
I. [*] ROYALTIES PAYABLE BY DSP TO NATIONAL
Subject to the provisions set forth in Section 5.3, for each license to a
[*] Core granted by DSP to a DSP Sublicensee, DSP shall pay to National
Royalties, which shall be equal to [*]:
A. [*] percent ([*]%) of the actual royalty payable to DSP pursuant to
such license; [*]
B. the [*] of the applicable [*] royalty
i) based upon the [*] for the cumulative volume of Compliant
Products Sold containing the [*] Core, multiplied by the number
of [*] Compliant Cores within Compliant Products Sold during
the subject fiscal quarter; [*]
ii) based upon the [*] Dollar Cap per [*] Compliant Core for the
cumulative volume of Compliant Products Sold containing the [*]
Core, multiplied by the number of [*] Compliant Cores within
Compliant Products Sold during the subject fiscal quarter.
[*]
C. the applicable [*] royalty based upon the [*] Dollar Amount per [*]
Compliant Core for the cumulative volume of Compliant Products Sold
containing the [*] Core, multiplied by the number of [*] Compliant
Cores within Compliant Products Sold during the subject fiscal
quarter.
<TABLE>
<CAPTION>
CUMULATIVE
VOLUME OF
COMPLIANT
PRODUCTS SOLD PERCENTAGE OF [*] DOLLAR [*] DOLLAR
CONTAINING [*] ASP CAP AMOUNT
<S> <C> <C> <C>
[*] [*]% $[*] $[*]
[*] [*]% $[*] $[*]
[*] [*]% $[*] $[*]
[*] [*]% $[*] $[*]
</TABLE>
- -------------------
[*] = Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
11
<PAGE>
II. [*] ROYALTIES PAYABLE BY NATIONAL TO DSP
Subject to the provisions set forth in Section 2.3 and 5.3, for each
license to a [*] Core granted by National to a National Sublicensee,
National shall pay to DSP Royalties, which shall be equal to [*]:
A. [*] percent ([*]%) of the actual royalty payable to National
pursuant to such license; [*]
B. the [*] of the applicable [*] royalty
i) based upon the [*] for the cumulative volume of Compliant
Products Sold containing the [*] Core, multiplied by the number
of [*] Compliant Cores within Compliant Products Sold during
the subject fiscal quarter; [*]
ii) based upon the [*] Dollar Cap per [*] Compliant Core for the
Cumulative volume of Compliant Products Sold containing the [*]
Core, multiplied by the number of [*] Compliant Cores within
Compliant Products Sold during the subject fiscal quarter.
[*]
C. the applicable [*] royalty based upon the [*] Dollar Amount per [*]
Compliant Core for the cumulative volume of Compliant Products Sold
containing the [*] Core, multiplied by the number of [*] Compliant
Cores within Compliant Products Sold during the subject fiscal
quarter.
<TABLE>
<CAPTION>
CUMULATIVE
VOLUME OF
COMPLIANT
PRODUCTS SOLD PERCENTAGE [*] DOLLAR [*] DOLLAR
CONTAINING [*] OF ASP CAP AMOUNT
<S> <C> <C> <C>
[*] [*]% $[*] $[*]
[*] [*]% $[*] $[*]
[*] [*]% $[*] $[*]
[*] [*]% $[*] $[*]
</TABLE>
- -------------------
[*] = Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
12
<PAGE>
EXHIBIT H
PAYMENT REPORT FORM
QUARTERLY REPORT FOR QUARTER ENDING */*/*
<TABLE>
<CAPTION>
Units Payment Per Unit
Sales Shipped ASP ($/units) Method of Fee to: Charge Payment
Name Desc. Revenue ($) (units) or Fee Calculation ____: ($u) (u*$u)
---- ----- ----------- ------- ------------- ------------- ------- -------- -------
<S> <C>
License
CR16B
Customer Sublicense Fee
A
Support Fee
Royalties
Tools
Total
License
CR32B
Customer A Sublicense Fees
Support Fees
Royalties
Tools
Total
TOTAL $
</TABLE>
13
<PAGE>
EXHIBIT H
SAMPLE PAYMENT REPORT
(DSP REPORTING TO NATIONAL)
Quarterly Report for Quarter Ending */*/*
<TABLE>
<CAPTION>
Name Desc. Sales Revenue Units Shipped ASP ($/units) Method of Fee Payment Per Unit Payment
($) (units) of Fee Calculation to: Charge ($u) (u*$u)
National:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
License [*] [*] [*] [*] [*] [*] [*]
Customer CR16B Royalty [*] [*] [*] [*] [*] [*] [*]
A
[*] Royalty [*] [*] [*] [*] [*] [*] [*]
Support [*] [*] [*] [*] [*] [*] [*]
Quarterly
Tools [*] [*] [*] [*] [*] [*] [*]
Total A [*]
License [*] [*] [*] [*] [*] [*] [*]
Customer B CR16B Royalty [*] [*] [*] [*] [*] [*] [*]
Support Yearly [*] [*] [*] [*] [*] [*] [*]
Tools [*] [*] [*] [*] [*] [*] [*]
Total B [*]
New C [*] License [*] [*] [*] [*] [*] [*] [*]
Royalties [*] [*] [*] [*] [*] [*] [*]
Support [*] [*] [*] [*] [*] [*] [*]
Tools [*] [*] [*] [*] [*] [*] [*]
Total C [*]
Total to [*]
NCS
</TABLE>
- -------------------
[*] = Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
14
<PAGE>
EXHIBIT I
NEW LICENSEE NOTIFICATION
<TABLE>
<CAPTION>
Support Prepaid Cumulative % of
Name Core Licensed License Charges Charges Royalties Volume ASP Cap Minimum
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Customer
Name
-------------------------------------
-------------------------------------
-------------------------------------
</TABLE>
Payment Terms and Conditions: (For example: License Fee to be paid in a lump
sum; Sublicensee paid 2 years of support in lump sum; No prepaid royalties)
15
<PAGE>
EXHIBIT J
ADDITIONAL TRAINING RATES
Scheduled Training in Santa Clara, California
There are pre-scheduled training sessions every [*]. The training is given at
the National's Santa Clara, California, facilities.
$[*] per person maximum of [*] persons per session of a 2-3 days. If number of
participant is less then 6 persons session will be canceled.
Specially Scheduled Training Sessions
These are individual or emergency training sessions for specific business units
and customers. Cost is $[*] for 1 to [*] people. Travel expenses if done out
side the Santa Clara, California, facilities are done at cost. An extra $[*]
will be added for sessions to be handled outside the US.
National reserves the right to change the above rates without prior written
notice.
- -------------------
[*] = Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
16
<PAGE>
EXHIBIT K
ADDITIONAL SUPPORT AND MAINTENANCE RATES
The following are National's standard rates for support and maintenance services
in effect as of the Effective Date. The rates are subject to change without
notice.
Engineering/Support
All rates are based on man/hour rates, both on-site and during travel. All
travel, accommodations and other expenses will be billed at a reasonable
rate.
1. Applications Engineer $[*]
2. Senior Engineer/Manager $[*]
Note: There is a minimum of 8 hours of billable time per each
service/support request.
- -------------------
[*] = Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
17
<PAGE>
EXHIBIT L
EXCLUDED NATIONAL SUBLICENSEES
[*]
- -------------------
[*] = Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
18
<PAGE>
EXHIBIT M
NATIONAL INTELLECTUAL PROPERTY RIGHTS
PATENTS
5,566,308 Processor Core Which Provides a Linear Extension of an Addressable
Memory Space
INVENTIONS
[*]
COPYRIGHTS
Copyright on all Licensed Technology listed in Exhibit A, whether delivered as
any form of software code or in printed form owned by National and/or its
licensors.
- -------------------
[*] = Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
19
<PAGE>
EXHIBIT N
END USER LICENSE
NAME OF DSP SUBLICENSEE ("LICENSOR") IS WILLING TO LICENSE THE SOFTWARE
INCORPORATED IN THIS PRODUCT TO YOU ("LICENSEE") ONLY UPON THE CONDITION THAT
YOU ACCEPT ALL OF THE TERMS CONTAINED IN THIS LICENSE AGREEMENT. READ THE TERMS
AND CONDITIONS OF THIS AGREEMENT CAREFULLY BEFORE OPENING AND USING THE PRODUCT.
BY OPENING AND/OR USING THE PRODUCT, YOU AGREE TO THE TERMS AND CONDITIONS OF
THIS AGREEMENT. IF YOU ARE NOT WILLING TO BE BOUND BY THIS AGREEMENT, RETURN THE
PRODUCT UNUSED WITHIN FIFTEEN (15) DAYS OF RECEIPT. UPON SUCH RETURN, YOU WILL
RECEIVE A REFUND OF THE LICENSE FEE PAID, IF ANY.
1. LICENSE GRANT
Licensee is granted a nontransferable, nonexclusive, license to use the software
identified on Exhibit A ("Software") at the location(s) identified on Exhibit A
under the following terms and conditions. Licensee may use the Software on any
one computer at one time except that the Software may be executed from a common
disc shared by multiple CPUs provided that one authorized copy of the Software
has been licensed from Licensor for each CPU executing the Software. Licensee
may make one (1) copy of the Software for back-up and archival purposes only.
Licensee may modify and compile the source code of the Software solely for the
purpose of integrating the Software into the Licensee's software development
tools suite. Except as provided above, Licensee shall have no right to (i)
modify the Software; (ii) sell, supply or otherwise distribute the Software in
any form; or (iii) reverse engineer, de-compile or disassemble the Software, in
whole or in part.
The Software is not designed or licensed for use in the design, development,
manufacture or distribution of software used in or in connection with critical
components in life support devices or systems.
The Software is the property of Licensor and/or its licensors. Other than the
limited license rights granted in this Agreement, Licensee acquires no right,
title or interest in or to the Software.
2. COPYRIGHTS AND TRADEMARKS
Licensee shall reproduce and apply any copyright or other proprietary rights
notices included on or embedded in the Software to any copies of the Software in
whole or in part, in any form. Licensee shall have no right to use any of the
trademarks or trade names appearing within the Software absent a separate
written agreement between Licensee, Licensor and Licensor's licensors if
applicable.
20
<PAGE>
3. TERM AND TERMINATION
This Agreement is effective from the date Licensee breaks the seal preventing
access to the Software and will remain in force until terminated. Licensee may
terminate this Agreement at any time by returning the Software, including any
documentation, to Licensor. This Agreement will terminate immediately without
notice from Licensor if Licensee fails to comply with any provisions of this
Agreement. Upon termination of this Agreement, use of all Software by Licensee
shall be immediately discontinued, the Agreement and all rights granted
hereunder shall cease, and Licensee shall return or certify the destruction of
all copies of the Software including any documentation to Licensor.
4, LIMITED WARRANTY
Licensor warrants that the disks containing the Software shall be free from
defects in materials and workmanship under normal use for a period of ninety
(90) days from the date of delivery. Any written or oral information or advice
given by Licensor, its distributors, agents or employees will in no way increase
the scope of this warranty. Licensor's entire liability and the Licensee's
exclusive remedy will be, at Licensor's sole option, to replace the disk or
refund to Licensee the amounts paid by Licensee for the Software, if any. Any
replacement disks will be warranted for the remainder of the original warranty
period or thirty (30) days, whichever is the longer. Licensee agrees that the
supply of the Software does not include updates and upgrades, which may be
available from Licensor under a separate support agreement.
THE ABOVE WARRANTIES ARE EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES, WHETHER
EXPRESS OR IMPLIED INCLUDING WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT. THE
SOFTWARE DOES NOT CONSTITUTE "CONSUMER GOODS' FOR THE PURPOSES OF THE LAWS OR
REGULATIONS OF ANY GOVERNMENTAL, REGULATORY OR SIMILAR AUTHORITY.
5. LIMITATION OF LIABILITY
IN NO EVENT WILL LICENSOR BE LIABLE FOR ANY INDIRECT, INCIDENTAL, PUNITIVE,
SPECIAL, OR CONSEQUENTIAL DAMAGES, INCLUDING LOST REVENUES, DATA, OR PROFITS
RELATING TO THIS LICENSE, INCLUDING BUT NOT LIMITED TO ANY DAMAGES RESULTING
FROM ITS PERFORMANCE, FAILURE TO PERFORM, OR THE FURNISHING, PERFORMANCE OR USE
OF THE SOFTWARE, WHETHER DUE TO BREACH OF CONTRACT, BREACH OF WARRANTY, OR
NEGLIGENCE EVEN IF LICENSOR HAS BEEN ADVISED OF THE POSSIBILITY OR PROBABILITY
OF SUCH DAMAGES. THE MAXIMUM LIABILITY OF LICENSOR SHALL BE LIMITED TO REFUNDING
LICENSEE THE FEE PAID BY LICENSEE FOR THE SOFTWARE, IF ANY. THE FOREGOING
LIMITATIONS SHALL APPLY EVEN IF THE ABOVE STATED WARRANTY FAILS OF ITS ESSENTIAL
PURPOSE.
21
<PAGE>
6. CONFIDENTIAL INFORMATION
The Software and any related documentation provided hereunder is the
confidential information of Licensor or its licensors ("Confidential
Information"). Licensee shall not disclose Confidential Information to any third
party and shall use it only for purposes specifically authorized by this
License. This License will not affect any other confidential disclosure
agreement between the parties.
7. EXPORT
Licensee agrees to comply strictly with all applicable laws and regulations
relating to the use and distribution of the Software and acknowledges that, to
the extent that it is authorized by this License to export, re-export or import
Software, it has the responsibility to obtain all licenses required to export,
re-export or import Software.
8. U.S. GOVERNMENT RESTRICTED RIGHTS
The Software is provided with RESTRICTED RIGHTS. Use, duplication, or disclosure
by the Government is subject to the restrictions as set forth in subparagraph
(c) (1) (ii) of the Rights in Technical Data and Computer Software Clause as
DFARS 252.227-7013 and FAR 52.227-19, as applicable. Manufacturer is National
Semiconductor Corporation, 2900 Semiconductor Drive, Santa Clara, California
95052.
