<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
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or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission File Number 0-23006
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DSP GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-2683643
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(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
3120 Scott Boulevard, Santa Clara, California 95054
-----------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (408) 986-4300
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of April 30, 1998 there were 9,916,994 shares of Common Stock ($.001 par
value per share) outstanding.
<PAGE>
INDEX
DSP GROUP, INC.
Page No.
PART I. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- March 31, 1998
and December 31, 1997 . . . . . . . . . . . . . . . . . . . . 3
Condensed consolidated statements of income -- Three months
ended March 31, 1998 and 1997 . . . . . . . . . . . . . . . . 4
Condensed consolidated statements of cash flows -- Three
months ended March 31, 1998 and 1997 . . . . . . . . . . . . 5
Condensed consolidated statements of Stockholders' Equity --
Three months ended March 31, 1998 . . . . . . . . . . . . . 6
Notes to condensed consolidated financial statements --
March 31, 1998. . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . 12
PART II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 19
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . 20
Item 3. Defaults upon Senior Securities . . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Security Holders . . . . . 20
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 20
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2
<PAGE>
PART 1. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
DSP GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ----------
<S> <C> <C>
ASSETS (Unaudited) (Note)
CURRENT ASSETS:
Cash and cash equivalents $ 6,270 $ 7,325
Marketable securities 57,977 58,619
Accounts receivable, net 4,751 3,594
Inventories 3,502 4,116
Deferred income taxes 2,850 2,850
Prepaid expenses and other 1,979 1,441
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TOTAL CURRENT ASSETS 77,329 77,945
Property and equipment, at cost: 9,294 9,010
Less accumulated depreciation and amortization (5,877) (5,522)
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3,417 3,488
Other investments, net of accumulated amortization 2,905 2,935
Other assets 150 150
Deferred income taxes 650 650
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TOTAL ASSETS $ 84,451 $ 85,168
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-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,788 $ 3,319
Other current liabilities 6,063 7,679
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TOTAL CURRENT LIABILITIES 8,851 10,998
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common Stock 10 10
Additional paid-in capital 74,128 74,418
Unrealized gain on marketable equity security 1,086 1,050
Retained earning (deficit) 1,903 (1,308)
Treasury stock at cost (1,527) --
-------- --------
TOTAL STOCKHOLDERS' EQUITY 75,600 74,170
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 84,451 $ 85,168
-------- --------
-------- --------
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date.
See notes to condensed consolidated financial statements.
3
<PAGE>
DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 30,
------------------------
1998 1997
--------- ----------
<S> <C> <C>
REVENUES:
Product sales $ 13,401 $ 11,898
Licensing, royalties and other 2,275 2,280
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TOTAL REVENUES 15,676 14,178
COST OF REVENUES:
Cost of product sales 7,727 7,530
Cost of licensing, royalties and other 66 343
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TOTAL COST OF REVENUES 7,793 7,873
-------- --------
GROSS PROFIT 7,883 6,305
OPERATING EXPENSES:
Research and development 2,028 1,941
Sales and marketing 1,313 1,256
General and administrative 1,092 1,079
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TOTAL OPERATING EXPENSES 4,433 4,276
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OPERATING INCOME 3,450 2,029
OTHER INCOME (EXPENSE):
Interest and other income 940 610
Interest expense and other (42) (63)
Equity in income (loss) of
equity method investees, net (66) (204)
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INCOME BEFORE PROVISION FOR INCOME TAXES 4,282 2,372
Provision for income taxes 1,071 356
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NET INCOME $ 3,211 $ 2,016
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-------- --------
NET INCOME PER SHARE:
Basic $ 0.32 $ 0.21
Diluted $ 0.31 $ 0.21
SHARES USED IN PER SHARE COMPUTATIONS:
Basic 10,080 9,559
Diluted 10,387 9,686
</TABLE>
See notes to condensed consolidated financial statements.
