<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
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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
------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
3120 Scott Boulevard, Santa Clara, California 95054
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (408) 986-4300
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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 July 31, 1999 there were 11,947,804 shares of Common Stock ($.001 par
value per share) outstanding.
<PAGE>
INDEX
DSP GROUP, INC.
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--June 30, 1999
and December 31, 1998................................................3
Condensed consolidated statements of income--Three and six
months ended June 30, 1999 and 1998..................................4
Condensed consolidated statements of cash flows--Six
months ended June 30, 1999 and 1998..................................5
Condensed consolidated statements of Stockholders' Equity --
Three and six months ended June 30, 1999 and 1998....................6
Notes to condensed consolidated financial statements--
June 30, 1999........................................................8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...............19
PART II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings...................................................20
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........................................................................21
</TABLE>
Page 2
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PART 1. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
DSP GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 28,536 $ 9,038
Marketable securities 72,421 57,951
Accounts receivable, net 10,546 5,721
Inventories 1,654 2,182
Deferred income taxes 1,374 1,374
Other accounts receivable 1,935 1,608
-------- --------
TOTAL CURRENT ASSETS 116,466 77,874
Property and equipment, at cost: 15,255 11,330
Less accumulated depreciation and amortization (8,096) (7,094)
-------- --------
7,159 4,236
Other investments, net of accumulated amortization 12,550 1,834
Severance pay fund 1,057 864
Deferred income taxes 848 848
Other assets 1,590 135
-------- --------
TOTAL ASSETS $139,670 $ 85,791
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,976 $ 2,360
Other current liabilities 8,388 6,841
-------- --------
TOTAL CURRENT LIABILITIES 14,364 9,201
LONG TERM LIABILITIES
Accrued severance pay 1,095 895
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common Stock 12 9
Additional paid-in capital 110,249 75,610
Retained earnings 26,517 12,129
Less cost of treasury stock (12,567) (12,053)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 124,211 75,695
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $139,670 $ 85,791
-------- --------
-------- --------
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the
audited financial statements at that date. See notes to condensed
consolidated financial statements.
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DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Product sales $12,673 $13,045 $19,195 $26,446
Licensing, royalties and other 4,029 3,704 7,969 5,979
------- ------- ------- -------
TOTAL REVENUES 16,702 16,749 27,164 32,425
COST OF REVENUES:
Cost of product sales 7,148 7,861 10,899 15,588
Cost of licensing, royalties and other 11 132 86 198
------- ------- ------- -------
TOTAL COST OF REVENUES 7,159 7,993 10,985 15,786
------- ------- ------- -------
GROSS PROFIT 9,543 8,756 16,179 16,639
OPERATING EXPENSES:
Research and development 3,741 2,500 7,102 4,528
Sales and marketing 2,201 1,278 4,117 2,591
General and administrative 1,304 1,189 2,556 2,281
------- ------- ------- -------
TOTAL OPERATING EXPENSES 7,246 4,967 13,775 9,400
------- ------- ------- -------
OPERATING INCOME 2,297 3,789 2,404 7,239
OTHER INCOME (EXPENSE):
Interest and other income 1,222 920 2,352 1,860
Interest expense and other (78) (66) (182) (108)
Equity in income (loss) of equity
method investees, net 575 (49) 1,017 (115)
Gain on sale of marketable
equity security -- 1,086 -- 1,086
Capital gain 11,780 -- 11,780 --
------- ------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES 15,796 5,680 17,371 9,962
Provision for income taxes 2,087 1,419 2,480 2,490
------- ------- ------- -------
NET INCOME $13,709 $ 4,261 $14,891 $ 7,472
------- ------- ------- -------
------- ------- ------- -------
NET INCOME PER SHARE:
Basic $ 1.19 $ 0.43 $ 1.33 $ 0.75
Diluted $ 1.13 $ 0.42 $ 1.29 $ 0.73
SHARES USED IN PER SHARE COMPUTATIONS:
Basic 11,561 9,884 11,167 9,981
Diluted 12,166 10,142 11,502 10,264
</TABLE>
See notes to condensed consolidated financial statements.