9. ASSIGNMENT
Neither this Agreement (including any licenses and rights granted hereunder),
nor the Software may be sold, leased, assigned, disseminated, disclosed,
sublicensed or otherwise transferred, in whole or in part, by Licensee to any
third party without the prior written consent of Licensor. Transfer to a U.S.
government department or agency or to a prime or lower tier contractor in
connection with a U.S. government contract shall be made only upon the prior
written agreement to terms agreed by Licensor.
10. GOVERNING LAW
Any action related to this License will be governed by California law, excluding
its choice of law provisions. If any of the above provisions are held to be in
violation of applicable law, void, or unenforceable in any jurisdiction, then
such provisions are hereby waived to the extent necessary for the Agreement to
be otherwise enforceable in such jurisdiction. However, if in Licensor's opinion
deletion of any provisions of the Agreement by operation of this paragraph
unreasonably compromises the rights or liabilities of Licensor or its licensors,
Licensor reserves the right to terminate the Agreement and refund the fee paid
by Licensee, if any, as Licensee's sole and exclusive remedy.
22
<PAGE>
11. INTEGRATION
This Agreement is the entire agreement between Licensee and Licensor relating to
the Software and: (i) supersedes all prior or contemporaneous oral or written
communications, proposals and representations with respect to its subject
matter; and (ii) prevails over any conflicting or additional terms of any quote,
order, acknowledgement or similar communication between the parties during the
term of this Agreement. No modification to this Agreement will be binding unless
in writing and signed by a duly authorized representative of each party.
23
<PAGE>
EXHIBIT O
TRADEMARK GUIDELINES
1. DSP and its Sublicensees must use the TM symbol as a superscript or
subscript after the first prominent use (e. g. titles, headlines,
taglines, paragraph headings, etc.) of the CompactRISC trademark and at
its first use in the text or body copy.
2. DSP and its Sublicensees must provide notice in each document in which the
CompactRISC trademark is used that it is a trademark of National
Semiconductor Corporation, a reference example is shown below.
3. DSP and its Sublicensees shall not use the CompactRISC Trademark as a noun,
but only as a proper adjective modifying a noun (example of acceptable
usage: CompactRISC technology).
4. DSP and its Sublicensees shall not use the CompactRISC trademark, or any
derivation of it, on any product, in any form.
5. DSP and its Sublicensees are required to mark with the CompactRISC
trademark all data sheets and other collateral materials for those
Compliant Products which are sold in a form where the architecture or
instruction set is open or accessible for reprogramming. If the Compliant
Product has a closed architecture and the end users do not need to know the
instruction set, DSP and its Sublicensees may mark such data sheets and
other collateral materials with the CompactRISC trademark but are not
required to do so.
EXAMPLE OF CORRECT REFERENCE TO OWNERSHIP:
CompactRISC-TM- is a Trademark of National Semiconductor Corporation
USAGE EXAMPLE: CORRECT USE
The CompactRISC-TM- Instruction Set beats all the competition. CompactRISC
Architecture is the best RISC core on the market today.
USAGE EXAMPLE: INCORRECT USE
CompactRISC beats all the competition. ABC Co. uses CompactRISC-TM- in it's XYZ
product.
24
<PAGE>
EXHIBIT P
TEST CHIP VERIFICATION RATES
<TABLE>
<CAPTION>
Item NRE fee Comments
<S> <C> <C>
Verification of $[*] Design and layout of a test chip on
each Compliant Core target process, Preparing patterns for
the test chip, improvement in existing
patterns if necessary, and design and
build of a tester load-board (~10 man-
months+board costs).
</TABLE>
National reserves the right to change its rates for test chip verification at
any time without notice.
- -------------------
[*] = Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
25
<PAGE>
EXHIBIT Q
TOOLS FEES
<TABLE>
<CAPTION>
Estimated VAR
Cost Per
Tools Additional Seat Description
<S> <C> <C>
CR16-SWA-1xx $[*] Additional Individual (1 seat) license
for tools.
</TABLE>
All tools can be purchased from National at the then currently published rates.
National reserves the right to change its rates for tools at any time without
notice.
- -------------------
[*] = Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
26
<PAGE>
EXHIBIT R
COMPACTRISC CORES LICENSED FOR DSP'S OWN USE
<TABLE>
<CAPTION>
Core Licensed to DSP Effective Date of License
<S> <C>
</TABLE>
27
<PAGE>
EXHIBIT S
ERROR REPORT
NAME: ____________ PHONE ___-_________
COMPANY/UNIT NAME: ____________ FAX: ___-_________
DATE OF REPORT: ____________ E-MAIL:___-_________
ISSUE NUMBER: _____________ (ASSIGNED BY CTU)
Short Description: ___________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Severity: HIGH q Critical q Severe q Moderate q Minor q Low
TYPE: q S/W q H/W q CORE q SPEC q MANUALS
REVISION NUMBER: ____________
MODULE
SUSPECTED:____________________________________________________________________
Found By: ______________________________
INSTRUCTIONS TO REPRODUCE:
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
28
<PAGE>
FOR NSC USE ONLY
DATE: _____________ HANDLED BY:_____________________________
SEVERITY: q Critical q Severe q Moderate q Minor
TYPE: ASAP q 1month q 3 months q 6 months q Next Release
COMMENTS: ____________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
29
<PAGE>
EXHIBIT T
SUPPORT AND MAINTENANCE TO BE PROVIDED BY DSP
0.0 "Supported Sublicensee" shall mean any National Sublicensee for which
DSP directly provides support and maintenance services.
1.1 During the term of this Agreement, DSP shall, if required, provide a
reasonable level of the support and maintenance services described in
Sections 1.2 1.7 to each Supported Sublicensee. National shall have no
obligation to provide any support or maintenance services to a Supported
Sublicensee receiving support directly from DSP.
1.2 DSP shall provide reasonable telephone and electronic mail support
regarding the operation, design and other technical aspects of the
Licensed Technology. Such support will be available during DSP's normal
business hours, Monday through Friday (excluding DSP holidays).
1.3 DSP shall promptly notify Supported Sublicensees via electronic mail of
the existence of any positively identified Errors in the form of the
report set forth in Exhibit S ("Error Report"). DSP shall provide
Supported Sublicensees with any Error corrections to the Licensed
Technology at such time as they are generally made available to DSP.
1.4 DSP shall provide Supported Sublicensees with all modifications,
enhancements and updates to the Licensed Technology which are generally
made available to DSP at such time as they are generally made available
to DSP Sublicensees.
1.5 If DSP reasonably determines that Errors are caused by mistakes or
errors contained in the applicable Licensed Technology documentation,
DSP shall request that National promptly issue corrections to such
documentation.
1.6 Upon DSP's receipt of an Error Report and test case from the Supported
Sublicensee, DSP will within [*] ([*]) days verify that it is a valid
Error and that the Error was not previously reported by DSP. For
verified and previously unreported Errors, DSP will promptly provide
such materials to National. Supported Sublicensee shall provide DSP, and
DSP will forward to National, such samples, technical information and
assistance as National may reasonably require to enable National to
provide support and maintenance services.
- -------------------
[*] = Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
30
<PAGE>
1.7 DSP shall be obligated to provide maintenance and support to the extent
the Licensed Technology remains unmodified and properly maintained at
revision levels supported by DSP, which shall include, at a minimum, the
most recent revision level and the revision level immediately preceding
the most recent revision level. If it is reasonably determined by DSP or
National that any apparent Error with the Licensed Technology is due to
alterations of the Licensed Technology by the Supported Sublicensee or
any third party, the use of an unsupported version of the Licensed
Technology, or failure to comply with the terms and conditions of the
appropriate license and support agreement(s) between National and the
Supported Sublicensee, DSP shall notify the Supported Sublicensee, and
if the Supported Sublicensee still wishes to receive Error corrections,
the time and expenses associated with such support effort will be billed
by National at its standard rates then in effect.
31
<PAGE>
EXHIBIT U
MANUFACTURER NAME SUBSTITUTION GUIDELINES
DSP and DSP Sublicensees may replace references to the name of National
Semiconductor Corporation in the sales and support literature with their own
individual corporate names to identify themselves as manufacturers of the
Compliant Products described in the literature. In no case however shall the
substitution change or confuse the fact that National Semiconductor Corporation
or its licensors has developed and owns certain rights title and interest to the
CompactRISC processing technology, the associated intellectual property rights
and the CompactRISC trademark.
DSP and its Sublicensees shall not use the National Semiconductor Corporation
trademark in any form or for any purpose. No license or grant is given to DSP or
DSP Sublicensees for use of this trademark.
32
<PAGE>
EXHIBIT V
POTENTIAL SUBLICENSEES WITH RIGHTS TO HAVE
COMPLIANT PRODUCTS MADE BY THIRD PARTIES
[*]
- -------------------
[*] = Omitted pursuant to a confidential treatment request. The material has
been filed separately with the Securities and Exchange Commission.
33
<PAGE>
EXHIBIT 10.26
AMENDMENT TO EMPLOYMENT AGREEMENT
Between DSP Group Inc., DSP Semiconductors Ltd. and Eli Ayalon, hereby referred
to as "The Executive." Effective date November 3, 1997.
1. In the event the Executive terminates the agreement without Good Reason or
the Corporation terminates the agreement for Cause, no further payments
shall be made and the Executive shall be subject to a one year prohibition
against competition in addition to the customary prohibitions against
disclosure of trade secretes.
2. The base compensation of the Executive shall be fixed at the commencement of
each year, but shall not be subject to reduction during the term of the
agreement.
3. Upon a change in control of the Corporation or if the agreement is
terminated by the Executive for Good Reason or by the Corporation without
Cause, all rights of the Executive under the contract would continue for two
years and all options held by the Executive would accelerate and immediately
vest and be exercisable in whole or in part at any time during the remaining
two-year term of the agreement.
4. In the event of death or permanent disability of the Executive all options
shall accelerate and immediately vest.
5. For purposes of these agreements, "Cause" would be defined as willful
failure to perform the Executive's duties after notice and a reasonable
opportunity to cure the breach or conviction of a felony.
/s/ IGAL KOHAVI /s/ ELI AYALON
- ------------------------------------- -------------------------------------
DSP Group Inc. Eli AYALON
/s/ IGAL KOHAVI
- -------------------------------------
DSP Semiconductors Ltd.
<PAGE>
EXHIBIT 10.27
AMENDMENT TO EMPLOYMENT AGREEMENT
Between DSP Group Inc., DSP Semiconductors Ltd. and Igal Kohavi, hereby referred
to as "The Executive." Effective date November 3, 1997.
1. In the event the Executive terminates the agreement without Good Reason or
the Corporation terminates the agreement for Cause, no further payments
shall be made and the Executive shall be subject to a one year prohibition
against competition in addition to the customary prohibitions against
disclosure of trade secretes.
2. The base compensation of the Executive shall be fixed at the commencement of
each year, but shall not be subject to reduction during the term of the
agreement.
3. Upon a change in control of the Corporation or if the agreement is
terminated by the Executive for Good Reason or by the Corporation without
Cause, all rights of the Executive under the contract would continue for two
years and all options held by the Executive would accelerate and immediately
vest and be exercisable in whole or in part at any time during the remaining
two-year term of the agreement.
4. In the event of death or permanent disability of the Executive all options
shall accelerate and immediately vest.
5. For purposes of these agreements, "Cause" would be defined as willful
failure to perform the Executive's duties after notice and a reasonable
opportunity to cure the breach or conviction of a felony.
/s/ ELI AYALON /s/ IGAL KOHAVI
- ------------------------------------- -------------------------------------
DSP Group Inc. Igal KOHAVI
/s/ ELI AYALON
- -------------------------------------
DSP Semiconductors Ltd.
<PAGE>
EXHIBIT 10.28
DSP GROUP, INC.
1993 DIRECTOR STOCK OPTION PLAN
(As Amended November 3, 1997)
1. PURPOSES OF THE PLAN. The purposes of this Director Stock Option Plan
are to attract and retain the best available personnel for service as Directors
of the Company, to provide additional incentive to the Outside Directors of the
Company to serve as Directors, and to encourage their continued service on the
Board.
All options granted hereunder shall be "nonstatutory stock options."
2. DEFINITIONS. As used herein, the following definitions shall apply:
a. "BOARD" shall mean the Board of Directors of the Company.
b. "CODE" shall mean the Internal Revenue Code of 1986, as amended.
c. "COMMON STOCK" shall mean the Common Stock of the Company.
d. "COMPANY" shall mean DSP Group, Inc., a Delaware corporation.
e. "CONTINUOUS STATUS AS A DIRECTOR" shall mean the absence of any
interruption or termination of service as a Director.
f. "DIRECTOR" shall mean a member of the Board.
g. "EFFECTIVE DATE" shall have the meaning as set forth in Section 6
below.
h. "EMPLOYEE" shall mean any person, including officers and
Directors, employed by the Company or any Parent or Subsidiary of the
Company. The payment of a Director's fee by the Company shall not be
sufficient in and of itself to constitute "employment" by the Company.
i. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
j. "FIRST OPTION" shall have the meaning as set forth in Section
4.b.ii. below.
k. "OPTION" shall mean a stock option granted pursuant to the Plan.
l. "OPTIONED STOCK" shall mean the Common Stock subject to an
Option.
m. "OPTIONEE" shall mean an Outside Director who receives an Option.
n. "OUTSIDE DIRECTOR" shall mean a Director who is not an Employee.
o. "PARENT" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
p. "PLAN" shall mean this 1993 Director Stock Option Plan.
q. "SHARE" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
r. "SUBSEQUENT OPTION" shall have the meaning as set forth in
Section 4.b.iii. below.
s. "SUBSIDIARY" shall mean a "Subsidiary Corporation," whether
now or hereafter existing, as defined in Section 424(f) of the Code.
t. "AFFILIATE" and "ASSOCIATE" shall have the respective meanings
ascribed to such terms in Rule 126-2 promulgated under the Exchange Act.
u. "CHANGE IN CONTROL" means a change in ownership or control of
the Company effected through either of the following transactions:
(i) the direct or indirect acquisition by any person or
related group of persons (other than an acquisition from or by the Company or
by a Company-sponsored employee benefit
1
<PAGE>
plan or by a person that directly or indirectly controls, is controlled by,
or is under common control with, the Company) of beneficial ownership (within
the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the Company's
outstanding securities pursuant to a tender or exchange offer made directly
to the Company's stockholders which a majority of the Continuing Directors
who are not Affiliates or Associates of the offeror do not recommend such
stockholders accept, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) months or less such that a majority of the Board members
(rounded up to the next whole number) ceases, by reason of one or more
contested elections for Board membership, to be comprised of individuals who
are Continuing Directors.
v. "CONTINUING DIRECTORS" means members of the Board who either
(i) have been Board members continuously for a period of at least thirty-six
(36) months or (ii) have been Board members for less than thirty-six (36)
months and were elected or nominated for election as Board members by at
least a majority of the Board members described in clause (i) who were still
in office at the time such election or nomination was approved by the Board.
w. "CORPORATE TRANSACTION" means any of the following
stockholder-approved transactions to which the Company is a party:
(i) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is
to change the state in which the Company is incorporated;
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company (including the capital stock
of the Company's subsidiary corporations) in connection with the complete
liquidation or dissolution of the Company; or
(iii) any reverse merger in which the Company is the surviving
entity but in which securities possessing more than fifty percent (50%) of
the total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such
securities immediately prior to such merger.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 11
of the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is 175,000 Shares (the "Pool") of Common Stock. The
Shares may be authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan. If Shares which were acquired upon exercise of an Option
are subsequently repurchased by the Company, such Shares shall not in any event
be returned to the Plan and shall not become available for future grant under
the Plan.