4
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DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 404 $ 2,081
INVESTING ACTIVITIES
Purchase of available-for-sale
marketable securities (25,069) (12,766)
Sale of available-for-sale marketable securities 25,711 16,041
Purchases of equipment (284) (543)
Sale of equipment -- 118
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NET CASH PROVIDED BY INVESTING ACTIVITIES 358 2,850
-------- --------
FINANCIAL ACTIVITIES
Sale of Common Stock for cash upon
exercise of options and employee
stock purchase plan 569 121
Purchase of treasury stock (2,386) --
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,817) 121
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (1,055) $ 5,052
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
RETAINED
THREE MONTHS ENDED ADDITIONAL EARNINGS OTHER TOTAL
MARCH 31, 1998 COMMON STOCK PAID-IN (Accumulated TREASURY COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITOL Deficit) STOCK AT COST INCOME EQUITY
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 10,094 $10 $74,418 $ (1,308) -- $1,050 $ 74,170
Unrealized gain on
marketable security -- -- -- -- -- 36 36
Net income -- -- -- 3,211 -- -- 3,211
Comprehensive income 3,247
Exercise of Common Stock
options by employees 44 -- (406) -- 859 -- 453
Sale of Common Stock under
employee stock purchase -- --
plan 13 -- 116 -- 116
Purchase of Treasury stock (99) -- -- -- (2,386) -- (2,386)
----------------------------------------------------------------------------------------------
Balance at March 31, 1998 10,052 $10 $74,128 $ 1,903 (1,527) $1,086 $ 75,600
----------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31, 1997
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Balance at December 31, 1996 9,540 $10 $66,781 $(12,342) -- $ -- $ 54,449
Net income -- -- -- 2,016 -- -- 2,016
Exercise of Common Stock
options by employees 11 -- 37 -- -- -- 37
Sale of Common Stock under
employee stock purchase -- --
plan 12 -- 85 -- 85
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Balance at March 31, 1997 9,563 $10 $66,903 $(10,326) -- $ -- $ 56,587
----------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three months ended March 31 1998,
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, reference is made to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
NOTE B - INVENTORIES
Inventory is valued at the lower of cost (first-in, first-out method) or market.
The components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------- -------
<S> <C> <C>
Work-in-process $57 $16
Finished goods 3,445 4,100
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$3,502 $4,116
------ ------
------ ------
</TABLE>
7
<PAGE>
DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - NET INCOME PER SHARE
Basic net income per share is based on the weighted average number of shares of
Common Stock outstanding during the period. For the same periods, diluted net
income per share further includes the effect of dilutive stock options
outstanding during the period. The following table sets forth the computation of
basic and diluted net income per share (in thousands except per share amounts):
<TABLE>
<CAPTION>
Three months ended
March 31
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
Numerator:
Net income $3,211 $2,016
------ ------
------ ------
Denominator:
Weighted average number of Shares of
Common Stock outstanding during the
period used to compute basic
earnings per share 10,080 9,559
Incremental shares attributable to
exercise of outstanding options
(assuming proceeds would be used
to purchase treasury stock) 307 127
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Weighted average number of shares of
Common Stock used to compute diluted
earnings per share 10,387 9,686
------ ------
------ ------
Basic net income per share $0.32 $0.21
------ ------
------ ------
Diluted net income per share $0.31 $0.21
------ ------
------ ------
</TABLE>
8
<PAGE>
DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - INVESTMENTS
The following is a summary of the cost of available-for-sale securities (in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------- -------
<S> <C> <C>
Corporate obligations $46,188 $53,270
Government and other
agency's obligations 11,976 6,002
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$58,164 $59,272
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------- -------
Amounts included in
marketable securities $57,977 $58,619
Amounts included in
cash and cash equivalents 187 653
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$58,164 $59,272
------- -------
------- -------
</TABLE>
At March 31, 1998 and at December 31, 1997, the carrying amount of securities
approximated their fair market value and the amount of unrealized gain or loss
was not significant. Gross realized gains or losses for the three months ended
March 31, 1998 and 1997, were not significant. The amortized cost of
available-for-sale debt securities at March 31, 1998, by contractual maturities,
is shown below (in thousands):
Amortized cost
--------------
Due in one year or less $15,014
Due after one year to twenty four months 43,150
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$58,164
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NOTE E - INCOME TAXES
The effective tax rate used in computing the provision for income taxes is based
on projected fiscal year income before taxes, including estimated income by tax
jurisdiction. The difference between the effective tax rate and the statutory
rate is due primarily to foreign tax holiday and tax exempt income in Israel.
9
<PAGE>
DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F - SIGNIFICANT CUSTOMERS
Product sales to a distributor accounted for 51% and 21% of total revenues for
the three months ended March 31, 1998 and 1997, respectively. The loss of one or
more major distributors or customers could have a material adverse effect on the
Company's business, financial condition and results of operations.