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DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,261 $ 6,291
INVESTING ACTIVITIES
Purchase of available-for-sale marketable securities (39,395) (36,148)
Sale of available-for-sale marketable securities 24,925 38,545
Purchases of equipment (3,999) (1,231)
Proceeds from sale of investment--net 3,224 1,262
Investment in subsidiary (1,143) --
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (16,388) 2,428
-------- --------
FINANCIAL ACTIVITIES
Sale of Common Stock for cash upon
exercise of options and employee
stock purchase plan 1,910 700
Purchase of treasury stock (2,710) (8,054)
Issue of Common Stock to investor 34,425 --
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 33,625 (7,354)
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS $ 19,498 $ 1,365
-------- --------
-------- --------
Non-cash investing and financing information:
Liabilities assumed in connection with asset acquisitions $ 590 --
-------- --------
-------- --------
Capitalized software acquisition in exchange
for license sale $ 2,000 --
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
Page 5
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DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
RETAINED
EARNINGS
ADDITIONAL (ACCUMULATED OTHER TOTAL
COMMON STOCK PAID-IN EARNINGS TREASURY COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) STOCK AT COST INCOME EQUITY
------ ------ ----------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
JUNE 30, 1999
Balance at March 31, 1999 11,534 $ 12 $ 110,035 $ 13,150 $ (14,301) $ -- $ 108,896
Net income -- -- -- 13,709 -- -- 13,709
Comprehensive income -- -- -- -- -- -- 13,709
Exercise of Common Stock
options by employees -- -- (57) -- -- -- (57)
Sale of Common Stock under
employee stock purchase plan -- -- -- -- -- --
Issue of treasury stock upon
exercise of stock options 106 -- 271 (342) 1,734 -- 1,663
Purchase of treasury stock -- -- -- -- -- -- --
Balance at June 30, 1999 11,640 $ 12 $ 110,249 $ 26,517 $ (12,567) $ -- $ 124,211
THREE MONTHS ENDED
JUNE 30, 1998
Balance at March 31, 1998 10,052 $ 10 $ 74,128 $ 1,903 $ (1,527) $ 1,086 $ 75,600
Net income -- -- -- 4,261 -- -- 4,261
Comprehensive income
Decrease in unrealized gain on
marketable security -- -- -- -- -- (1,086) (1,086)
Comprehensive income -- -- -- -- -- -- 3,175
Exercise of Common Stock
options by employees 13 -- (160) -- 291 -- 131
Sale of Common Stock under
employee stock purchase plan -- -- -- -- -- -- --
Purchase of treasury stock (280) -- -- -- (5,668) -- (5,668)
Balance at June 30, 1998 9,785 $ 10 $ 73,968 $ 6,164 $ (6,904) $ -- $ 73,238
SIX MONTHS ENDED
JUNE 30, 1999
Balance at December 31, 1998 9,406 $ 9 $ 75,610 $ 12,129 $ (12,053) $ -- $ 75,695
Net income -- -- -- 14,891 -- -- 14,891
Comprehensive income -- -- -- -- -- -- 14,891
Sale of Common Stock, net of
issuance cost 2,300 3 34,425 -- -- -- 34,428
Exercise of Common Stock
options by employees 10 -- (57) (54) 172 -- 61
Sale of Common Stock under
employee stock purchase plan 18 -- -- (107) 290 -- 183
Issuance of treasury stock upon 106 -- 271 (342) 1,734 -- 1,663
exercise of stock options
Purchase of treasury stock (200) -- -- -- (2,710) -- (2,710)
Balance at June 30, 1999 11,640 $ 12 $ 110,249 $ 26,517 $ (12,567) $ -- $ 124,211
</TABLE>
Page 6
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<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED
JUNE 30, 1998
Balance at December 31, 1997 10,094 $ 10 $ 74,418 $ (1,308) $ -- $ 1,050 $ 74,170
Net income -- -- -- 7,472 -- -- 7,472
Comprehensive income,
Decrease in unrealized gain on
marketable equity securities,
net of reclassification
adjustment (a) -- -- -- -- -- (1,050) (1,050)
-------
Comprehensive income -- -- -- -- -- -- 6,422
Exercise of Common Stock
options by employees 57 -- (566) -- 1,150 -- 584
Sale of Common Stock under
employee stock purchase plan 13 -- 116 -- -- -- 116
Purchase of treasury stock (379) -- -- -- (8,054) -- (8,054)
Balance at June 30, 1998 9,785 $ 10 $73,968 $ 6,164 $(6,904) $ -- $ 73,238
(a) Disclosure of reclassification
amount:
Unrealized holding gains
arising during period $ 36
Less: reclassification
for gains included in income (1,086)
-------
Net decrease in unrealized gain
on marketable security $ (1,050)
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</TABLE>
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DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three and six months ended June 30, 1999, are not necessarily indicative
of the results that may be expected for the year ended December 31, 1999. For
further information, reference is made to the consolidated financial
statements and footnotes thereto included in our Annual Report on Form 10-K
for the year ended December 31, 1998.