4. ADMINISTRATION OF AND GRANTS OF OPTIONS UNDER THE PLAN.
a. ADMINISTRATOR. Except as otherwise required herein, the Plan
shall be administered by the Board.
b. PROCEDURE FOR GRANTS. All grants of Options hereunder shall
be automatic and nondiscretionary and shall be made strictly in accordance
with the following provisions:
i) No person shall have any discretion to select which
Outside Directors shall be granted Options or to determine the number of
Shares to be covered by Options granted to Outside Directors.
ii) Each person who is an Outside Director on the Effective
Date of this Plan and each Outside Director who subsequently becomes a member
of the Board of Directors shall be automatically granted an Option to
purchase 15,000 Shares (the "First Option") on the date on which the later of
the following events occurs: (A) the Effective Date of this Plan, as
determined in accordance with Section 6
2
<PAGE>
hereof; or (B) the date on which such person first becomes an Outside
Director, whether through election by the stockholders of the Company or
appointment by the Board of Directors to fill a vacancy.
iii) Additionally, beginning on January 1, 1997, each Outside
Director shall be automatically granted (i) an Option to purchase 5,000
Shares (a "Subsequent Option"), on January 1 of each year, if on such date,
he or she shall have served on the Board for at least six (6) months and (ii)
an Option to purchase 5,000 Shares (a "Committee Option"), on January 1 of
each year, for each committee of the Board on which he or she shall have
served as the chairperson for at least six (6) months on such date.
iv) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, in the event that a grant would cause the number of Shares
subject to outstanding Options, plus the number of shares previously
purchased upon exercise of Options to exceed the Pool, then each such
automatic grant shall be for that number of Shares determined by dividing the
total number of Shares remaining available for grant by the number of grants
to be made on the automatic grant date. Any further grants shall then be
deferred until such time, if any, as additional Shares become available for
grant under the Plan through action of the stockholders to increase the
number of Shares which may be issued under the Plan or through cancellation
or expiration of Options previously granted hereunder.
v) Notwithstanding the provisions of subsections ii) and
iii) hereof, any grant of an Option made before the Company has obtained
stockholder approval of the Plan in accordance with Section 17 hereof shall
have their exercisability conditioned upon obtaining such stockholder
approval of the Plan in accordance with Section 17 hereof.
vi) The terms of any Option granted hereunder shall be as
follows:
a) The First Option shall be exercisable only while
the Outside Director remains a Director of the Company, except as set forth
in Section 9 hereof.
b) The exercise price per Share shall be 100% of the
fair market value (as defined in Section 8.b. hereunder) per Share on the
date of grant of the First Option.
c) The First Option shall vest and become exercisable
as to one-third of the Shares subject to the First Option on the first
anniversary of the date of grant of the First Option, and shall vest and
become exercisable as to one-third of the Shares subject to the First Option
at the end of each twelve-month period thereafter, subject to the provisions
set forth in Section 9, below.
c. POWERS OF THE BOARD. Subject to the provisions and
restrictions of the Plan, the Board shall have the authority, in its
discretion: (i) to determine, upon review of relevant information and in
accordance with Section 8.b. of the Plan, the fair market value of the Common
Stock; (ii) to determine the exercise price per share of Options to be
granted, which exercise price shall be determined in accordance with Section
8.a. of the Plan; (iii) to interpret the Plan; (iv) to prescribe, amend and
rescind rules and regulations relating to the Plan; (v) to authorize any
person to execute on behalf of the Company any instrument required to
effectuate the grant of an Option previously granted hereunder; and (vi) to
make all other determinations deemed necessary or advisable for the
administration of the Plan.
d. EFFECT OF BOARD'S DECISION. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees and
any other holders of any Options granted under the Plan.
5. ELIGIBILITY. Options may be granted only to Outside Directors. All
Options shall be automatically granted in accordance with the terms set forth in
Section 4.b. hereof. An Outside Director who has been granted an Option may, if
he or she is otherwise eligible, be granted an additional Option or Options in
accordance with such provisions.
The Plan shall not confer upon an Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his or her directorship at any time.
6. TERM OF PLAN; EFFECTIVE DATE. The Plan shall become effective on the
date on which the Company's registration statement on Form S-1 (or any successor
form thereof) is declared effective by the Securities and Exchange Commission
(the "Effective Date"). It shall continue in effect for a term of ten (10)
years, unless sooner terminated under Section 13 of the Plan, subject to the
limitations set forth in this Plan.
3
<PAGE>
7. TERM OF OPTION. The term of each Option shall be ten (10) years from
the date of grant thereof.
8. EXERCISE PRICE AND CONSIDERATION.
a. EXERCISE PRICE. The per Share exercise price for the Shares
to be issued pursuant to exercise of an Option shall be 100% of the fair
market value per Share on the date of grant of the Option.
b. FAIR MARKET VALUE. The fair market value per Share shall be
the mean of the bid and asked prices of the Common Stock in the
over-the-counter market on the date of grant, as reported in THE WALL STREET
JOURNAL (or, if not so reported, as otherwise reported by the National
Association of Securities Dealers Automated Quotation ("NASDAQ") System) or,
in the event that the Common Stock is traded on the NASDAQ National Market
System or listed on a stock exchange, the fair market value per Share shall
be the closing price on such system or exchange on the date of grant of the
Option, as reported in THE WALL STREET JOURNAL; provided, however, that if
such market or exchange is closed on the date of the grant of the Option then
the fair market value per Share shall be based on the most recent date on
which such trading occurred immediately prior to the date of the grant of the
Option; provided, further, that for purposes of First Options granted on the
Effective Date, the fair market value per share shall be the initial public
offering price as set forth in the final prospectus filed with the Securities
and Exchange Commission pursuant to Rule 424 under the Securities Act of
1933, as amended.
c. FORM OF CONSIDERATION. The consideration to be paid for the
Share to be issued upon exercise of an Option shall consist entirely of cash,
check, other Shares having a fair market value on the date of surrender equal
to the aggregate exercise price of the Shares as to which said Option shall
be exercised (which, if acquired from the Company, shall have been held for
at least six months), delivery of a properly executed exercise notice,
together with such other documentation as the Company and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price,
or any combination of such methods of payment and/or any other consideration
or method of payment as shall be permitted under applicable corporate law.
9. EXERCISE OF OPTION.
a. PROCEDURE FOR EXERCISE: RIGHTS AS A STOCKHOLDER. An Option
granted hereunder shall be exercisable at such times as are set forth in
Section 4.b. hereof; provided, however, that no Options shall be exercisable
until stockholder approval of the Plan in accordance with Section 17 hereof
has been obtained.
An option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 8.c. of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a stockholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. A share certificate for the number of Shares so acquired shall be
issued to the Optionee as soon as practicable after exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
b. TERMINATION OF STATUS AS A DIRECTOR. If an Outside Director
ceases to serve as a Director, he or she may, but only within three (3)
months after the date he or she ceases to be a Director of the Company,
exercise his or her Option to the extent that he or she was entitled to
exercise it at the date of such termination. Notwithstanding the foregoing,
in no event may the Option be exercised after its term set forth in Section 7
has expired. To the extent that such Outside Director was not entitled to
exercise an Option at the date of such termination, or does not exercise such
Option (which he or she was entitled to exercise) within the time specified
herein, the Option shall terminate.
4
<PAGE>
c. DISABILITY OF OPTIONEE. Notwithstanding the provisions of
Section 9.b. above, in the event a Director is unable to continue his or her
service as a Director with the Company as a result of his or her total and
permanent disability (as defined in Section 22.3 of the Internal Revenue Code),
he or she may, but only within six (6) months from the date of such termination,
exercise his or her Option to the extent he or she was entitled to exercise it
at the date of such termination. Notwithstanding the foregoing, in no event may
the Option be exercised after its term set forth in Section 7 has expired. To
the extent that he or she was not entitled to exercise the Option at the date of
termination, or if he or she does not exercise such Option (which he or she was
entitled to exercise) within the time specified herein, the Option shall
terminate.
d. DEATH OF OPTIONEE. In the event of the death of an Optionee:
i) during the term of the Option who is, at the time of his
or her death, a Director of the Company and who shall have been in Continuous
Status as a Director since the date of grant of the Option, the Option may be
exercised, at any time within twelve (12) months following the date of death,
by the Optionee's estate or by a person who acquired the right to exercise
the Option by bequest or inheritance, but only to the extent of the right to
exercise that would have accrued had the Optionee continued living and
remained in Continuous Status as Director for six (6) months after the date
of death. Notwithstanding the foregoing, in no event may the Option be
exercised after its term set forth in Section 7 has expired.
ii) within three (3) months after the termination of
Continuous Status as a Director, the Option may be exercised, at any time
within twelve (12) months following the date of death, by the Optionee's
estate or by a person who acquired the right to exercise the Option by
bequest or inheritance, but only to the extent of the right to exercise that
had accrued at the date of termination. Notwithstanding the foregoing, in no
event may the option be exercised after its term set forth in Section 7 has
expired.
10. NONTRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution. The designation of a
beneficiary by an Optionee does not constitute a transfer. An Option may be
exercised during the lifetime of an Optionee only by the Optionee or a
transferee permitted under this Section.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR
ASSET SALE.
a. CHANGES IN CAPITALIZATION. Subject to any required action by
the stockholders of the Company, the number of Shares covered by each
outstanding Option and the number of Shares which have been authorized for
issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, as well as the price per Share covered by each such outstanding
Option, shall be proportionately adjusted for an increase or decrease in the
number of issued Shares resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares effected without
receipt of consideration by the Company; provided, however, that conversion
of any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made
by the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of
stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or prices of Shares subject to an Option.
b. DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, to the extent that an Option has
not been previously exercised, it will terminate immediately prior to the
consummation of such proposed action. The Board may, in the exercise of its
sole discretion in such instances, declare that any Option shall terminate as
of a date fixed by the Board and give each Optionee the right to exercise his
or her Option as to all or any part of the Optioned Stock, including Shares
as to which the Option would not otherwise be exercisable.
c. MERGER OR ASSET SALE. In the event of a Corporate
Transaction, each Option which is at the time outstanding under the Plan
automatically shall become fully vested and exercisable and be released from
any restrictions on transfer and repurchase or forfeiture rights, immediately
prior to the specified effective date of such Corporate Transaction, for all
of the Shares at the time represented by such Option. Effective upon the
consummation of the Corporate Transaction, all outstanding Options under the
Plan shall terminate unless assumed by the successor company or its Parent.
In the event of a Change in Control (other than a Change in Control which
also is a Corporate Transaction), each Option which is at the time
outstanding under the Plan
5
<PAGE>
automatically shall become fully vested and exercisable and be released from
any restrictions on transfer and repurchase or forfeiture rights, immediately
prior to the specified effective date of such Change in Control, for all of
the Shares at the time represented by such Options. Each such Option shall
remain exercisable until the expiration or sooner termination of the
applicable Option term.
12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Section 4.b. hereof.
Notice of the determination shall be given to each Outside Director to whom an
Option is so granted within a reasonable time after the date of such grant.
13. AMENDMENT AND TERMINATION OF THE PLAN.
a. AMENDMENT AND TERMINATION. The Board may amend or terminate
the Plan from time to time in such respects as the Board may deem advisable;
provided that, to the extent necessary and desirable to comply with Rule
16b-3 under the Exchange Act (or any other applicable law or regulation), the
Company shall obtain approval of the stockholders of the Company to Plan
amendments to the extent and in the manner required by such law or
regulation. Notwithstanding the foregoing, the provisions set forth in
Section 4 of this Plan (and any other Sections of this Plan that affect the
formula award terms required to be specified in this Plan by Rule 16b-3)
shall not be amended more than once every six months, other than to comport
with changes in the Code, the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder.
b. EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan that would impair the rights of any Optionee shall
not affect Options already granted to such Optionee and such Options shall
remain in full force and effect as if this Plan had not been amended or
terminated, unless mutually agreed otherwise between the Optionee and the
Board, which agreement must be in writing and signed by the Optionee and the
Company.
14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares, if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
15. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
16. OPTION AGREEMENT. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
17. STOCKHOLDER APPROVAL.
a. Continuance of the Plan shall be subject to approval by the
stockholders of the Company at or prior to the first annual meeting of
stockholders held subsequent to the granting of an Option hereunder. If such
stockholder approval is obtained at a duly held stockholders' meeting, it may
be obtained by the affirmative vote of the holders of a majority of the
outstanding shares of the Company present or represented and entitled to vote
thereon. If such stockholder approval is obtained by written consent, it may
be obtained by the written consent of the holders of a majority of the
outstanding shares of the Company.
Any required approval of the stockholders of the Company shall be
solicited substantially in accordance with Section 14.a. of the Exchange Act
and the rules and regulations promulgated thereunder.
6
<PAGE>
EXHIBIT 13
DSP Group Inc.