NOTE G - OTHER INVESTMENTS
Other investments are comprised of:
AudioCodes, Ltd.: AudioCodes, Ltd. ("AudioCodes") is an Israeli corporation
primarily engaged in research, development, production and marketing of voice
communication products. In July 1997, AudioCodes completed a private placement
of additional equity securities without the participation of the Company and,
as a result, the Company's equity ownership interest in AudioCodes was diluted
from approximately 35% to approximately 29%. The Company also has an option to
purchase up to an additional 5% of the outstanding stock of AudioCodes. The
condensed consolidated statements of income for the three months ended March 31,
1998 and 1997, include a $66,000 and $21,000 equity loss, respectively, in the
Company's investment in AudioCodes.
Aptel Ltd. and Nexus Telecommunications Systems Ltd.: In July 1996, the Company
invested $2.0 million of cash for approximately 40% of the equity interests in
Aptel Ltd. ("Aptel"), an Israeli company. In connection with the investment, the
Company incurred a one-time write-off of acquired in-process technology of $1.5
million. In October 1997, the Company invested approximately $176,000 in
convertible debentures issued by Aptel. In December 1997, the Company converted
its debentures into equity and Aptel's shareholders (including the Company)
exchanged their shares in Aptel for common shares of Nexus Telecommunications
Systems Ltd. ("Nexus"), an Israeli company registered and traded on the Nasdaq
SmallCap Market. In April 1998, the Company sold all of its Nexus shares in a
private transaction and realized a pre-tax gain of approximately $1.1 million.
NOTE H- REPURCHASE OF COMPANY'S COMMON STOCK
On January 27, 1998, the Company announced that its Board of Directors had
authorized management to repurchase up to 1,000,000 shares of the Company's
Common Stock from time to time on the open-market or in privately negotiated
transactions. In the first quarter ended March 31, 1998, the Company repurchased
approximately 99,000 shares of its Common Stock at an average price of $24.10
per share.
10
<PAGE>
DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - DEFERRED REVENUE
During the first quarter of 1998, the Company successfully finalized testing on
a certain TAD chip shipped to a customer in the third and fourth quarters of
fiscal 1997. Accordingly, in the first quarter ended March 31, 1998, the Company
recorded approximately $2,180,000 of revenue and approximately $1,208,000 of
related inventory cost, which had been previously deferred at December 31, 1997.
NOTE J- CONTINGENCIES
The Company is involved in certain claims arising in the normal course of
business, including claims that it may be infringing patent rights owned by
third parties. The Company is unable to foresee the extent to which these
matters will be pursued by the claimants or to predict with certainty the
eventual outcome. However, the Company believes that the ultimate resolution of
these matters will not have a material adverse effect on its financial position,
results of operations or cash flow.
In November 1995, after the Company's stock price declined, several lawsuits
were filed in the United States District Court for the Northern District of
California accusing the Company, its former Chief Executive Officer, and its
former Chief Financial Officer of issuing materially false and misleading
statements in violation of the federal securities laws. These lawsuits were
consolidated into a single amended complaint in February 1996. In the
amended complaint, plaintiffs sought unspecified damages on behalf of all
persons who purchased shares of the Company's Common Stock during the period
June 6, 1995 through November 10, 1995. On June 11, 1996, the Court granted
the Company's motion to dismiss the lawsuit, with leave to amend. The
plaintiffs filed an amended complaint on July 11, 1996. On March 7, 1997,
the Court issued an order dismissing with prejudice all claims based on
statements issued by the Company. The Court permitted plaintiffs to proceed
with their claims regarding statements the Company allegedly made to
securities analysts. The Court also permitted plaintiffs to amend their
complaint as to their claim that the Company is responsible for the
statements contained in analysts' reports, but the plaintiffs have chosen not
to amend their complaint. On November 5, 1997, the parties reached an
agreement in principle to settle this litigation and have executed a
stipulation of settlement subject to court approval. The settlement is being
funded by insurance proceeds except for $50,000 funded by the Company in
order to fulfill the retention amounts under the Company's insurance policy.
The Company continues to deny all allegations in the lawsuit.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
TOTAL REVENUES. Total revenues increased to $15.7 million in the first quarter
of 1998 from $14.2 million in the first quarter of 1997 due primarily to
increased revenues for the Company's TAD speech processors, especially those
utilizing flash memory.