NOTE B - INVENTORIES
Inventory is valued at the lower of cost or market. Inventories are composed
of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Finished goods $1,654 $2,182
------ ------
$1,654 $2,182
------ ------
------ ------
</TABLE>
NOTE C - NET INCOME PER SHARE
Basic net income per share is computed 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 year, all in accordance with the
Financial Accounting Standards Board issued Statement No. 128, "Earnings per
Share" ("SFAS 128"). The following table sets forth the computation of basic
and diluted net income per share (in thousands except per share amounts):
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<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 13,709 $ 4,261 $ 14,891 $ 7,472
-------- -------- -------- --------
-------- -------- -------- --------
Denominator:
Weighted average number of shares of Common
Stock outstanding during the period used to
compute basic earnings per share 11,561 9,884 11,167 9,981
Incremental shares attributable to exercise of
outstanding options (assuming proceeds would
be used to purchase treasury stock) 605 258 335 283
Weighted average number of shares of
Common Stock used to compute diluted -------- -------- -------- --------
income per share 12,166 10,142 11,502 10,264
-------- -------- -------- --------
-------- -------- -------- --------
Basic net income per share $1.19 $0.43 $1.33 $0.75
-------- -------- -------- --------
-------- -------- -------- --------
Diluted net income per share $1.13 $0.42 $1.29 $0.73
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
NOTE D - INVESTMENTS
The following is a summary of the cost of available-for-sale securities (in
thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Obligations of states and
political subdivisions $ 26,312 $ 25,290
Corporate obligations 62,818 33,218
-------- --------
$ 89,130 $ 58,508
-------- --------
-------- --------
Amounts included in
marketable securities $ 72,421 $ 57,951
Amounts included in
cash and cash equivalents 16,709 557
-------- --------
$ 89,130 $ 58,508
-------- --------
-------- --------
</TABLE>
At June 30, 1999 and at December 31, 1998, the carrying amount of securities
approximated their fair market value and the amount of unrealized gain or
loss was not significant. Gross realized gains or losses for the three months
ended June 30, 1999 and 1998, were not
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significant. The amortized cost of available-for-sale debt securities at June
30, 1999, by contractual maturities, is shown below (in thousands):
<TABLE>
<CAPTION>
Amortized cost
--------------
<S> <C>
Due in one year or less $ 34,068
Due after one year to two years 55,062
--------
$ 89,130
--------
--------
</TABLE>
NOTE E - INCOME TAXES
The effective tax rate used in computing the provision for income taxes is
based on projected fiscal year income before taxes, including estimated
income by tax jurisdiction. The difference between the effective tax rate and
the statutory rate is due primarily to foreign tax holiday and tax exempt
income in Israel.
NOTE F - SIGNIFICANT CUSTOMERS
Product sales to one distributor accounted for 50% of our total revenues for
the three months ended June 30, 1999 and 42% for the three months ended June
30, 1998. Additionally, product sales to one distributor accounted for 38% of
our total revenues for the six months ended June 30, 1999 and 46% for the six
months ended June 30, 1998. The loss of one or more major distributors or
customers could have a material adverse effect on our 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 design, research, development, manufacturing and
marketing of hardware and software products that enable simultaneous
transmission of voice and data over networks including the Internet, ATM and
Frame Relay. In May 1999, we exercised our option to purchase approximately
3.5% of the outstanding stock of AudioCodes for approximately $1.1 million.
In May 1999, AudioCodes finalized its initial public offering (IPO) and is
now listed on the Nasdaq SmallCap Market under the symbol AUDC. In its IPO,
AudioCodes issued 3.5 million shares at a price of $14.00 per share. After
the IPO, AudioCodes had approximately 17.5 million shares outstanding. As a
result, we recorded an equity gain on the issuance of new shares of
approximately $9.3 million in the second quarter of 1999, after fully
amortizing the remaining unamortized excess of purchase price over net assets
acquired by approximately $209,000. We also participated as a selling
shareholder in the IPO and sold approximately 248,000 shares. As a result, we
recorded an additional capital gain of $2.4 million. As of June 30, 1999, we
still hold approximately 4,000,000 shares, or approximately 23%, of the
outstanding shares of AudioCodes. In connection with our investment in
AudioCodes, the condensed consolidated statements of income for the three
months ended June 30, 1999 include a $575,000 equity gain and the condensed
consolidated statements of income for three months ended June 30, 1998
include a $49,000 equity loss. In "Other income (expense)" we included this
one-time capital gain from AudioCodes' IPO of approximately $11.8 million for
each of the three and six months ended June 30, 1999.