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
----------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues $61,959 $52,910 $50,347 $28,604 $12,447
Income (loss) from continuing operations $11,034 $ 5,979 $ 7,211 $ 4,032 $ (467)
Weighted average number of common shares
outstanding during the period used to
compute basic earnings per share 9,736 9,510 9,352 8,111 2,125
Weighted average number of common shares
outstanding during the period used to
compute diluted earnings per share 10,203 9,581 9,658 9,135 2,125
Net income (loss) per share - Basic $ 1.13 $ .63 $ .77 $ .50 $ (.22)
Net income (loss) per share - Diluted $ 1.08 $ .62 $ .75 $ .44 $ (.22)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities $65,944 $42,934 $33,828 $26,376 $ 2,019
Working capital $66,947 $47,851 $39,304 $29,824 $ 1,797
Total assets $85,168 $59,207 $54,854 $43,563 $ 8,070
Long-term obligations, less current portion $ - $ - $ - $ - $ 1,211
Total stockholders' equity $74,170 $54,449 $47,541 $36,801 $ 2,517
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS BY QUARTER
-------------------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------------------
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
QUARTERLY DATA: 4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
Revenues $16,581 $16,558 $14,642 $14,178 $15,081 $13,611 $13,021 $11,197
Gross profit $8,697 $8,050 $6,595 $6,305 $6,660 $5,015 $4,940 $5,767
Net income (loss) (1) $3,445 $3,348 $2,225 $2,016 $5,400 $(263) $268 $574
Net income (loss) per share - Basic $.34 $.34 $.23 $.21 $.57 $(.03) $.03 $.06
Net income (loss) per share - Diluted $.33 $.32 $.23 $.21 $.56 $(.03) $.03 $.06
</TABLE>
(1) See Notes 1 and 8 of Notes to Consolidated Financial Statements for
explanation of charge for acquired in-process research and development in
third quarter of 1996, and gain on settlement of a lawsuit in the fourth
quarter of 1996.
17
<PAGE>
DSP Group Inc.
Price Range of Common Stock
The Company's common stock trades (Nasdaq symbol "DSPG") on the Nasdaq
National Market. The following table presents for the periods indicated the
intraday high and low sale prices for the common stock as reported by the
Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
--------------------
<S> <C> <C>
1997
First Quarter $13.00 $ 8.50
Second Quarter $15.50 $ 8.50
Third Quarter $40.38 $15.06
Fourth Quarter $42.25 $17.94
1996
First Quarter $ 13.75 $ 8.25
Second Quarter $ 15.00 $ 8.75
Third Quarter $ 10.50 $ 6.75
Fourth Quarter $ 11.25 $ 7.38
</TABLE>
As of December 31, 1997, there were approximately 90 holders of record
of the Company's Common Stock, which the Company believes represents
approximately 6,400 beneficial holders. The Company has not paid cash
dividends on its Common Stock and presently intends to follow a policy of
retaining any earnings for reinvestments in its business.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATION
RESULTS OF OPERATIONS. 1997 has been a successful year for DSP Group,
following the completion of the Company's turnaround in 1996. Results of
operations for 1997 show record level revenues, improved product gross
margins, over all decreased operating expenses due to close monitoring.
The Company's liquidity and working capital continually improved
throughout 1997 and by year end reached record highs in both cash and
marketable securities and working capital.
TOTAL REVENUES. Total revenues were $62.0 million in 1997, $52.9 million in
1996 and $50.4 million in 1995, representing an increase over the prior year
of 17% for 1997 compared with a 5% increase for 1996 over 1995. The increase
in 1997 is due primarily to increased sales of the Company's TAD speech
processors and royalties received from licensees.
Through 1997 the Company maintained its role as a leading supplier of
technologically advanced, cost effective speech processors. The Company's
future operating results will be dependent upon a variety of factors - see
also "Factors Affecting Operating Results" in this report and in the
Company's Form 10-K for the year ended December 31, 1997.
Export sales, primarily consisting of TAD speech processors shipped to
manufacturers in Europe and Asia, represented 92%, 91% and 81% of total
revenues for the Company in 1997, 1996 and 1995 respectively. All export
sales are denominated in U.S. dollars.
SIGNIFICANT CUSTOMERS. Revenues from a distributor, Tomen Electronics,
accounted for 33% of total revenues in 1997 compared to 17% in 1996 and 25%
in 1995.
Revenues from the Samsung group accounted were for 6% in 1997 compared to 11%
in 1996. The loss of one or more major distributors or major customers could
have an adverse effect on the Company's business, financial condition and
results of operations.
GROSS PROFIT. Gross profit as a percentage of total revenues was 48% in
1997, 42% in 1996 and 48% in 1995. The increase in gross profit in 1997
compared to 1996 was due primarily to the increase in product gross profit.
This gross profit was achieved even though the Company continues to
experience price pressure for its TAD products. In 1997, management
succeeded in reducing the high costs of manufacturing to create a higher
gross profit.
Product gross profit as a percentage of product sales increased to 39%
in 1997 from 29% in 1996. The decrease in product costs was achieved as a
result of improvements in technology and better manufacturing prices obtained
from foundries. In 1995 the product gross profit as a percentage of product
sales was 40% mainly due to higher selling prices in 1995 as compared with
selling prices in 1996.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses slightly
decreased in 1997 to $8.4 million from $8.5 million in 1996. Research and
development expenses in 1995 were $8.4 million. This slight decrease in
research and development expense in 1997 occurred as the Company finalized
the consolidation of its research and development activities in Israel, which
resulted in a closely managed, leaner and better focused research team. The
slightly higher level of research and development expenses in 1996 compared
to 1995 was primarily due to additional cost required to eliminate
redundancies in the Company's research and development activities. Research
and development expenses as a percentage of total revenues decreased to 14%
in 1997 from 16% in 1996 and from 17% in 1995.
19
<PAGE>
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased in 1997
to $4.9 million from $4.4 million in 1996. This increase in expenses,
primarily in the second half of 1997, is due to the Company's establishment
of a new worldwide marketing group and extensive participation in trade shows
and professional conferences.
Sales and marketing expenses decreased to $4.4 million in 1996 from $5.1
million in 1995, due primarily to the elimination of redundant managerial
layers and strict monitoring of expenses. This decrease was partially offset
by higher marketing expenses in the European office which had started to
operate at the end of 1995. Sales and marketing expenses as a percentage of
total revenues remained at 8% in both 1997 and 1996. In 1995 sales and
marketing expenses as a percentage of total revenues was 10%.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased significantly to $4.5 million in 1997 from $5.7 million in 1996 and
from $5.6 million in 1995. General and administrative expenses decreased
mainly due to a decrease in salary and fringe benefits expense, legal
expenses and closer monitoring of other expenses, such as facilities rent and
maintenance and insurance expenses. General and administrative expenses in
1996 contain one time charges associated with the departure of senior
management in the Santa Clara office.
General and administrative expenses as a percentage of total revenues
decreased to 7% in 1997 from 11% in 1996 and 1995.
UNUSUAL ITEMS. In July 1996, the Company made an initial cash investment of
$2.0 million for approximately 40% of the equity interests in Aptel Ltd.
("Aptel"), which is located in Netanya, Israel. Aptel was an emerging company
in its product development stage. In connection with the acquisition, the
Company incurred a one-time write-off of acquired in-process technology of
$1.5 million based on an independent estimate of value.
In the second quarter of 1995, the Company decided to sell its 89%
equity interest in its subsidiary Nogatech Inc. Accordingly, the Company
incurred a charge of $500,000 to write down Nogatech Inc., to its estimated
fair value less costs to sell. In addition, in April 1995, the former
Chairman of the Board of the Company resigned to pursue other business
interests and as a result the Company incurred $413,000 of severance expense.
OTHER INCOME (EXPENSE). Interest and other income increased to $2.9 million
in 1997 from $1.6 million in 1996 and from $1.4 million in 1995. The increase
in 1997 is a result of higher levels of cash equivalents and marketable
securities in 1997 as compared with 1996 and 1995, as well as higher interest
yields.
Equity in loss of equity method investees were $706,000, $457,000 and
$212,000 in 1997, 1996 and 1995, respectively. The increase was due to higher
equity losses of both Aptel and AudioCodes Ltd. Equity in loss of equity
method investees also included amortization of the excess of purchase price
over net assets acquired for an equity investment in AudioCodes, Ltd., made
in the second quarter of 1994.
GAIN ON SETTLEMENT OF LITIGATION. In October 1996, the Company entered into a
settlement agreement with Rockwell International Corporation. As part of the
litigation settlement a one time gain of $3.8 million, net of legal
expenses, was reported.
GAIN ON SALE OF STOCK IN AFFILIATE. The Company sold its remaining equity
interest in DSP Communications, Inc. ("DSPC"), in DSPC's initial public
offering in 1995. DSPC is the successor of a former subsidiary of the
Company, DSP Telecommunications, Ltd. The equity interest, which had no
book value, was sold for $1.9 million of cash, including amounts to related
parties of $1.4 million.
20
<PAGE>
PROVISION FOR INCOME TAXES. The effective tax rate for the years ended
December 31, 1997, 1996 and 1995 was 20%, 15% and 0.7%, respectively. The
tax rate for 1997 is higher than 1996 due to decreased percentage benefits
from the utilization of net operating loss carry forwards, offset slightly by
increased percentage foreign tax holiday benefits and the recognition of
previously unbenefited deferred tax assets. In 1995, the Company benefited,
for federal, state, and Israeli tax purposes, from the utilization of its net
operating loss carry forwards as well as the recognition of certain other
deferred tax assets.
DSP Semiconductors Ltd. in Israel has been granted "Approved Enterprise"
status by the Israel government according to two investment plans. The
Approved Enterprise status allows a tax holiday for a period of 2 - 4 years
and a corporate tax rate of 10% for an additional 6 - 8 years on the
respective investment plans' proportionate share of taxable income. The tax
benefits under these investment plans are scheduled to expire in 2005.
Management has assessed the need for a valuation allowance against
deferred tax assets and has concluded that it is likely that $1.3 million
will not be realized. Management believes that the remaining deferred tax
asset of approximately $3.5 million will be realized based on current levels
of future taxable income and potentially refundable taxes. Approximately,
$828,000 of the valuation allowance relates to deferred tax assets
attributable to stock option deductions, the benefit of which will be
credited to equity when realized.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company generated $18.6 million of cash and cash
equivalents from its operating activities as compared to $11.3 million during
1996 and $4.1 million in 1995. The increase in 1997 from 1996 was primarily
due to the increase in net income from operations and the increase in
deferred revenue. For 1996 as compared with 1995, cash flow from operations
increased despite the decline in net income primarily because of a net
reduction in operation assets and liabilities as compared with an increase in
1995, the non-operating cash flow effects of acquired research and
development in 1996 as compared with the non-operating cash flow from gain on
sale of stock in affiliated company in 1995, and a decrease in deferred taxes
in 1996 as compared with an increase in 1995.
The Company invests excess cash in short and long term investments,
depending on its projected cash needs for operations, capital expenditures
and other business purposes. In 1997, 1996 and 1995, the Company purchased
$77.1 million, $32.2 million and $28.3 million, respectively, and sold $49.3
million, $20.6 million and $18.2 million, respectively, of investments
classified as marketable securities. In 1997, the Company extended the
average maturity of its investments to a maximum of 18 months. As a result,
as of December 31, 1997 a larger portion of the Company's investments were
held for a period greater than one year as compared to the Company's
investments at December 31, 1996.
Capital equipment purchases in 1997, 1996 and 1995 were $2.2 million,
$836,000 and $3.1 million, respectively, for computer hardware and software
used in engineering development, engineering test equipment, leasehold
improvements, vehicles, and furniture and fixtures. The 1997 acquisitions of
capital equipment were primarily leasehold improvements in the new facility
in Israel.
In 1996, the Company made an initial cash investment of $2.0 million for
approximately 40% of the equity interests in Aptel Ltd. ("Aptel"). In 1997,
the Company invested an additional $176,000 in convertible debentures in
Aptel. Subsequently, Aptel's shareholders, including the Company, exchanged
their shares in Aptel for shares in Nexus Telecommunications Systems Ltd.
("Nexus"), an Israeli company, whose shares are registered and traded on the
Nasdaq SmallCap Market. In 1995, the Company sold all its shares of DSP
Communications Inc. and Nogatech, Inc. for aggregated amount of $3.4 million.
21
<PAGE>
Cash provided by financing activities in 1997, totaled $6.6 million
compared to $495,000 and $1.9 million in 1996 and 1995, respectively,
received upon the exercise of employee stock options and the issuance of
Common Stock under the Company's employee stock purchase plan. Repayment of
stockholders' notes receivable provided cash of $434,000 and $706,000 in 1996
and 1995, respectively.
At December 31, 1997, the Company's principal source of liquidity
consisted of cash and cash equivalents totaling $7.3 million and marketable
securities of $58.6 million. The Company's working capital at December 31,
1997 was $67.0 million, an increase from $47.9 million at December 31, 1996.
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 business, products
and technologies. Accordingly, a portion of its available cash may be used
for the acquisition of complementary products or business. Such potential
transactions may require substantial capital resources, which may require the
Company to seek additional debt or equity financing.
FACTORS AFFECTING OPERATING RESULTS. The stockholders' letter and discussion
in this annual report concerning the Company's future products, expenses,
revenue, liquidity and cash needs as well as the Company's plans and
strategies contain forward-looking statements concerning the Company's future
operations and financial results. These forward-looking statements are based
on current expectations and the Company assumes no obligation to update this
information. Numerous factors could cause results to differ from those
described in these statements and prospective investors and stockholders
should carefully consider the factors set forth below in evaluating these
forward-looking statements.
The Company's revenues are derived predominantly from product sales and
accordingly vary significantly depending on the volume and timing of product
orders. The Company's quarterly operating results also depend on the timing
of the recognition of license fees and the level of per unit royalties.
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 are dependent upon the success of its
original equipment manufacturer ("OEM") licensees in introducing products
utilizing the Company's technology and the success of those OEM products in
the marketplace. Royalties from two DSP Core licensees have started to become
meaningful in 1997.
The Company's quarterly operating results may fluctuate significantly as
demand for TADs varies during the year due to seasonal customer buying
patterns, and other factors, including the mix of products sold; fluctuations
in the level of sales by OEMs and other vendors of products incorporating the
Company's products; changes in general economic conditions, including the
changing economics conditions in Southeast Asia and other factors, including
those documented elsewhere in this report.