In the first quarter of 1998, the Company recorded approximately $2.2 million
of revenue and approximately $1.2 million of related inventory cost, which
had been previously deferred at December 31, 1997, as the Company had not yet
finalized testing on a certain TAD chip shipped to a customer during 1997.
Export sales, primarily consisting of TAD speech processors shipped to customers
in Europe and Asia, as well as license fees on DSP core designs, represented 94%
and 88% of total revenues for the three months ended March 31, 1998 and 1997,
respectively. All export sales are denominated in U.S. dollars.
Revenues from Tomen Electronics (a distributor), accounted for 51% and 21% of
total revenues for the three months ended March 31, 1998 and 1997, respectively.
GROSS PROFIT. Gross profit as a percentage of total revenues increased to 50%
in the first quarter of 1998 from 44% in the first quarter of 1997. The increase
in gross profit primarily is due to the increase in product gross margin.
Product gross profit as a percentage of product sales increased to 42% in the
first quarter of 1998 compared to 37% in the first quarter of 1997 primarily due
to lower costs of manufactured products.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased slightly to $2.0 million in the first quarter of 1998 from $1.9
million in the first quarter of 1997 primarily due to an increase in
engineering personnel as compared to the same period in 1997, and additional
tapeouts for new and enhanced products. However, such expenses were partially
offset by a reduction in the use of subcontractors for the research and
development team.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $1.3 million in
each of the first quarters of 1998 and 1997. Salaries and fringe benefits
increased in the first quarter of 1998 compared to 1997, but were offset by
lower sales commissions and lower consulting costs. Sales and marketing expenses
as a percentage of total revenues slightly decreased to 8% in the first quarter
of 1998, compared to 9% in the first quarter of 1997. The decline is due to
revenues increasing at a higher rate than expenses for the quarter ended March
31, 1998 as compared to the same quarter last year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$1.1 million in each of the first quarters of 1998 and 1997. These expenses as a
percentage of total revenues slightly decreased to 7% in the first quarter of
1998, compared to 8% in the comparable period of 1997. The decline is due to an
increase in total revenues in the first quarter of 1998 compared to the first
quarter of 1997.
12
<PAGE>
OTHER INCOME (EXPENSE) - NET. Interest and other income (expense), net was
$898,000 for the three months ended March 31, 1998, compared to $547,000 for the
three months ended March 31, 1997. The increase was primarily the result of
higher levels of cash equivalents and marketable securities in 1998 as compared
with 1997.
EQUITY IN INCOME (LOSS) OF EQUITY METHOD INVESTEES, NET. Equity in income
(loss) of equity method investees was a $66,000 loss for the first quarter of
1998 as compared to a $204,000 loss in the first quarter of 1997. The condensed
consolidated statements of income for the first quarter of 1997 include a
$183,000 equity loss for the Company's proportionate share of the results of
operations of Aptel, and a loss of $21,000 for the Company's equity basis in
AudioCodes. In December 1997, Aptel's shareholders, including the Company,
exchanged their shares in Aptel for common shares of Nexus. The Company's
investment in Nexus was accounted for using the cost method. As a result, the
Company's results of operations for the first quarter of 1998 do not include any
equity earnings (losses) pertaining to Aptel or Nexus. See also Note G - Other
Investments.
PROVISION FOR INCOME TAXES. In 1998 and 1997, the Company benefited for federal
and state tax purposes from foreign tax holiday and tax exempt income in Israel.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the three months ended March 31, 1998, the
Company generated $405,000 of cash and cash equivalents from its operating
activities as compared to $2.1 million during the first three months ended
March 31, 1997. This decrease in the first quarter of 1998 from the same
period in 1997 was attributed primarily to the non-cash effects of
recognizing deferred revenue and the use of cash to decrease accounts payable
and accrued compensation and benefits in the first quarter of 1998, even
though the Company experienced an increase in net income.
INVESTING ACTIVITIES. The Company invests excess cash in marketable securities
of varying maturity, depending on its projected cash needs for operations,
capital expenditures and other business purposes. In the first three months of
1998, the Company purchased $25.1 million and sold $25.7 million of investments
classified as marketable securities. Capital equipment additions in the first
three months of 1998 totaled $284,000, primarily for computer equipment and
software.