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NOTE H- REPURCHASE OF DSP GROUP COMMON STOCK
In March 1999, our Board of Directors authorized a new plan to repurchase up
to an additional 1,000,000 shares of our Common Stock from time to time on
the open-market or in privately negotiated transactions, increasing the total
shares authorized to be repurchased to 2,000,000 shares. In the six months
ended June 30, 1999, we repurchased 200,000 shares of our Common Stock at an
average purchase price of $13.55 per share. The accumulated number of shares
of Common Stock we repurchased as of June 30, 1999 is 1,014,000 shares.
NOTE I- CONTINGENCIES
We are involved in certain claims arising in the normal course of business,
including claims that we may be infringing patent rights owned by third
parties. We are unable to foresee the extent to which these matters will be
pursued by the claimants or to predict with certainty the eventual outcome.
However, we believe that the ultimate resolution of these matters will not
have a material adverse effect on our financial position, results of
operations or cash flow.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
TOTAL REVENUES. Our total revenues were $16.7 million in both of the second
quarters of 1999 and 1998. Total revenues in the first half of 1999 decreased
to $27.2 million, from $32.4 million in the first half of 1998. The decrease
in the first half of 1999 compared to the same period in 1998 was due to our
phasing out of our D6xxx line of products and our phasing in and sales of our
new line of D16xxx products. Our licensing and royalty revenues increased to
$4.0 million in the second quarter of 1999 compared to $3.7 million in the
same period of 1998 primarily due to two new licensees which licensed the
TeakLite DSP Core and the TeakDSPCore.
Export sales, primarily consisting of TAD speech processors shipped to
customers in Europe and Asia, including Japan, as well as license fees on DSP
core designs, represented 91% of our total revenues for the three months
ended June 30, 1999 and 95% of our total revenues for the three months ended
June 30, 1998. Additionally, these sales represented 83% of our total
revenues for the six months ended June 30, 1999 and 94% of our total revenues
for the six months ended June 30, 1998. All export sales are denominated in
U.S. dollars.
Revenues from Tomen Electronics, one of our distributors, accounted for 50%
of our total revenues for the three months ended June 30, 1999, and 42% of
our total revenues for the three months ended June 30, 1998. Additionally,
Tomen Electronics accounted for 38% of our total revenues for the six months
ended June 30, 1999 and 46% of our total revenues for the six months ended
June 30, 1998.
GROSS PROFIT. Gross profit as a percentage of total revenues increased to 57%
in the second quarter of 1999 from 52% in the second quarter of 1998. The
increase in gross profit was primarily due to higher gross margin in our
licensing revenues and in the product gross profit in the second quarter of
1999, compared to the same period in 1998. Product gross profit as a
percentage of product sales increased to 44% in the second quarter of 1999,
from 40% in the second quarter of 1998, primarily due to the introduction of
the new IDT-16K products, and to
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the operations of managing the off-set of the continuing decline in average
selling prices with a decrease in manufacturing costs.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses
increased significantly to $3.7 million in the second quarter of 1999 from
$2.5 million in the second quarter of 1998. In the first half of 1999,
research and development expenses increased to $7.1 million from $4.5 million
in the comparable period of 1998. The increases were primarily due to our
newly acquired wireless communication technologies and products, including
partial amortization of research and development costs that have not yet
reached technological feasibility. The expense increase also was attributed
to an increase in research and development personnel as compared to the same
period in 1998, and to more expenses performed in connection with the release
of our new line of products.
SALES AND MARKETING EXPENSES. Our sales and marketing expenses increased to
$2.2 million in the second quarter of 1999 from $1.3 million in the same
quarter in 1998. In the first six months of 1999, sales and marketing
expenses increased to $4.1 million from $2.6 million in the comparable period
of 1998. Salaries and fringe benefits increased in 1999 compared to 1998,
primarily due to an increase in sales and marketing personnel, partially
associated with our new wireless communication activities. Our sales and
marketing expenses as a percentage of total revenues were 13% in the three
months ended June 30, 1999 and 8% in the three months ended June 30, 1998.
The increase was attributed to our higher sales and marketing expenses in
connection with the support of our new product introductions in 1999, as
compared with the same period in 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative expenses
were approximately $1.3 million in the three months ended June 30, 1999 and
$1.2 million in the three months ended June 30, 1998. In the first half of
1999 general and administrative expenses were $2.6 million compared to $2.3
million in the comparable period of 1998. The increase was mainly due to
higher levels of legal expenses, rent and utilities expenses. These expenses
as a percentage of total revenues slightly increased to approximately 8% in
three months ended June 30, 1999, compared to 7% in the three months ended
June 30, 1998.