RECENT DEVELOPMENTS - REVENUES FROM ASIA. In 1997, the Company generated
approximately $19.9 million, or 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 Maxon, Daewoo and L.G.
Electronics. Many of these customers are
22
<PAGE>
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 the Asian region 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 does not believe that economic
conditions in Asia had a material effect on its 1997 revenue. 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 quarter of 1998 the Company has been experiencing a
decline in the flow of orders from Southeast Asia, specially from South Korea
mainly due to the general economic atmosphere in that region. If the trend
continues, it may result in a decrease of the Company's backlog at the end of
the first quarter. There can be no assurance that continued negative
developments in the Asian region will not have an 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
reductions of manufacturing costs would have a material adverse effect on the
Company's business, financial condition and results of operations. The
markets for the Company's products are extremely competitive and the Company
expects this competition will increase. The Company's existing and potential
competitors in each of its markets include large and emerging domestic and
foreign companies, many of which have significantly greater financial,
technical, manufacturing, marketing, selling and distribution resources and
management expertise than the Company. Sales of TAD products comprise a
substantial part of the Company's product sales. Any adverse change in the
digital TAD market or the Company's ability to compete and maintain its
position in that market would have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENTS ON 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.
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 of
supply could have an adverse effect on the Company's business and results of
operations due to customers delay or discontinuance of orders for the
Company's products until such components are available.
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 virtually every Company's computer operation will be affected
in some way.
23
<PAGE>
The Company is utilizing both internal and external resources to
identify, correct or reprogram, and test the Company's systems for Year 2000
compliance. It is anticipated that all reprogramming efforts will be
completed by December 31, 1998, allowing adequate time for testing. To date,
confirmations have been received from the Company's primary processing
vendors that plans are being developed to address processing of transactions
in the year 2000. Management believes that Year 2000 compliance expenses will
not have an adverse effect on the Company's earnings. However, there can be
no assurances that Year 2000 problems will not accur with respect to the
Company's computer systems. 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.
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, NTT and
VoiceCraft recently raised public claims that they have patents related to
the G.723.1 technology. If it appears necessary or desirable, the Company may
seek licenses under such patents or intellectual property rights that it is
allegedly infringing. Although holders of such intellectual property rights
commonly offer such licenses, no assurances can be given that licenses will
be offered or that terms of any offered licenses will be acceptable to the
Company. The failure to obtain a license for key intellectual property rights
from a third party for technology used by the Company could cause the Company
to incur substantial liabilities and to suspend the manufacture of products
utilizing the technology. However, the Company in its licensing activities
represents only the four co-developers' patents and intellectual property
rights as they relate to the G.723.1 technology. The Company believes that
the ultimate resolution of these matters will not have material adverse
effect on the Company's financial position and results of operations, or cash
flows.
STOCKHOLDERS' LITIGATION. In November 1995, after the Company's stock price
declined, several lawsuits were filed in the United States District Court for
the Northern District of California 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 dismissed
with leave to amend plaintiffs' claim that the Company is responsible for the
statements contained in analysts' reports, but the plaintiffs have chosen not
to amend this claim. On November 5, 1997, the parties reached an agreement in
principle to settle this litigation. The proposed settlement requires that
the Company fund approximately $50,000 of the settlement amount to fulfill
the retention amounts under the Company's insurance policy. The proposed
settlement is subject to the execution of a stipulation of settlement and
court approval.
The 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.
24
<PAGE>
DSP Group, Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
-----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Product sales $51,238 $41,290 $41,425
Licensing, royalties and other 10,721 11,620 9,012
---------------------------------------
Total revenues 61,959 52,910 50,437
Costs of revenues:
Cost of product sales 31,143 29,432 24,775
Cost of licensing, royalties and other 1,169 1,096 1,308
---------------------------------------
Total cost of revenues 32,312 30,528 26,083
---------------------------------------
Gross profit 29,647 22,382 24,354
Operating expenses:
Research and development 8,420 8,481 8,396
Sales and marketing 4,934 4,429 5,135
General and administrative 4,505 5,669 5,624
Unusual items - 1,529 913
---------------------------------------
Total operating expenses 17,859 20,108 20,068
---------------------------------------
Operating income 11,788 2,274 4,286
Other income (expense):
Interest and other income 2,936 1,627 1,399
Interest expense and other (226) (158) (102)
Gain on settlement of litigation, net of expenses - 3,750 -
Equity in income (loss) of equity method investees,
net of amortization of goodwill
of $351 in 1997, $286 in 1996, and $273 in 1995 (706) (457) (212)
Gain on sale of stock in affiliated company - - 1,893
---------------------------------------
Income before provision for income taxes 13,792 7,036 7,264
Provision for income taxes (2,758) (1,057) (53)
---------------------------------------
Net income $11,034 $ 5,979 $ 7,211
---------------------------------------
---------------------------------------
Net earning per share:
Basic $ 1.13 $ 0.63 $ 0.77
Diluted $ 1.08 $ 0.62 $ 0.75
Shares used in per share computation:
Basic 9,736 9,510 9,352
Diluted 10,203 9,581 9,658
</TABLE>
SEE ACCOMPANYING NOTES.
25
<PAGE>
DSP Group, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
--------------------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,325 $ 12,172
Marketable securities 58,619 30,762
Accounts receivable, less allowance for returns and
doubtful accounts of $293 in 1997 and $636 in 1996 3,594 4,861
Inventories 4,116 2,957
Deferred income taxes 2,850 500
Prepaid expenses and other current assets 1,441 1,357
--------------------------
Total current assets 77,945 52,609
Property and equipment, at cost:
Computer equipment 6,341 5,985
Furniture and fixtures and other 1,428 1,040
Leasehold improvements 1,241 299
--------------------------
9,010 7,324
Less accumulated depreciation and amortization 5,522 4,033
--------------------------
3,488 3,291
Other investments, net of accumulated amortization 2,935 2,415
Other assets, net of accumulated amortization of $284
in 1996 150 388
Deferred income taxes 650 504
--------------------------
Total assets $ 85,168 $ 59,207
--------------------------
--------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
26
<PAGE>
DSP Group, Inc.
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
--------------------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,319 $ 1,428
Accrued compensation and benefits 2,171 1,739
Income taxes payable 1,691 908
Accrued royalties 171 176
Deferred revenue 2,360 -
Accrued expenses and other 1,286 507
--------------------------
Total current liabilities 10,998 4,758
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value:
Authorized shares -- 5,000
Issued and outstanding shares -- none - -
Common stock, $0.001 par value:
Authorized shares -- 20,000
Issued and outstanding shares -- 10,094 in 1997
and 9,540 in 1996 10 10
Additional paid-in capital 74,418 66,781
Unrealized gain on marketable equity security 1,050 -
Accumulated deficit (1,308) (12,342)
--------------------------
Total stockholders' equity 74,170 54,449
--------------------------
Total liabilities and stockholders' equity $ 85,168 $ 59,207
--------------------------
--------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
27
<PAGE>
DSP Group, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
THREE YEARS ENDED ADDITIONAL STOCKHOLDERS' UNREALIZED GAIN TOTAL
DECEMBER 31, 1997 COMMON STOCK PAID-IN NOTES ACCUMULATED ON MARKETABLE STOCKHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT EQUITY SECURITY EQUITY
(IN THOUSANDS)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 9,199 $ 9 $ 63,151 $ (827) $ (25,532) $ -- $ 36,801
Exercise of Common Stock
options by employees and
third parties for cash and
notes receivable 224 -- 1,986 (313) -- -- 1,673
Compensation expense upon
acceleration of stock option
vesting -- -- 130 -- -- -- 130
Sale of Common Stock under
employee stock purchase plan 16 -- 222 -- -- -- 222
Income tax benefit from stock
options exercised -- 798 -- -- -- 798
Payments on notes receivable
from stockholders -- -- -- 706 -- -- 706
Net income -- -- -- 7,211 -- 7,211
-------------------------------------------------------------------------------------------
Balance at December 31, 1995 9,439 9 66,287 (434) (18,321) -- 47,541
-------------------------------------------------------------------------------------------
Exercise of Common Stock
options by employees 77 1 283 -- -- -- 284
Sale of Common Stock under
employee stock purchase plan 24 -- 211 -- -- -- 211
Payments on notes receivable
from stockholders -- -- -- 434 -- -- 434
Net income -- -- -- -- 5,979 -- 5,979
-------------------------------------------------------------------------------------------
Balance at December 31, 1996 9,540 10 66,781 -- (12,342) -- 54,449
-------------------------------------------------------------------------------------------
Exercise of Common Stock
options by employees 526 6,382 -- -- -- 6,382
Sale of Common Stock under
employee stock purchase plan 28 -- 218 -- -- -- 218
Income tax benefit from stock
options exercised -- -- 1,037 -- -- -- 1,037
Unrealized gain on
marketable security -- -- -- -- -- 1,050 1,050
Net income -- -- 11,034 -- 11,034
-------------------------------------------------------------------------------------------
Balance at December 31, 1997 10,094 $ 10 $ 74,418 $ -- $ (1,308) $1,050 $ 74,170
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
28, 29
<PAGE>
DSP Group, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 11,034 $ 5,979 $ 7,211
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,797 1,443 1,278
Amortization of software development costs 322 185 98
Loss (gain) on disposal of equipment - - (30)
Deferred revenue 2,360 (50) (53)
Deferred income tax (1,459) 1,169 (2,173)
Gain on sale of stock of affiliated company - - (1,893)
Gain on write off of deferred rent - (380) -
Acquired research and development from
related party - 1,529 -
Equity in loss (income) of equity method
investees net of amortization 706 457 (212)
Write down/write off of assets - 290 500
Write off of capitalized software development
cost - 31 89
Compensation expense upon acceleration of
stock option vesting - - 130
Changes in operating assets and liabilities:
Accounts receivable 1,267 2,628 (1,521)
Accounts and notes receivable from
related parties - 640 742
Inventories (1,159) 43 (1,044)
Prepaid expenses and other current assets (84) (481) (297)
Other assets (84) (14) 41
Accounts payable 1,891 (1,009) (1,673)
Accrued compensation and benefits 432 (152) 600
Income taxes payable 783 (609) 1,344
Accrued royalties (5) (371) 249
Accrued expenses and other 779 16 335
------------------------------------
Net cash provided by operating activities 18,580 11,344 4,145
</TABLE>
SEE ACCOMPANYING NOTES.
30
<PAGE>
DSP Group, Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
INVESTING ACTIVITIES
Purchase of available-for-sale marketable
securities $(77,135) $(32,217) $(28,310)
Sale of available-for-sale marketable securities 49,278 20,604 18,171
Purchases of equipment (2,160) (836) (3,060)
Sale of equipment 166 - 75
Sale of Nogatech, Inc. - - 1,259
Sale of stock of affiliated company - - 1,893
Investment in Aptel (176) (2,158) -
Capitalized software development costs -- (173) (265)
------------------------------------
Net cash used in investing activities (30,027) (14,780) (10,237)
------------------------------------
FINANCING ACTIVITIES
Line of credit - - 5
Sale of common stock for cash upon exercise
of options, warrants, and employee stock
purchase plan 6,600 495 1,895
Repayment of stockholders' notes receivable - 434 706
Income tax benefit from stock option exercises - - 798
------------------------------------
Net cash provided by financing activities 6,600 929 3,404
------------------------------------
Decrease in cash and cash equivalents (4,847) (2,507) (2,688)
Cash and cash equivalents at beginning of year 12,172 14,679 17,367
------------------------------------
Cash and cash equivalents at end of year $ 7,325 $12,172 $14,679
------------------------------------
------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest expense $ 6 $ 17 $ 7
Income taxes $ 3,148 $ 372 $ 221
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Issuance of Common Stock in exchange for notes
receivable, net of repurchases $ - $ - $ 313
</TABLE>
SEE ACCOMPANYING NOTES.
31
<PAGE>
DSP Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DSP Group, Inc. (the "Company") is engaged in the development of
high-performance, cost-effective DSP-based software and integrated circuits
for digital speech products targeted at the convergence of the personal
computer, communications, and consumer electronics markets. The Company has
three wholly owned subsidiaries: DSP Semiconductors Ltd. (DSP Semiconductors
Israel), an Israeli corporation primarily engaged in research, development,
marketing, sales, technical support and certain general and administrative
functions, Nihon DSP K.K. (DSP Japan), a Japanese corporation primarily
engaged in marketing and technical support activities; DSP Group Europe SARL,
a French corporation primarily engaged in marketing and technical support
activities.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. Intercompany accounts and transactions have
been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
REVENUE RECOGNITION
PRODUCT SALES
Product sales of speech processors for digital telephone answering devices,
computer telephony and other products are recognized upon shipment. The
Company has no ongoing commitments after shipment other than for warranty and
sales returns/exchanges by distributors. The Company accrues estimated sales
returns/exchanges upon recognition of sales. The Company has not experienced
significant warranty claims to date, and accordingly, the Company provides
for the costs of warranty when specific problems are identified.
LICENSING AND ROYALTY REVENUES
Licensing revenues, including technology revenues, are generally recognized
on shipment by the Company provided that no significant vendor or
post-contract support obligations remain outstanding and collection of the
resulting receivable is deemed probable. Insignificant vendor and
post-support obligations are accrued upon shipment. Certain royalty
agreements provide for per unit royalties to be paid to the Company based on
shipments by customers of units containing the Company's products. Revenue
under such agreements is recognized at the time of shipment by the customer.
DEFERRED REVENUE
Deferred revenue at December 31, 1997, is primarily comprised of $2,180,000
in deferred revenue for a certain untested TAD chip shipped to a customer in
the third and fourth quarters of fiscal 1997. The customer has already paid
for the chip, but the Company is deferring revenue recognition until the
completion of its testing to ensure the chip meets customer specifications.
The related inventory cost of the chip totals $1,208,000 and is included in
Finished Goods Inventory in the accompanying consolidated balance sheet. The
Company currently anticipates that it will complete its testing in the first
quarter of fiscal 1998. Upon completion of the testing, the Company's
operating results will reflect the recognition of the deferred revenue and
related inventory costs.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Depreciation and amortization are provided using the straight-line method
over the estimated useful lives of the assets, which range from three to ten
years, or the life of the lease, whichever is shorter.