FINANCING ACTIVITIES. During the three months ended March 31, 1998, the Company
received $569,000, upon the exercise of employee stock options and through
purchases pursuant to the employee stock purchase plan. In the first quarter of
1998, the Company repurchased approximately 99,000 shares of its Common Stock,
at an average price of $24.10, totaling $2,386,000.
At March 31, 1998, the Company's principal source of liquidity consisted of cash
and cash equivalents totaling $6.2 million and marketable securities of $58.0
million. The Company's working capital at March 31, 1998 was $68.5 million.
13
<PAGE>
The Company believes that its current cash, cash equivalent and marketable
securities will be sufficient to meet its cash requirements through at least
the next twelve months. In January 1998, the Company announced a stock
repurchase program pursuant to which up to 1,000,000 shares of its Common
Stock may be acquired in the open market or in privately negotiated
transactions. Accordingly, the Company will use part of its available cash
for this purpose. As part of its business strategy, the Company occasionally
evaluates potential acquisitions of businesses, products and technologies.
Accordingly, a portion of its available cash may be used for the acquisition
of complementary products or businesses. Such potential transactions may
require substantial capital resources, which may require the Company to seek
additional debt or equity financing. There can be no assurance that the
Company will consummate any such transactions. See "Factors Affecting Future
Operating Results -- Acquisition Strategy."
14
<PAGE>
FACTORS AFFECTING FUTURE OPERATING RESULTS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING THE COMPANY'S
FUTURE PRODUCTS, EXPENSES, REVENUE, LIQUIDITY AND CASH NEEDS AS WELL AS THE
COMPANY'S PLANS AND STRATEGIES. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON
CURRENT EXPECTATIONS AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THIS
INFORMATION. NUMEROUS FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER
SIGNIFICANTLY FROM THE RESULTS DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS,
INCLUDING THE FOLLOWING RISK FACTORS.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's revenues
are derived predominantly from product sales and accordingly vary significantly
depending on the volume and timing of product orders. In addition, the Company's
quarterly operating results depend on the timing of the recognition of license
fees and the level of per unit royalties. Through 1998, the Company expects
that revenues from its DSP core designs and TrueSpeech will be derived primarily
from license fees rather than by per unit royalties. The uncertain timing of
such license fees has caused, and may continue to cause, quarterly fluctuations
in the Company's operating results. The Company's per unit royalties from
licensees are completely dependent upon the success of its original equipment
manufacturer ("OEM") licensees in introducing products utilizing the Company's
technology and the success of those OEM products in the marketplace. Royalties
from two DSP Core licensees have started to become meaningful in 1997.
The Company's quarterly operating results may also fluctuate significantly
as demand for TADs varies during the year due to seasonal customer buying
patterns, and as a result of other factors, such as the mix of products sold;
fluctuations in the level of sales by OEMs and other vendors of products
incorporating the Company's products; the timing of new products introductions
by the Company or its customers, licensees or competitors; changes in general
economic conditions, including the changing economics conditions in Southeast
Asia and other factors, including those documented elsewhere in this quarterly
report.
RECENT DEVELOPMENTS - REVENUES FROM ASIA. In 1997, the Company generated
approximately 39% of its total product sales, from sales to customers located in
South Korea, Taiwan, Singapore and Hong Kong. While economic activity in some of
these countries, most notably South Korea, has been adversely affected by recent
developments in local currency and banking markets, the Company believes that
the effect of these developments on the Company's business is somewhat mitigated
by the financial condition of many of the Company's customers in these markets,
such as Daewoo, L.G. Electronics and Maxon. Many of these customers are leaders
in their respective industries and conduct their business on a multinational
basis. In addition, management estimates that approximately 70% of the Company's
product sales generated from 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 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 experienced a decline in the
flow of orders from Southeast Asia, primarily South Korea, mainly due to the
general economic uncertainty in that region, which was primarily offset by
increased orders from Japan and Europe, resulting in a decrease in the Company's
backlog. If this trend in the Asian economic market continues, it may result in
a further decrease of the Company's backlog at the end of the second quarter.
There can be no
15
<PAGE>
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 that
competition will increase. The Company's existing and potential competitors in
each of its markets include large and emerging domestic and foreign companies,
many of which have significantly greater financial, technical, manufacturing,
marketing, selling and distribution resources and management expertise than the
Company. Sales of TAD products comprise a substantial part of the Company's
product sales. Any adverse change in the digital TAD market or the Company's
ability to compete and maintain its position in that market would have a
material adverse effect on the Company's business, financial condition and
results of operations.