OTHER INCOME (EXPENSE). Interest and other income and interest expense other,
net was $2.2 million for the six months ended June 30, 1999, compared to $1.7
million for the six months ended June 30, 1998. The increase was primarily
the result of higher levels of cash equivalents and marketable securities in
1999 as compared with 1998, which were partially off-set by lower yields.
EQUITY IN INCOME (LOSS) OF EQUITY METHOD INVESTEES, NET. Equity in income
(loss) of equity method investees, net, was a $575,000 gain for the three
months ended June 30, 1999 as compared to a $49,000 loss in the comparable
period ended June 30, 1998. In the first half of 1999 equity in income (loss)
of equity method investees, net, was a $1.0 million gain, as compared with a
$115,000 loss in the same period in 1998.
CAPITAL GAIN. In May 1999, as a result of the AudioCodes IPO, we recorded an
equity gain of approximately $9.3 million, after fully amortizing the
remaining unamortized excess of purchase price over net assets acquired, by
approximately $209,000. We also participated as a selling shareholder in the
IPO and sold approximately 248,000 shares. As a result, we recorded an
additional capital gain of $2.4 million. In "Other income (expense)" we
included a one-time capital gain from AudioCodes' IPO, of approximately $11.8
million for the three and six months ended June 30, 1999.
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PROVISION FOR INCOME TAXES. In 1999 and 1998, we benefited mainly from
foreign tax holiday and tax exempt income in Israel.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the six months ended June 30, 1999, we generated
$2.3 million of cash and cash equivalents from our operating activities as
compared to $6.3 million during the six months ended June 30, 1998. This
decrease, even though we experienced an increase in net income during the six
months ended June 30, 1999, was attributable primarily to the non-cash effect
of the capital gain recorded in connection with the AudioCodes IPO and to the
increase of our accounts receivable. However, each were offset by the
increase in accounts payable in the first six months of 1999.
INVESTING ACTIVITIES. We invest excess cash in marketable securities of
varying maturity, depending on our projected cash needs for operations,
capital expenditures and other business purposes. In the first six months of
1999, we purchased $39.4 million and sold $24.9 million of investments
classified as marketable securities. Our capital equipment purchases in the
first six months of 1999 totaled $4.0 million, primarily for new equipment
associated with the acquisition of wireless communicating technologies,
including computers and testing equipment. In May 1999, prior to the
AudioCodes IPO, we exercised our option to purchase approximately 3.5% of the
outstanding stock of AudioCodes for approximately $1.1 million. We also
participated as a selling shareholder in the IPO and sold approximately
248,000 shares and received $3.2 million, net of fees.
FINANCING ACTIVITIES. During the six months ended June 30, 1999, we received
$1.9 million upon the exercise of employee stock options and through
purchases pursuant to the employee stock purchase plan. In the first six
months of 1999, we repurchased 200,000 shares of our Common Stock at an
average purchase price of $13.55 per share, for an aggregate purchase price
of approximately $2.7 million.
At June 30, 1999, our principal source of liquidity consisted of cash and
cash equivalents totaling $28.5 million and marketable securities with an
aggregate value of $72.4 million. Our working capital at June 30, 1999 was
$102.1 million.
We believe that our current cash, cash equivalent and marketable securities
will be sufficient to meet our cash requirements through at least the next
twelve months. In March 1999, we announced a new stock repurchase program
pursuant to which up to an additional 1,000,000 shares of our Common Stock
may be acquired in the open market or in privately negotiated transactions,
increasing the total shares authorized to be repurchased to 2,000,000 shares.
Accordingly, we may use part of our available cash for this purpose.
Additionally, as part of our business strategy, we occasionally evaluate
potential acquisitions of businesses, products and technologies. Accordingly,
a portion of our available cash may be used for the acquisition of
complementary products or businesses. These potential transactions may
require substantial capital resources, which may require us to seek
additional debt or equity financing. There can be no assurance that we will
be able to raise additional debt or equity financing resources for these
transactions or that we will consummate these transactions. See "Factors
Affecting Operating Results -- There are Risks Associated with Our
Acquisition Strategy" for more detailed information.
Page 13
<PAGE>
YEAR 2000 READINESS
We are aware of the issues associated with the programming code in existing
computer systems as the Year 2000 approaches. The "Year 2000" problem is
concerned with whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Year 2000 problem is pervasive and complex as the
computer operation of virtually every company will be affected in some way.