32
<PAGE>
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and are composed of the following (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
-----------------------
<S> <C> <C>
Work-in-process $ 16 $ 217
Finished goods 4,100 2,740
-----------------------
$4,116 $2,957
-----------------------
-----------------------
</TABLE>
OTHER INVESTMENTS
Other investments are comprised of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
-----------------------
<S> <C> <C>
Equity method investments:
Investment in AudioCodes Ltd., net of accumulated
amortization of $876 in 1997 and $681 in 1996 $ 1,709 $ 2,008
Investment in Aptel Ltd., net of accumulated
amortization of $14 in 1996 - 407
Cost method investments:
Investment in Nexus Telecommunications Systems
Ltd., at fair value (cost basis of $176) 1,226 -
-----------------------
$ 2,935 $ 2,415
-----------------------
-----------------------
</TABLE>
AudioCodes, Ltd.
AudioCodes, Ltd. (AudioCodes) is an Israeli corporation primarily engaged in
research, development production and marketing of voice communication
products. The Company acquired an approximate 35% ownership in AudioCodes in
two separate transactions in 1993 and 1994. 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 35% to approximately 29%. The Company
also has an option to purchase up to an additional 5% of the outstanding
stock of AudioCodes.
The Company accounts for its ownership in AudioCodes using the equity method.
The Company's original investment in AudioCodes included the excess of
purchase price over net assets acquired (approximately $1,907,000 at the date
of purchase), which was attributed to developed technology to be amortized
over seven years. The private placement by AudioCodes in July 1997 was at a
price per share greater than the Company's then current investment in
AudioCodes. As a result, even though the Company's ownership interest
decreased from 35% to 29%, the Company's proportionate share of the net
assets of AudioCodes increased from $816,000 to $1,481,000 at the date of the
private placement. This increase in the Company's proportionate share of the
net assets of AudioCodes reduced the remaining unamortized excess of purchase
price over net assets acquired from $1,080,000 to $415,000 as of the date of
the private placement.
The Company's equity in the net income (loss) of AudioCodes was ($103,000) in
1997, $36,000 in 1996, and $61,000 in 1995. As of December 31, 1997, the
difference between the investment in AudioCodes and the Company's
proportionate share of net assets is $356,000, primarily related to the
remaining unamortized portion of the excess of purchase price over net
assets.
33
<PAGE>
Aptel Ltd. and Nexus Telecommunications Systems Ltd.
In July 1996, the Company invested $2,000,000 of cash for approximately 40%
of the equity interests in Aptel Ltd. (Aptel), which is located in Netanya,
Israel. Aptel was an emerging company in its product development stage. Aptel
had expertise in spread spectrum direct sequence modulation technology, which
is applicable to the development of products for two-way paging systems and
telemetry applications. Expenses related to the acquisition were $158,000. In
accordance with Accounting Principles Board Opinion No. 16, the total cost of
the acquisition was allocated to the estimated fair value of the assets
acquired, and as a result, the Company incurred a one-time write-off of
acquired in-process technology of $1,529,000 based on an independent estimate
of value. The Company accounted for its investment in Aptel using the equity
method. The Company's equity in the net losses of Aptel, including
amortization of related intangibles, was $408,000 in 1997 and $221,000 in
1996. As of June 30, 1997, the Company had fully written-off its investment
in Aptel.
In December 1997, Aptel's shareholder's (including the Company) exchanged
their shares in Aptel for ordinary shares of Nexus Telecommunications Systems
Ltd. (Nexus). Nexus is an Israeli company whose shares are registered and
traded on the Nasdaq SmallCap Market under the symbol NXUSF. In October 1997,
the Company invested $176,000 in a convertible debenture in Aptel which was
converted into ordinary shares of Aptel prior to the closing of the Nexus
transaction. The Company received 297,000 ordinary shares of Nexus in the
exchange transaction amounting to a 2% ownership interest in Nexus. The
Company's basis in the Nexus stock received is $176,000 and the Company
accounts for the investment using the cost method. The Company's investment
in Nexus is classified as available-for-sale, however, the Company is
restricted from trading the shares under an agreement with Nexus until
December 1998. The Company's investment in Nexus is presented in the
Company's consolidated balance sheet at the market value of the Nexus shares
as of December 31, 1997, of $1,226,000, with the unrealized gain of
$1,050,000 recorded as a separate component of stockholder's equity.
FOREIGN CURRENCY TRANSACTIONS
Foreign operations are measured using the U.S. dollar as the functional
currency. Accordingly, monetary accounts (principally cash, receivables, and
liabilities) are remeasured using the foreign exchange rate at the balance
sheet date. Operations accounts and nonmonetary balance sheet accounts are
remeasured at the rate in effect at the date of transaction. The effects of
foreign currency remeasurement are reported in current operations and have
not been significant to date.
NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share (SFAS 128). SFAS 128 replaced the previously
reported primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to conform to
the SFAS 128 requirements.
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):
34
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Numerator:
Net Income $11,034 $5,979 $7,211
------- ------ ------
------- ------ ------
Denominator:
Weighted average number of common shares
outstanding during the period used to compute
basic earnings per share . . . . . . . . . 9,736 9,510 9,352
Incremental shares attributable to exercise of
outstanding options (assuming proceeds would
be used to purchase treasury stock) . . . . . . 467 71 306
------- ------ ------
Weighted average number of shares of
common stock used to compute diluted earnings
per share . . . . . . . . . . . . . . . . . . . 10,203 9,581 9,658
Net income per share - Basic. . . . . . . . . . $ 1.13 $ 0.63 $ 0.77
------- ------ ------
------- ------ ------
Net income per share - Diluted. . . . . . . . . $ 1.08 $ 0.62 $ 0.75
------- ------ ------
------- ------ ------
</TABLE>
Options outstanding to purchase approximately 210,000, 1,067,000 and 119,000
of common stock for the years ended December 31, 1997, 1996 and 1995,
respectively, were not included in the computation of diluted net income per
share, because option exercise prices were greater than the average market
price of the common stock resulting in an antidilutive effect.
CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to credit risk consist
principally of cash, cash equivalents, marketable securities, and trade
receivables. By policy, the Company places its cash, cash equivalents, and
marketable securities only with high credit quality financial institutions
and corporations and, other than U.S. Government Treasury instruments, limits
the amounts invested in any one institution or type of investment. The
majority of the Company's product sales are to distributors who in turn sell
to manufacturers of consumer electronics products. The Company's licensing
revenues are primarily from customers that have licensed rights to use the
Company's DSPCore microprocessor architectures and speech compression
technology. No collateral is required from the Company's customers; however,
some of the customers pay using letters of credit. Write-offs for bad debts
have not been significant to date.
CONCENTRATION OF OTHER RISKS
Sales of TAD products comprise a substantial portion of the Company's product
sales. Any adverse change in the digital TAD market or the Company's ability
to compete and maintain its position in that market would have a material
adverse effect on the Company's business, financial condition, and results of
operations. The Company's operating results also depend on the timing of the
recognition of license fees and the level of per unit royalties. During 1998,
the Company expects that revenues from its DSPCore designs and TrueSpeech
will continue to be derived primarily from license fees rather than per unit
royalties. However, the uncertain timing of such license fees may continue to
cause fluctuations in the Company's operating results. The Company's
royalties from such products are totally dependent upon the success of its
original equipment manufacturer ("OEM") licensees in introducing these products
and the success of such products in the marketplace.
35
<PAGE>
All of the Company's integrated circuit products are manufactured by
independent foundries. While these foundries have been able to adequately
meet the demands of the Company's business, the Company is and will continue
to be dependent upon these foundries to achieve acceptable manufacturing
yields, quality levels, costs, and to allocate to the Company sufficient
foundry capacities to meet the Company's needs in a timely manner. Revenues
could be materially and adversely affected should any of these foundries fail
to meet the Company's request for products due to a shortage of production
capacity, process difficulties, low yield rates or financial instability.
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.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents. The carrying (at cost) amount
of cash and cash equivalents as of December 31, 1996 and 1997 approximates
fair value (quoted market price).
SECURITIES AVAILABLE-FOR-SALE
All debt and equity securities have been designated as available-for-sale
under Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"). The
amortized cost of available-for-sale debt securities is adjusted for the
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in investment income. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in investment income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in interest and
other income.
The following is a summary of available-for-sale securities at December 31,
1997 and 1996 (IN THOUSANDS):
<TABLE>
<CAPTION>
AMORTIZED COST
1997 1996
------------------------
<S> <C> <C>
Obligations of states and
political subdivisions $ 6,002 $16,891
Municipal auction rate preferred stock - 2,200
Corporate obligations 53,270 19,301
------------------------
$59,272 $38,392
------------------------
------------------------
Amounts included in marketable
securities $58,619 $30,762
Amounts included in cash and
cash equivalents 653 7,630
------------------------
$59,272 $38,392
------------------------
------------------------
</TABLE>
At December 31, 1997 and 1996, the carrying amount of securities approximated
the fair value (quoted market price), and the amount of unrealized gain or
loss was not significant. Gross realized gains or losses for 1997, 1996, and
1995 were not significant.
The amortized cost of available-for-sale debt and securities at December 31,
1997, by contractual maturities, are shown below (IN THOUSANDS):
<TABLE>
<CAPTION>
AMORTIZED
COST
---------
<S> <C>
Due in one year or less $43,531
Due after one year to twenty two months 15,088
---------
$58,619
---------
---------
</TABLE>
36
<PAGE>
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company's policy is to capitalize software development costs beginning at
the time technological feasibility is determined to have occurred using
either the detailed program design or working model approach. Capitalizable
software development costs were not material in 1997 and no such additional
costs were capitalized during 1997. At December 31, 1997, all remaining
capitalized software development costs have been fully amortized.
RECLASSIFICATION
Certain reclassifications have been made to the 1995 and 1996 consolidated
financial statements to conform to the 1997 presentation.
GAIN ON SETTLEMENT OF LITIGATION
In October 1996, the Company entered into agreements with Rockwell
International, Inc. ("Rockwell") to license certain of the Company's
TrueSpeech speech technologies and to settle all pending litigation between
the companies. In connection with the litigation settlement in fiscal 1996,
the Company recorded in other income a one time gain on settlement of
litigation, net of expenses of $3,750,000.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting Comprehensive Income ("SFAS 130") and Statement No. 131,
Disclosures About Segments of An Enterprise and Related Information (SFAS
131). SFAS 130 establishes rules for reporting and displaying comprehensive
income. SFAS 131 will require the Company to use the "management approach"
in disclosing segment information. Both statements are effective for the
Company during 1998.
2. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Board of Directors has the authority, without any further vote or action
by the stockholders, to provide for the issuance of up to 5,000,000 shares of
Preferred Stock in one or more series with such designations, rights,
preferences, and limitations as the Board of Directors may determine,
including the consideration received, the number of shares comprising each
series, dividend rates, redemption provisions, liquidation preferences,
sinking fund provisions, conversion rights, and voting rights.
DIVIDEND POLICY
The company has various stock plans under which employees, consultants,
officers, and directors may be granted options to purchase the Company's
Common Stock. A summary of the various plans is as follows:
STOCK PURCHASE PLAN AND STOCK OPTION PLANS
The Company has various stock plans under which employees, consultants,
officers, and directors may be granted options to purchase the Company's
Common Stock. A summary of the various plans is as follows:
1991 EMPLOYEE AND CONSULTANT STOCK PLAN
In 1991, the Company adopted the 1991 Employee and Consultant Stock Plan (the
"1991 Plan"). Under the 1991 Plan, employees and consultants may be granted
incentive or non-qualified stock options or stock purchase rights for the
purchase of the Company's Common Stock. The 1991 Plan expires in 2001 and
currently provides for the purchase of up to 2,800,000 shares of the
Company's Common Stock. In addition, under the 1991 Plan, on the date on
which a person first becomes a Director of the Company, such new Director is
granted an option to purchase 10,000 shares of Common Stock.
37
<PAGE>
The exercise price of options under the 1991 Plan shall not be less than the
fair market value of the Common Stock for incentive stock options and not
less than 85% of the fair market value of the Common Stock for nonqualified
stock options, as determined by the Board of Directors.
Options under the 1991 Plan are generally exercisable over a 48-month period
beginning twelve months after issuance or as determined by the Board of
Directors. Options under the 1991 Plan expire five years after the date of
grant.
During October 1995, employees and officers holding options to purchase
shares of the Company's Common stock were offered the opportunity to exchange
their existing options for the same number of options at the then current
market price. Under the terms of the program, options to purchase 395,000
shares of the Company's Common Stock were exchanged and are reflected in
grant and cancelation activity for fiscal 1995.
DIRECTORS' PLAN
The Directors' Stock Option Plan (the "Directors' Plan") was adopted in
January 1994. Under the Directors' Plan the Company is authorized to issue
nonqualified stock options to purchase up to 175,000 shares of the Company's
Common Stock at an exercise price equal to the fair market value of the
Common Stock on the date of grant. The Directors' Plan, following certain
amendments in 1996 approved by the shareholders, provides that each person
who is an outside Director on the effective date of the Directors' Plan and
each outside Director who subsequently becomes a member of the Board of
Directors shall automatically be granted an option to purchase 15,000 shares
(the "First Option"). Additionally, each outside director shall automatically
be granted an option to purchase 5,000 shares (a "Subsequent Option") on
January 1 of each year if, on such date, he/she shall have served on the
Board of Directors for at least six months. In addition, an option to
purchase 5,000 shares of Common Stock is granted on January 1 of each year to
each outside Director for each committee of the Board of Directors on which
he/she shall have as a chairperson for at least six months.
Options granted under the Directors' Plan generally have a term of ten years.
The First Option is exercisable 25% after the first year (one-third after the
first year for options granted after May 1996) and in quarterly installments
over the ensuing three years (one-third at the end of each twelve-month
period for options granted after May 1996). Each Subsequent Option becomes
exercisable in full on the fourth anniversary from the date of grant
(one-third at the end of each twelve-month period from the date of grant for
options granted after May 1996).