RELIANCE ON INTERNATIONAL OPERATIONS; RISK OF OPERATIONS IN ISRAEL. The Company
is subject to the risks of doing business internationally, including unexpected
changes in regulatory requirements; fluctuations in the exchange rate for the
United States dollar; imposition of tariffs and other barriers and restrictions;
and the burdens of complying with a variety of foreign laws. The Company is
also subject to general geopolitical risks, such as political and economic
instability and changes in diplomatic and trade relationships, in connection
with its international operations. In particular, the Company's principal
research and development facilities are located in the State of Israel and, as a
result, at March 31, 1998, 82 of the Company's 109 employees were located in
Israel, including 100% of the Company's research and development personnel. In
addition, although the Company is incorporated in Delaware, a majority of the
Company's directors and executive officers are non-residents of the United
States. Therefore, the Company is directly affected by the political, economic
and military conditions to which Israel is subject. In addition, many of the
Company's expenses in Israel are paid in Israeli currency, thereby also
subjecting the Company to foreign currency fluctuations and to economic
pressures resulting from Israel's generally high rate of inflation. While
substantially all of the Company's sales and expenses are denominated in United
States dollars, a portion of the Company's expenses are denominated in Israeli
shekels. The Company's primary expenses paid in Israeli currency are employee
salaries and lease payments on the Israeli facilities. As a result, an increase
in the value of Israeli currency in comparison to the United States dollar could
increase the cost of technology development, research and development expenses
and general and administrative expenses. The rate of inflation in Israel for the
first three months of 1998 and 1997, respectively, was 0.1% and 2.6%. There can
be no assurance that currency fluctuations, changes in the rate of inflation in
Israel or any of the other aforementioned factors will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
ACQUISITION STRATEGY. The Company has pursued, and will continue to pursue,
growth opportunities through internal development and acquisition of
complementary businesses, products and technologies. The Company is unable to
predict whether or when any prospective acquisition will be completed. The
process of integrating an acquired business
16
<PAGE>
may be prolonged due to unforeseen difficulties and may require a
disproportionate amount of resources and management's attention. There can be
no assurance that the Company will be able to successfully identify suitable
acquisition candidates, complete acquisitions, integrate acquired businesses
into its operations, or expand into new markets. Once integrated, acquisitions
may not achieve comparable levels of revenues, profitability or productivity as
the existing business of the Company or otherwise perform as expected. The
occurrence of any of these events could have a material adverse effect on the
Company's business, financial condition or results of operations. Future
acquisitions may require substantial capital resources, which may require the
Company to seek additional debt or equity financing.
DEPENDENCE ON INDEPENDENT FOUNDRIES. All of the Company's integrated circuit
products are manufactured by independent foundries. While these foundries have
been able to adequately meet the demands of the Company's increasing business,
the Company is and will continue to be dependent upon these foundries to achieve
acceptable manufacturing yields, quality levels and costs, and to allocate to
the Company a sufficient portion of foundry capacity to meet the Company's needs
in a timely manner. The Company believes that it now has sufficient foundry
capacity through 1998. Revenues could be materially and adversely affected,
however, should any of these foundries fail to meet the Company's request for
products due to a shortage of production capacity, process difficulties or low
yield rates.
RELIANCE ON OEMS TO OBTAIN REQUIRED COMPLEMENTARY COMPONENTS. Certain of the raw
materials, components and subassemblies included in the products manufactured by
the Company's OEM customers, which also incorporate the Company's products, are
obtained from a limited group of suppliers. Supply disruptions, shortages or
termination of certain of these sources could have an adverse effect on the
Company's business and results of operations due to customers delay or
discontinuance of orders for the Company's products until such components are
available.