Beginning in 1997, during 1998 and going forward in 1999, we have been and
will continue to utilize both internal and external resources to identify,
correct or reprogram and test our systems for Year 2000 readiness. We are in
the final stages our Year 2000 readiness program, and anticipate that all
reprogramming efforts, including testing, will be completed by September 30,
1999. Our efforts include the evaluation of both information technology
("IT") and non-IT systems. Non-IT systems include systems or hardware
containing embedded technology such as microcontrollers. To date the costs we
have incurred with respect to this project are not material and we do not
believe that future costs for the completion of this project will be
material. However, if systems material to our operations have not been made
Year 2000 ready by the completion of the project, the Year 2000 issue could
have a material adverse effect on our financial statements. We have not
developed a contingency plan to operate in the event that a non compliant
critical system is not remedied by January 1, 2000 and do not intend to do so.
Throughout 1998 and into 1999, we have been and continue to take steps to
ensure that our products and services will continue to operate on and after
January 1, 2000. We believe that our products being shipped today are Year
2000 ready. In addition, to date, confirmations have been received from our
primary processing vendors that plans are being developed to address the
processing of transactions in the Year 2000. We also have been communicating
with suppliers and other third parties that we do business with to coordinate
Year 2000 readiness. The responses received to date indicate that such third
parties are taking steps to address this concern.
Based upon the steps being taken to address this issue and the progress to
date, we believe that Year 2000 readiness expenses will not harm our
earnings. However, we cannot assure you that Year 2000 problems will not
occur with respect to our computer systems. Furthermore, the Year 2000
problem may impact other entities with which we transact business, and we
cannot predict the effect of the Year 2000 problem on these entities or the
resulting effect on us. As a result, if preventative and/or corrective
actions mainly by those with which we do business with are not made in a
timely manner, the Year 2000 issue could result in a failure of some of our
manufacturing operations, which would harm our business, financial condition
and results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. It is our policy not to enter into derivative financial
instruments. Due to this, we did not have significant overall interest rate
risk exposure at August 1, 1999.
FOREIGN CURRENCY RATE RISK. As nearly all of our sales and part of our
expenses are denominated in U.S. Dollars, we have experienced only
insignificant foreign exchange gains and losses to date. We do not currently
have any significant foreign currency exposure and do not expect to incur
significant gains and losses in 1999. We did not engage in foreign currency
hedging activities during the six months ended June 30, 1999.
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<PAGE>
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the "EMU")
introduced a new currency, the euro, on January 1, 1999. During 2002, all EMU
countries are expected to be operating with the euro as their single
currency. Uncertainty exists as to the effect the euro currency will have on
the marketplace. Additionally, all of the final rules and regulations have
not yet been defined and finalized by the European Commission with regard to
the euro currency. We are assessing the effect the euro formation will have
on DSP Group's internal systems and the sale of DSP Group products. We expect
to take appropriate actions based on the results of such assessment. We
believe that the cost related to this issue will not be material to us and
will not have a substantial effect on our financial condition and results of
operations.
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<PAGE>
FACTORS AFFECTING FUTURE OPERATING RESULTS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING OUR FUTURE
PRODUCTS, EXPENSES, REVENUE, LIQUIDITY AND CASH NEEDS AS WELL AS OUR PLANS
AND STRATEGIES. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT
EXPECTATIONS AND WE ASSUME NO OBLIGATION TO UPDATE THIS INFORMATION. NUMEROUS
FACTORS COULD CAUSE OUR ACTUAL RESULTS TO DIFFER SIGNIFICANTLY FROM THE
RESULTS DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS, INCLUDING THE
FOLLOWING RISK FACTORS.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. Our quarterly
results of operations may vary significantly in the future for a variety of
reasons, including the following:
- fluctuations in volume and timing of product orders;
- timing of recognition of license fees;
- level of per unit royalties;
- changes in demand for our products due to seasonal customer buying
patterns and other factors;
- timing of new product introductions by us or our customers,
licensees or competitors;
- changes in the mix of products sold by us;
- fluctuations in the level of sales by original equipment
manufacturers (OEMs) and other vendors of products incorporating
our products; and
- general economic conditions, including the changing economic
conditions in Asia.
Each of the above factors is difficult to forecast and thus could
harm our business, financial condition and results of operations. Through
1999, we expect that revenues from our DSP core designs and TrueSpeech
algorithms 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 our operating results. Our per
unit royalties from licenses are dependent upon the success of our OEM
licensees in introducing products utilizing our technology and the success of
those OEM products in the marketplace. Per unit royalties from TrueSpeech
licensees have not been significant to date.