1993 ISRAELI PLAN
In 1993, the Company adopted the DSP Group, Inc. Israeli Stock Option Plan
(the "1993 Israeli Plan") under which the Company is authorized to issue
nonqualified stock options to purchase up to 167,000 shares of the Company's
Common Stock at an exercise price equivalent to fair market value. Options
are immediately exercisable and expire five years from the date of grant. All
options and shares are held in a trust until the later of 24 months from the
date of grant or the shares are vested based on a vesting schedule determined
by a committee appointed by the Board of Directors. Nonvested shares are
subject to repurchase by the Company at the original issuance price.
38
<PAGE>
A summary of activity under the U.S. Plan, the 1993 Israeli Plan, and the
Directors' Plan is as follows (SHARES IN THOUSANDS):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------
SHARES SHARES
AVAILABLE UNDER PRICE PER
FOR GRANT OPTION SHARE
-------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1994 133 889 $ 1.80 - $22.50
---------------------------
Authorized 500 -
Granted (902) 902 $15.13 - $24.25
Exercised - (224) $ 1.80 - $15.40
Canceled 505 (505) $ 1.80 - $24.25
---------------------------
Balance at December 31, 1995 236 1,062 $ 1.80 - $24.25
---------------------------
<CAPTION>
Weighted
Average
Exercise Price
----------------
<S> <C> <C> <C>
Authorized 875 - $ -
Granted (990) 990 $ 9.61
Exercised - (77) $ 3.71
Canceled 500 (500) $13.00
---------------------------
Balance at December 31, 1996 621 1,475 $10.94
---------------------------
Authorized
Granted (797) 797 $21.67
Exercised (526) $12.12
Canceled 429 (429) $11.18
---------------------------
Balance at December 31, 1997 253 1,317 $16.87
---------------------------
---------------------------
</TABLE>
A summary of the Company's stock option activity and related information as
of December 31, 1997, is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 7.63 -$ 8.99 292,512 3.97 Years $ 7.96 23,535 $ 8.12
$ 9.00 -$13.99 308,716 4.49 Years $11.03 10,946 $10.66
$14.00 -$19.99 156,294 3.20 Years $15.68 67,156 $14.93
$20.00 -$25.99 264,400 4.75 Years $22.78 4,500 $24.25
$26.00- $34.38 295,000 4.66 Years $27.15 37,500 $26.38
--------------------------------------------------------------------
$ 7.63- $34.48 1,316,922 4.31 Years $16.87 143,637 $16.77
--------------------------------------------------------------------
--------------------------------------------------------------------
</TABLE>
1993 EMPLOYEE STOCK PURCHASE PLAN
Upon the closing of the Company's initial public offering, the Company
adopted the 1993 Employee Stock Purchase Plan (the "1993 Purchase Plan"). An
aggregate of 350,000 shares of the Company's Common Stock have been reserved
for issuance under the 1993 Purchase Plan. The 1993 Purchase Plan provides
that substantially all employees may purchase stock at 85% of its fair market
value on specified dates via payroll deductions. There were approximately
28,000, 24,000 and 16,000 shares issued under the Purchase Plan in 1997, 1996
and 1995, respectively.
39
<PAGE>
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
Shares of common stock of the Company reserved for future issuance at
December 31, 1997 are as follows (IN THOUSANDS):
<TABLE>
<S> <C>
Employee Stock Purchase Plan 282
Stock Options 1,570
Undesignated Preferred Stock 5,000
-------
6,852
-------
-------
</TABLE>
STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB Opinion No. 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), requires the use of option valuation
models that were not developed for use in valuing employee stock options.
Under APB Opinion No. 25, because the exercise price of the Company's stock
options generally equals the market price of the underlying stock on the date
of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required
by SFAS 123 which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994, under the fair value method of this Statement. The fair
value of these options was estimated at the date of grant using a
Black-Scholes single option pricing model with the following weighted average
assumptions; risk-free interest rates of 6.15%, 6.10% and 6.30% for 1997,
1996 and 1995, respectively; a dividend yield of 0.0%, a volatility factor of
the expected market price of the Company's common stock of 0.70 for 1997 and
0.55 for 1996 and 1995, and a weighted-average expected life of the option of
2.7 years for 1997, and 3.6 years for 1996 and 1995. The weighed average net
fair value of options granted in 1997, 1996 and 1995 was $9.90, $4.53 and
$6.58 per share, respectively.
The Company does not recognize compensation cost related to employee purchase
rights under the Plan. To comply with the pro forma reporting requirements of
SFAS 123, compensation cost is estimated for the fair value of the employees'
purchase rights using the Black-Scholes model with the following assumptions
for those rights granted in 1997, 1996 and 1995; dividend yield of 0.0%; an
expected life ranging up to 0.5 years; expected volatility factor of 0.75 in
1997 and 0.5 in both 1996 and 1995; and a risk free interest rate of 5.49% in
1997 and 5.72% in both 1996 and 1995. The weighted average fair value of
those purchase rights granted in January 1997, July 1997, January 1996, July
1996, January 1995 and July 1995 were $2.45, $8.21, $1.31, $1.17, $6.29 and
$11.09, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
40
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Pro forma net income $ 8,485 $ 2,843 $ 5,112
Pro forma basic earnings per share $ 0.87 $ 0.30 $ 0.55
Pro forma diluted earnings per share $ 0.85 $ 0.30 $ 0.53
</TABLE>
For pro forma disclosure under SFAS 123, the repricing of stock options in
October 1995 is treated as a modification of an award. Any additional
compensation arising from the modification is recognized over the remaining
vesting period of the new grant. SFAS 123 is effective for options granted by
the Company commencing January 1, 1995. All options granted before January 1,
1995 have not been valued and no pro forma compensation expense has been
recognized. However, any option granted before January 1, 1995, that was
repriced in 1995, is treated as a new grant within 1995 and is valued
accordingly. In addition, since compensation expense is recognized over the
vesting period of the related options, which are generally four years, and
because pro forma disclosure is only required commencing with 1995, the
initial impact on pro forma income may not be representative of compensation
expense in future years.
3. INDUSTRY SEGMENT REPORTING
The Company and its subsidiaries operate in one industry segment, principally
the development of affordable, high performance, cost effective DSP-based
software, integrated circuits, and circuit boards.
Operations outside the United States include research, development, sales,
and certain general and administrative functions. The Company's Israeli
subsidiary performs research, development, sales, marketing, technical
support, and certain general and administrative functions. The Company's
Japanese and French subsidiaries perform marketing and technical support
activities.
The following is a summary of operations within geographic areas (IN
THOUSANDS):
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
Sales to unaffiliated customers:
United States $57,364 $51,883 $49,163
Israel 4,595 1,027 1,274
-------------------------------
$61,959 $52,910 $50,437
-------------------------------
-------------------------------
Transfers between geographic
areas (eliminated in consolidation):
Israel $9,398 $7,435 $4,846
Japan 602 574 542
Europe 319 436 -
-------------------------------
$10,319 $8,445 $5,388
-------------------------------
-------------------------------
Income (loss) before provision
(benefit) for income taxes
(including intercompany amounts):
United States $10,297 $7,504 $7,183
Israel 3,462 (596) 123
Japan 4 7 36
France 29 121 (78)
-------------------------------
$13,792 $7,036 $7,264
-------------------------------
-------------------------------
41
<PAGE>
Identifiable assets:
United States $78,028 $54,880 $51,614
Israel 6,891 4,039 3,045
Japan 206 219 195
France 43 69 --
-------------------------------
$85,168 $59,207 $54,854
-------------------------------
-------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
Export sales:
Asia $45,046 $35,477 $27,636
Europe 10,357 10,853 12,188
Israel 1,868 1,747 1,274
-------------------------------
$57,271 $48,077 $41,098
-------------------------------
-------------------------------
</TABLE>
Sales to one distributor totaled 33%, 17% and 25% of total revenues in 1997,
1996 and 1995 respectively, and sales to one other customer totaled 11% of
total revenues for 1996.
4. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases certain equipment and facilities under noncancelable
operating leases. The Company has significant leased facilities in Herzelia
Pituach, Israel and in Santa Clara, California. In 1996, the Company
negotiated the assignment of its Santa Clara facility lease obligations to
another company (the "Assignee"). Accordingly, in 1997, the Company received
payments from the lessor of $322,000 in 1997 and will receive $322,000 in
1998, $322,000 in 1999, and $295,000 in 2000 as compensation for the higher
rents to be paid by the Assignee. In addition, commencing January 1, 1997,
the Company began subleasing a new space in the same building from the
Assignee under a separate sublease agreement that expires in December 1999.
In August 1997 the Company entered into a new lease for its Israel
facilities in Herzelia Pituach. The lease agreement is effective until May
2002.
At December 31, 1997, the Company is required to make the following minimum
lease payments, to reflect the sublease of the new space by the Company as
described above and the payments to be received from the lessor on the Santa
Clara facility leases (in thousands):
<TABLE>
<CAPTION>
Year Amount
---- --------
<S> <C>
1998 $ 519
1999 462
2000 162
2001 438
2002 196
--------
$1,777
--------
--------
</TABLE>
Total rental expense for all leases was approximately $778,000 (net of
sublease income of $469,000), $334,000 (net of sublease income of $546,000,
and a gain of $380,000 on write-off of deferred rent), and $656,000 (net of
$171,000) for the years ended December 31, 1997, 1996, and 1995, respectively.
42
<PAGE>
CONTINGENCIES
The Company is involved in certain claims arising in the normal course of
business, including claims that it may be infringing patent rights owned by
third parties. The Company is unable to foresee the extent to which these
matters will be pursued by the claimants or to predict with certainty the
eventual outcome. However, the Company believes that the ultimate resolution
of these matters will not have a material adverse effect on its financial
position, results of operations, or cash flows.
STOCKHOLDERS' LITIGATION
In November 1995, after the Company's stock price declined, several lawsuits
were filed in the United States District Court for the Northern District of
California accusing the Company, its former Chief Executive Officer, and its
former Chief Financial Officer of issuing materially false and misleading
statements in violation of the federal securities laws. These lawsuits were
consolidated into a single amended complaint in February 1996. In the
amended complaint, plaintiffs sought unspecified damages on behalf of all
persons who purchased shares of the Company's Common Stock during the period
June 6, 1995 through November 10, 1995. On June 11, 1996, the Court granted
the Company's motion to dismiss the lawsuit, with leave to amend. The
plaintiffs filed an amended complaint on July 11, 1996. On March 7, 1997,
the Court issued an order dismissing with prejudice all claims based on
statements issued by the Company. The Court permitted plaintiffs to proceed
with their claims regarding statements the Company allegedly made to
securities analysts. The Court also dismissed with leave to amend
plaintiffs' claim that the Company is responsible for the statements
contained in analysts' reports, but the plaintiffs have chosen not to amend
this claim. On November 5, 1997, the parties reached an agreement in
principle to settle this litigation. The proposed settlement requires that
the Company fund approximately $50,000 of the settlement amount to fulfill
the retention amounts under the Company's insurance policy. The proposed
settlement is subject to the execution of a stipulation of settlement and
court approval.
5. INCOME TAXES
The provision for income taxes is as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------
<S> <C> <C> <C>
Federal taxes:
Current $ 3,166 $ (180) $ 1,898
Deferred (1,301) 1,099 (2,173)
------------------------------
1,865 919 (275)
State taxes:
Current 337 3 239
Deferred (158) 70 -
------------------------------
179 73 239
Foreign taxes:
Current 714 65 89
------------------------------
Provision for income taxes $ 2,758 $1,057 $ 53
------------------------------
------------------------------
</TABLE>
The tax benefits associated with the exercise of stock options reduced taxes
currently payable by $1,037,000 in 1997 and $798,000 in 1995. Such benefits
were credited to paid in capital when realized.
Pretax income (loss) from foreign operations was $3,495,000 in 1997,
$1,061,000 in 1996 (exclusive of an in-process technology write-off of
$1,529,000), and ($81,000) in 1995.
43
<PAGE>
Unremitted foreign earnings that are considered to be permanently invested
outside of the U.S., and on which no deferred taxes have been provided,
amount to approximately $4,286,000 at December 31, 1997. If such amounts were
remitted , the Company would be subject to U.S. income taxes (subject to an
adjustment for foreign tax credits) and additional Israeli corporate income
and withholding taxes. Determination of the amount of additional taxes on
unremitted earnings is not practicable.
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate of 35% in 1997 and 1995 and 34% in 1996 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
---------------------------------
<S> <C> <C> <C>
Tax at U.S. statutory rate $ 4,827 $ 2,396 $ 2,646
State taxes, net of federal benefit 116 3 155
Operating losses utilized (1,160) (1,169) (3,382)
Tax exempt interest income (26) (422) (177)
Foreign income taxed at rates other
than U.S. rate (813) (306) 44
Research and development expensed
upon acquisition -- 520 --
Basis difference upon sale of
subsidiary - -- 711
Tax credits utilized (480) -- (126)
Nondeductible losses and expenses
of investees 247 92 162
Other individually immaterial items 47 (57) 20
---------------------------------
$ 2,758 $ 1,057 $ 53
---------------------------------
---------------------------------
</TABLE>
As of December 31, 1997, the Company had federal net operating loss and tax
credit carryforwards of approximately $4,500,000 and $530,000, respectively.
The federal net operating loss carryforward will expire at various dates
beginning in the years 2006 through 2009, if not utilized. The tax credits
will expire at various dates beginning in the years 2000 through 2003, if not
utilized.
Due to the change in ownership provisions of the Tax Reform Act of 1986, the
Company's federal net operating loss carryforwards and approximately $108,000
of credit carryforwards are subject to an annual limitation of approximately
$3,300,000 per year.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities as of
December 31, 1997 and 1996 are as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
1997 1996
-----------------------
<S> <C> <C>
Deferred tax assets:
Tax credits carryforwards $ 530 $ 450
Net operating loss carryforwards 1,550 2,700
Capitalized research and development 330 450
Reserves and accruals 1,730 890
Other 610 210
-----------------------
Total deferred tax assets 4,750 4,700
Valuation allowance (1,250) (3,696)
-----------------------
Net deferred tax assets $ 3,500 $ 1,004
-----------------------
-----------------------
</TABLE>
44
<PAGE>
Approximately $828,000 of the valuation allowance at December 31, 1997 is
related to benefits of stock option deductions, which will be allocated to
paid-in capital when realized. The valuation allowance decreased by
$2,446,000, $189,000 and $5,201,000 for 1997, 1996 and 1995, respectively.