INTELLECTUAL PROPERTY. As is typical in the semiconductor industry, the Company
has been and may from time to time be notified of claims that it may be
infringing patents or intellectual property rights owned by third parties. For
example, AT&T has asserted that G.723.1, which is primarily composed of a
TrueSpeech algorithm, includes certain elements covered by patents held by AT&T
and has requested that video conferencing manufacturers license such technology
from AT&T. Other organizations including Lucent Microelectronics, NTT and
VoiceCraft recently have raised public claims that they also have patents
related to the G.723.1 technology. If it appears necessary or desirable, the
Company may seek licenses under such patents or intellectual property rights
that it is allegedly infringing. Although holders of such intellectual property
rights commonly offer such licenses, no assurances can be given that licenses
will be offered or that terms of any offered licenses will be acceptable to the
Company. The failure to obtain a license for key intellectual property rights
from a third party for technology used by the Company could cause the Company to
incur substantial liabilities and to suspend the manufacture of products
utilizing the technology. 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 a material adverse effect on
the Company's financial position and results of operations, or cash flows.
17
<PAGE>
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 effected in some way.
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 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. The Court also permitted
plaintiffs to amend their complaint as to their claim that the Company is
responsible for the statements contained in analysts' reports, but the
plaintiffs have chosen not to amend their complaint. On November 5, 1997, the
parties reached an agreement in principle to settle this litigation and have
executed a stipulation of settlement subject to court approval. The
settlement is being funded by insurance proceeds except for $50,000 funded by
the Company in order to fulfill the retention amounts under the Company's
insurance policy. The Company continues to deny all allegations in the
lawsuit.
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>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 1995, after the Company's stock price declined, several lawsuits
were filed in the United States District Court for the Northern District of
California accusing the Company, its former Chief Executive Officer, and its
former Chief Financial Officer of issuing materially false and misleading
statements in violation of the federal securities laws. These lawsuits were
consolidated into a single amended complaint in February 1996. In the
amended complaint, plaintiffs sought unspecified damages on behalf of all
persons who purchased shares of the Company's Common Stock during the period
June 6, 1995 through November 10, 1995. On June 11, 1996, the Court granted
the Company's motion to dismiss the lawsuit, with leave to amend. The
plaintiffs filed an amended complaint on July 11, 1996. On March 7, 1997,
the Court issued an order dismissing with prejudice all claims based on
statements issued by the Company. The Court permitted plaintiffs to proceed
with their claims regarding statements the Company allegedly made to
securities analysts. The Court also permitted plaintiffs to amend their
complaint as to their claim that the Company is responsible for the
statements contained in analysts' reports, but the plaintiffs have chosen not
to amend their complaint. On November 5, 1997, the parties reached an
agreement in principle to settle this litigation and have executed a
stipulation of settlement subject to court approval. The settlement is being
funded by insurance proceeds except for $50,000 funded by the Company in
order to fulfill the retention amounts under the Company's insurance policy.
The Company continues to deny all allegations in the lawsuit.
On February 12, 1997, BEKA Electronic GmbH ("BEKA") commenced an action in the
United States District Court for the Northern District of California against the
Company. The action alleges breach of contract, breach of implied covenant of
good faith and fair dealing and requests an accounting by the Company in
connection with the Company's termination of the Sales Representative Agreement
between BEKA and the Company. The complaint seeks an unspecified amount of
damages. The parties have agreed to nonbinding mediation, scheduled for May
22, 1998. The Company believes the lawsuit to be without merit and intends to
defend itself vigorously.
19
<PAGE>
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended March 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DSP GROUP, INC.
(Registrant)
By /s/ Avi Basher
------------------------------------------------------------------------
Avi Basher, Vice President of Finance, Chief Financial Officer
and Secretary (Principal Financial Officer and Principal Accounting Officer)
Date: May 13, 1998
20
<PAGE>
EXHIBIT INDEX
Exhibit 27.1 Financial Data Schedule
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q OF DSP GROUP, INC. FOR
THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,270
<SECURITIES> 57,977
<RECEIVABLES> 5,078
<ALLOWANCES> 327
<INVENTORY> 3,502
<CURRENT-ASSETS> 77,329
<PP&E> 9,294
<DEPRECIATION> 5,877
<TOTAL-ASSETS> 84,451
<CURRENT-LIABILITIES> 8,851
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 75,590
<TOTAL-LIABILITY-AND-EQUITY> 84,451
<SALES> 13,401
<TOTAL-REVENUES> 15,676
<CGS> 7,727
<TOTAL-COSTS> 7,793
<OTHER-EXPENSES> 2,028
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42
<INCOME-PRETAX> 4,282
<INCOME-TAX> 1,071
<INCOME-CONTINUING> 3,211
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,211
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.31
</TABLE>