OUR AVERAGE SELLING PRICES CONTINUE TO DECLINE. We have experienced a
decrease in the average selling prices of our TAD speech processors, but have
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. However, we cannot guarantee that our on-going efforts
will be successful or that they will keep pace with the anticipated,
continuing decline in average selling prices.
WE DEPEND ON THE DIGITAL TAD MARKET WHICH IS HIGHLY COMPETITIVE. Sales of TAD
products comprise a substantial portion of our product sales. Any adverse
change in the digital TAD market or in our ability to compete and maintain
our position in that market would harm our business, financial condition and
results of operations. The digital TAD market and the markets for our
products in general are extremely competitive and we expect that competition
will only increase. Our existing and potential competitors in each of our
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
Page 16
<PAGE>
expertise than we do. It is possible that we may one day be unable to respond
to increased price competition for TAD speech processors or other products
through the introduction of new products or reductions of manufacturing
costs. This inability would have a material adverse effect on our business,
financial condition and results of operations. Likewise, any significant
delays by us in developing, manufacturing or shipping new or enhanced
products would also have a material adverse effect on our business, financial
condition and results of operations.
WE DEPEND ON REVENUES FROM A CURRENTLY UNSTABLE ASIAN MARKET. In 1997, we
generated approximately $19.9 million, or 39% of our total product sales,
from sales to customers located in South Korea, Taiwan, Singapore and Hong
Kong. However, in 1998, due to economic problems in some of these countries,
most notably South Korea and Singapore, our product sales in this region
decreased to $10.9 million, or 22% of our total product sales. The decline in
sales from Southeast Asia countries resulted in a decrease in our backlog,
but was partially offset by increased orders from Japan. If this negative
economic trend in the Asian markets continues, it may result in a further
decrease of our backlog in 1999. We cannot provide assurance that continued
negative economic development in Asia will not have a material adverse effect
on our future operating performance.
WE DEPEND ON INDEPENDENT FOUNDRIES TO MANUFACTURE OUR INTEGRATED CIRCUIT
PRODUCTS. All of our integrated circuit products are manufactured by
independent foundries. While these foundries have been able to adequately
meet the demands of our increasing business, we are and will continue to be
dependent upon these foundries to achieve acceptable manufacturing yields,
quality levels and costs, and to allocate to us a sufficient portion of
foundry capacity to meet our needs in a timely manner. To meet our increased
wafer requirements, we have added additional independent foundries to
manufacture our TAD speech processors. Our revenues could be harmed should
any of these foundries fail to meet our request for products due to a
shortage of production capacity, process difficulties, low yield rates or
financial instability.
WE DEPEND ON INTERNATIONAL OPERATIONS, PARTICULARLY IN ISRAEL. We are subject
to the risks of doing business internationally, including:
- unexpected changes in regulatory requirements;
- fluctuations in the exchange rate for the U.S. dollar;
- imposition of tariffs and other barriers and restrictions;
- burdens of complying with a variety of foreign laws;
- political and economic instability; and
- changes in diplomatic and trade relationships.
In particular, our principal research and development facilities are located
in the State of Israel and, as a result, at June 30, 1999, 107 of our 142
employees were located in Israel, including 75 of our 85 research and
development personnel. In addition, although DSP Group is incorporated in
Delaware, a majority of our directors and executive officers are residents of
Israel. Therefore, we are directly affected by the political, economic and
military conditions to which Israel is subject.
Moreover, many of our expenses in Israel are paid in Israeli currency which
subjects us to the risks of foreign currency fluctuations and to economic
pressures resulting from Israel's
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<PAGE>
generally high rate of inflation. The rate of inflation in Israel was (0.4%)
for the six months ended June 30, 1999 and 2.2% for the six months ended June
30, 1998. While substantially all of our sales and expenses are denominated
in United States dollars, a portion of our expenses are denominated in
Israeli shekels. Our primary expenses paid in Israeli currency are employee
salaries and lease payments on our 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. We cannot
provide assurance that currency fluctuations, changes in the rate of
inflation in Israel or any of the other factors mentioned above will not have
a material adverse effect on our business, financial condition and results of
operations.