DSP Semiconductors Israel ("DSP Israel") has been awarded "Approved
Enterprise" status by the Israeli government according to two investment
plans that included investments of $3,788,000 and $760,000, respectively. The
"Approved Enterprise" status allowed DSP Israel a two year tax holiday on
undistributed earnings commencing with the year 1992 for which taxable income
had been attained and a corporate tax rate of 10%, for an additional eight
years, on the first investment plan's proportionate share of income. The
proportionate share of income related to the second investment plan will
entitle DSP Israel to a four year tax holiday on undistributed earnings
commencing with the 1996 tax year and a corporate tax rate of 10% for an
additional six years. The aggregate dollar and per share benefit of the
Israeli tax holiday was $1,154,000 and $0.11 for 1997, and $306,000 and $0.03
for 1996, respectively.
6. RELATED PARTY TRANSACTIONS
In 1995, the Company performed certain contract engineering, research and
development, sales and marketing, and general and administrative services for
DSP Communications Inc. ("DSPC") amounting to $919,000 and received certain
research and development, sales and marketing, and general and administrative
services from DSPC amounting to approximately $122,000.
In 1995, the Company performed certain research and development and general
and administrative services for Zen Research, amounting to approximately
$127,000.
In 1993, the Company entered into a development and licensing agreement with
AudioCodes (SEE NOTE 1). Under the agreement, AudioCodes is to perform
certain research and development services for the Company. Upon development
of the technology, the Company is to pay AudioCodes a service fee and
additional royalty fees of approximately 15% to 24% of the net revenue and 3%
to 10% of the gross margin realized from the sale of the technology
incorporated in the Company's products. In 1997, 1996 and 1995 the Company
recorded approximately $50,000, $0 and $527,000 of research and development
costs related to this agreement and $290,000, $260,000 and $179,000 in 1997,
1996 and 1995 of service fees.
<TABLE>
<CAPTION>
---------------------------------
RELATED PARTY TRANSACTIONS 1997 1996 1995
(IN THOUSANDS) ---------------------------------
<S> <C> <C> <C>
REVENUES:
- ----------------------------
PRODUCT SALES $1,542 $1,644 --
LICENSING $ 206 $ 65 $1,046
COST OF REVENUES:
- ----------------------------
COST OF PRODUCTS $ 291 -- --
COST OF LICENSING $ 268 $ 355 $ 179
OPERATING EXPENSES:
- ----------------------------
RESEARCH AND DEVELOPMENT $ 340 $ 269 $ 527
SALES AND MARKETING -- -- $ 85
GENERAL AND ADMINISTRATIVE -- -- $ 34
</TABLE>
45
<PAGE>
7. SALE OF STOCK OF DSPC
DSPC is a Delaware corporation primarily engaged in the development and
marketing of integrated circuits based on digital signal processing for the
wireless communications market. The Company sold its remaining 131,000 shares
of common stock of DSPC, the successor of a former subsidiary of the Company,
DSP Telecommunications Ltd., in April 1995 upon the exercise of the
underwriters' overallotment option in connection with DSPC's initial public
offering. As the Company's basis in the investment had no book value, the
sale resulted in a gain of approximately $1,200,000 in the second quarter of
1995. The Company had sold 73,000 shares of common stock of DSPC in DSPC's
March 1995 initial public offering, resulting in a gain of approximately
$666,000 in the first quarter of 1995. In 1994, the Company sold 1,234,000
shares of DSPC stock to a group of investors for $1,851,000 in cash of which
$1,551,000 and $300,000 were sold during the second and fourth quarter of
1994, respectively. Of this amount, $1,351,000 was sold to investors who were
also stockholders of the Company. As the Company's basis in the investment
had no book value, the sale resulted in a gain of $1,851,000.
8. UNUSUAL ITEMS
During the second quarter of 1995, the Company formulated a plan to divest
its 89% equity interest in its Nogatech subsidiary. The Company incurred a
$500,000 charge for the write-down of Nogatech's intangible assets in
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." Nogatech's revenues for the period from January 1, 1995
through August 11, 1995 were $500,000, and Nogatech incurred an operating
loss, exclusive of the $500,000 write-off, of $767,000.
In April 1995, the former Chairman of the Board resigned to focus his efforts
on DSPC where he serves as chairman. The Company incurred $413,000 of
severance expense as a result of this resignation. The expense consisted of
$283,000 for severance payments to be made over a two-year period and a
$130,000 charge for accelerated vesting of the former Chairman's outstanding
stock options.
In July 1996, the Company acquired a 40% equity ownership interest in Aptel,
Ltd., a company located in Israel. In connection with the acquisition, the
Company recorded a charge of $1,529,000 for acquired research and development
from a related party in the third quarter of 1996 (SEE NOTE 1, OTHER
INVESTMENTS).
9. SUBSEQUENT EVENTS
On January 27, 1998, the Company announced its intention to repurchase up to
1,000,000 shares of its common stock from time to time on the open-market or
in privately negotiated transactions.
46
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
DSP Group, Inc.
We have audited the accompanying consolidated balance sheets of DSP Group,
Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of three
years in the period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. For the year ended December 31, 1997, we did not audit the financial
statements of DSP Semiconductors, Ltd., a wholly-owned subsidiary, which
statements reflect total assets of $6,891,000 as of December 31, 1997, and
total revenues of $4,595,000, for the year then ended. Those statements were
audited by Almagor & Co. whose report has been furnished to us, and our
opinion, insofar as it relates to data included for DSP Semiconductors, Ltd.,
is based solely on the report of Almagor & Co.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report
of Almagor & Co. provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of Almagor & Co., the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of DSP Group, Inc. at December
31, 1997 and 1996, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Jose, California
January 23, 1998, except for Note 9, as to which the date is January 27, 1998
47
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE ANNUAL REPORT ON FORM 10-K OF DSP GROUP, INC FOR THE
YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,325
<SECURITIES> 58,619
<RECEIVABLES> 3,887
<ALLOWANCES> 293
<INVENTORY> 4,116
<CURRENT-ASSETS> 77,945
<PP&E> 9,010
<DEPRECIATION> 5,522
<TOTAL-ASSETS> 85,168
<CURRENT-LIABILITIES> 10,998
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 74,160
<TOTAL-LIABILITY-AND-EQUITY> 85,168
<SALES> 51,238
<TOTAL-REVENUES> 61,959
<CGS> 31,143
<TOTAL-COSTS> 32,312
<OTHER-EXPENSES> 8,420
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 226
<INCOME-PRETAX> 13,792
<INCOME-TAX> 2,758
<INCOME-CONTINUING> 11,034
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,034
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.08
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q OF DSP GROUP, INC. FOR
THE QUARTER ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 14,911
<SECURITIES> 46,281
<RECEIVABLES> 3,393
<ALLOWANCES> 811
<INVENTORY> 3,987
<CURRENT-ASSETS> 70,610
<PP&E> 8,745
<DEPRECIATION> (4,976)
<TOTAL-ASSETS> 76,889
<CURRENT-LIABILITIES> 10,707
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 66,172
<TOTAL-LIABILITY-AND-EQUITY> 76,889
<SALES> 37,626
<TOTAL-REVENUES> 45,378
<CGS> 23,306
<TOTAL-COSTS> 24,428
<OTHER-EXPENSES> 6,043
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 176
<INCOME-PRETAX> 9,255
<INCOME-TAX> 1,666
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,589
<EPS-PRIMARY> .79
<EPS-DILUTED> .76
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS RESTATED 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>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-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> 24,079
<TOTAL-REVENUES> 28,820
<CGS> 15,074
<TOTAL-COSTS> 15,920
<OTHER-EXPENSES> 3,959
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121
<INCOME-PRETAX> 5,021
<INCOME-TAX> 780
<INCOME-CONTINUING> 4,241
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,241
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q OF DSP GROUP, INC
FOR THE QUARTER ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 17,224
<SECURITIES> 27,487
<RECEIVABLES> 7,254
<ALLOWANCES> 375
<INVENTORY> 2,634
<CURRENT-ASSETS> 56,352
<PP&E> 7,454
<DEPRECIATION> 4,110
<TOTAL-ASSETS> 62,719
<CURRENT-LIABILITIES> 6,132
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 56,577
<TOTAL-LIABILITY-AND-EQUITY> 62,719
<SALES> 11,898
<TOTAL-REVENUES> 14,178
<CGS> 7,530
<TOTAL-COSTS> 7,873
<OTHER-EXPENSES> 1,941
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> 2,372
<INCOME-TAX> 356
<INCOME-CONTINUING> 2,016
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,016
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE ANNUAL REPORT ON FORM 10-K OF DSP GROUP, INC. FOR
THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 12,172
<SECURITIES> 30,762
<RECEIVABLES> 5,497
<ALLOWANCES> 636
<INVENTORY> 2,957
<CURRENT-ASSETS> 52,609
<PP&E> 7,324
<DEPRECIATION> 4,033
<TOTAL-ASSETS> 59,207
<CURRENT-LIABILITIES> 4,758
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 54,439
<TOTAL-LIABILITY-AND-EQUITY> 59,207
<SALES> 41,290
<TOTAL-REVENUES> 52,910
<CGS> 29,432
<TOTAL-COSTS> 30,528
<OTHER-EXPENSES> 8,481
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 158
<INCOME-PRETAX> 7,036
<INCOME-TAX> 1,057
<INCOME-CONTINUING> 5,979
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,979
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0.62
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q OF DSP GROUP, INC.
FOR THE QUARTER ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 24,152
<SECURITIES> 9,361
<RECEIVABLES> 5,051
<ALLOWANCES> 0
<INVENTORY> 5,389
<CURRENT-ASSETS> 45,573
<PP&E> 7,389
<DEPRECIATION> (3,637)
<TOTAL-ASSETS> 53,805
<CURRENT-LIABILITIES> 4,879
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 48,917
<TOTAL-LIABILITY-AND-EQUITY> 53,805
<SALES> 29,136
<TOTAL-REVENUES> 37,829
<CGS> 21,511
<TOTAL-COSTS> 22,107
<OTHER-EXPENSES> 6,584
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121
<INCOME-PRETAX> 646
<INCOME-TAX> 68
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 578
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS RESTATED 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, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 13,888
<SECURITIES> 18,406
<RECEIVABLES> 6,574
<ALLOWANCES> 0
<INVENTORY> 8,103
<CURRENT-ASSETS> 48,844
<PP&E> 7,020
<DEPRECIATION> (3,295)
<TOTAL-ASSETS> 56,652
<CURRENT-LIABILITIES> 7,591
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 49,061
<TOTAL-LIABILITY-AND-EQUITY> 56,652
<SALES> 17,733
<TOTAL-REVENUES> 24,218
<CGS> 13,133
<TOTAL-COSTS> 13,511
<OTHER-EXPENSES> 4,782
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71
<INCOME-PRETAX> 939
<INCOME-TAX> 97
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 842
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q OF DSP GROUP, INC. FOR
THE QUARTER ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 14,651
<SECURITIES> 18,669
<RECEIVABLES> 5,376
<ALLOWANCES> 0
<INVENTORY> 7,951
<CURRENT-ASSETS> 48,598
<PP&E> 6,847
<DEPRECIATION> (2,965)
<TOTAL-ASSETS> 56,627
<CURRENT-LIABILITIES> 8,038
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 48,580
<TOTAL-LIABILITY-AND-EQUITY> 56,627
<SALES> 7,655
<TOTAL-REVENUES> 11,197
<CGS> 5,200
<TOTAL-COSTS> 5,430
<OTHER-EXPENSES> 2,544
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43
<INCOME-PRETAX> 638
<INCOME-TAX> 64
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 574
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE ANNUAL REPORT ON FORM 10-K OF DSP GROUP, INC. FOR
THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 14,679
<SECURITIES> 19,149
<RECEIVABLES> 8,074
<ALLOWANCES> 613
<INVENTORY> 3,000
<CURRENT-ASSETS> 46,617
<PP&E> 6,688
<DEPRECIATION> 2,591
<TOTAL-ASSETS> 54,854
<CURRENT-LIABILITIES> 7,313
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 47,532
<TOTAL-LIABILITY-AND-EQUITY> 54,854
<SALES> 41,425
<TOTAL-REVENUES> 50,437
<CGS> 24,775
<TOTAL-COSTS> 26,083
<OTHER-EXPENSES> 8,396
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102
<INCOME-PRETAX> 7,264
<INCOME-TAX> 53
<INCOME-CONTINUING> 7,211
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,211
<EPS-PRIMARY> .77
<EPS-DILUTED> .75
</TABLE>
<PAGE>
Exhibit 99.1
ALMAGOR & CO., CERTIFIED PUBLIC ACCOUNTANTS (ISRAEL)
AUDITORS' REPORT
TO THE SHAREHOLDERS OF
DSP SEMICONDUCTORS LTD.
We have audited the accompanying balance sheets of DSP Semiconductors Ltd.
(hereinafter - the Company) as of December 31, 1997 and 1996 and the related
statements of profit and loss, changes in shareholders' equity and cash flows
for each of the years then ended translated into U.S. dollars. These financial
statements are the responsibility of the Company's Board of Directors and
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards,
including those prescribed by the Israeli Auditor's Regulations (Auditor's Mode
of Performance), 1973. Such auditing standards are substantially identical to
generally accepted auditing standards in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance that
the financial statements are free of material misstatement, whether its source
be a mistake made in the financial statements or whether its source be a
misleading item included in them. An audit includes examining on a test basis,
evidence supporting the amounts and disclosure in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by the Board of Directors and Management of the Company, as well
as evaluating the overall financial statements presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, based on our audits the abovementioned financial statements
present fairly in conformity with generally accepted accounting principles
applied in Israel and in the United States (as applicable to these financial
statements, such accounting principles are practically identical), in all
material respects, the financial position of the Company as of December 31, 1997
and 1996 and the results of its operations, changes in shareholders equity, and
cash flows for each of the years then ended.
Pursuant to Section 211 of the Companies Ordinance (New Version) - 1983, we
state that we have obtained all the information and explanations we have
required and our opinion on the above financial statements is given according to
the best information and explanations received by us and as presented in the
Company's books.
/s/ Almagor & Co.
Certified Public Accountants (Israel)
Tel-Aviv, Israel January 22, 1998