WE DEPEND ON OEMS AND THEIR SUPPLIERS TO OBTAIN REQUIRED COMPLEMENTARY
COMPONENTS. Some of the raw materials, components and subassemblies included
in the products manufactured by our OEM customers, which also incorporate our
products, are obtained from a limited group of suppliers. Supply disruptions,
shortages or termination of any of these sources could have an adverse effect
on our business and results of operations due to the delay or discontinuance
of orders for our products by customers until those necessary components are
available.
WE DEPEND UPON THE ADOPTION OF INDUSTRY STANDARDS BASED ON TRUESPEECH. Our
prospects are partially dependent upon the establishment of industry
standards for digital speech compression based on TrueSpeech algorithms in
the computer telephony and Voice over IP markets. The development of industry
standards utilizing TrueSpeech algorithms would create an opportunity for us
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. In
March 1997, the International Multimedia Teleconferencing Consortium, 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 IP applications
for H.323 conferencing products.
THERE ARE RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY. DSP Group has
pursued, and will continue to pursue, growth opportunities through internal
development and acquisition of complementary businesses, products and
technologies. We are unable to predict whether or when any prospective
acquisition will be completed. The process of integrating an acquired
business may be prolonged due to unforeseen difficulties and may require a
disproportionate amount of our resources and management's attention. We
cannot provide assurance that we will be able to successfully identify
suitable acquisition candidates, complete acquisitions, integrate acquired
businesses into our operations, or expand into new markets. Once integrated,
acquisitions may not achieve comparable levels of revenues, profitability or
productivity as the existing business of DSP Group or otherwise perform as
expected. The occurrence of any of these events could harm our business,
financial condition or results of operations. Future acquisitions may require
substantial capital resources, which may require us to seek additional debt
or equity financing.
PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED; RISKS OF INFRINGEMENT OF
RIGHTS OF OTHERS. As is typical in the semiconductor industry, we have been
and may from time to time be notified of claims that we may be infringing
patents or intellectual property rights owned by third parties. For example,
AT&T has asserted that G.723.1, which primarily is composed of a TrueSpeech
algorithm, includes certain elements covered by patents held by AT&T and has
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<PAGE>
requested that video conferencing manufacturers license the technology from
AT&T. Other organizations including Lucent Microelectronics, NTT and
VoiceCraft have raised public claims that they also have patents related to
the G.723.1 technology.
If it appears necessary or desirable, we may try to obtain licenses for those
patents or intellectual property rights that we are allegedly infringing.
Although holders of these type of intellectual property rights commonly offer
these licenses, we cannot assure that licenses will be offered or that terms
of any offered licenses will be acceptable to us. Our failure to obtain a
license for key intellectual property rights from a third party for
technology used by us could cause us to incur substantial liabilities and to
suspend the manufacturing of products utilizing the technology. We believe
that the ultimate resolution of these matters will not have a material
adverse effect on our financial position, results of operations, or cash
flows.
WE MAY HAVE YEAR 2000 READINESS ISSUES. We may discover Year 2000 readiness
problems in our information technology ("IT") and non-IT systems that will
require substantial revision. If we cannot fix or replace these systems
before January 1, 2000 our operating costs could be increased and we could
experience business interruptions which could harm our business.
Furthermore, the Year 2000 problem may impact other entities with which we
transact business, including suppliers, primary processing vendors and
customers, and we cannot predict the effect of the Year 2000 problem on these
entities or the resulting effect on us. As a result, if preventative and/or
corrective actions mainly by those with which we do business are not made in
a timely manner, the Year 2000 issue could harm our business, financial
condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000
Readiness" for more detailed information.
OUR STOCK PRICE MAY BE VOLATILE. Announcements of developments related to our
business, announcements by competitors, quarterly fluctuations in our
financial results, changes in the general conditions of the highly dynamic
industry in which we compete or the national economies in which we do
business and other factors could cause the price of our common stock to
fluctuate, perhaps substantially. In addition, in recent years the stock
market has experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies. These factors
and fluctuations could have a material adverse effect on the market price of
our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Quantitative and Qualitative Disclosures About Market Risk."
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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 June 30, 1999.
Page 20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DSP GROUP, INC.
(Registrant)
By /s/ MOSHE ZELNIK
---------------------------------------------------------------
Moshe Zelnik, Vice President of Finance, Chief Financial Officer
and Secretary (Principal Financial Officer and Principal Accounting Officer)
Date: August 13, 1999
Page 21
<TABLE> <S> <C>
<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q OF DSP GROUP, INC. FOR
THE QUARTER ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 28,536
<SECURITIES> 72,421
<RECEIVABLES> 11,020
<ALLOWANCES> 474
<INVENTORY> 1,654
<CURRENT-ASSETS> 116,466
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