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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
Commission File Number 0-23006
DSP GROUP, INC.
(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 No.)
incorporation and organization)
3120 Scott Boulevard, Santa Clara, CA 95054
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(Address of principal executive offices, including zip code)
(408) 986-4300
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(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 per share
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing price of the Common Stock on March 15,
2000, as reported on the Nasdaq National Market, was approximately
$1,103,666,561. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded from this computation in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 15, 2000, the Registrant had outstanding 26,167,520 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended December 31, 1999 are incorporated by reference into Part II of this
Form 10-K Report. With the exception of those portions which are incorporated by
reference, the Registrant's 1999 Annual Report is not deemed filed as part of
this Report.
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INDEX
DSP GROUP, INC.
Page No.
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PART I
Item 1. BUSINESS..........................................................3
Item 2. PROPERTIES.......................................................20
Item 3. LEGAL PROCEEDINGS................................................20
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............20
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..............................................21
Item 6. SELECTED FINANCIAL DATA..........................................21
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONAL AND RESULTS OF OPERATIONS............................21
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RATE.......21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................21
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE...........................21
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............22
Item 11. EXECUTIVE COMPENSATION...........................................22
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...................................................22
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................22
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K......................................................23
SIGNATURES.......................................................28
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This Annual Report on Form 10-K contains certain forward-looking
statements that are based on the beliefs of, and estimates made by and
information currently available to, DSP Group's management. The words "expect,"
"anticipate," "intend," "plan" and similar expressions identify forward-looking
statements. These statements are subject to risks and uncertainties. Actual
results could differ materially from those discussed here. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below in "Factors that May Affect Future Operating Results" and
elsewhere in this Annual Report on Form 10-K.
This Annual Report on Form 10-K includes trademarks and registered
trademarks of DSP Group. Products or service names of other companies mentioned
in this Annual Report on Form 10-K may be trademarks or registered trademarks of
their respective owners.
PART I
Item 1. BUSINESS.
General Business
DSP Group develops and markets products and technologies that perform
digital signal processing--the electronic manipulation of digitized speech and
other digital signals. DSP Group's products are used in a wide variety of
telecom applications.
Digital signal processing (DSP) based solutions are more cost effective
and provide a broader range of features than analog based solutions. Many
applications, including digital cellular and wireless communications, broadband
modems, Voice Over the Internet and digital audio/video, all use DSP techniques
intensively.
Our work in the field of DSP has yielded four synergetic product families:
o DSP-based Speech and Telephony Processor - "System on a Chip"
that handles telephony functions and advanced speech
algorithms.
o Cordless Telephony - 900 Megahertz Digital Spread Spectrum
Processor - A chip set that handles digital wireless
communication along with telephony functions and advanced
speech algorithms.
o DSP Cores - Digital Signal Processor Cores - A family of
processors that, when combined with other hardware elements
such as memories and input/output devices, forms a chip that
is most efficiently targeted for specific applications.
o TrueSpeech(R) - A family of proprietary speech compression
algorithms.
DSP-Based Speech and Telephony Processors
DSP Group has developed two lines of speech and telephony processing
chips: integrated digital telephony processors, which are designed for use in
the consumer telephone market, and Voice over IP speech co-processors, which are
designed for use in network telephony and video conferencing products. Both
product lines are based upon our DSP core designs and incorporate our TrueSpeech
speech compression algorithms.
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Integrated Digital Telephony Speech Processors
DSP Group's integrated digital telephony (IDT) speech processors are
currently incorporated in over 90 models of featured phones from more than 40
different companies. These models are being sold in Europe, Japan and the United
States.
Our IDT speech processors are based on our PineDSPCore(R), which is more
fully described below. Our integrated digital telephony speech processors use
our TrueSpeech speech compression technology to provide the highest quality
speech recording and playback. They incorporate the following speech and
telephony technologies in various combinations:
- --------------------------------------------------------------------------------
Technology Description
- --------------------------------------------------------------------------------
Triple Rate Coder(TM) Instructs the telephone answering
system to decide automatically between better voice
quality and longer recording time.
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True Full-Duplex Allows simultaneous two-way (full-duplex),
SpeakerPhone(TM) hands-free operation of the telephone and
suppresses and cancels acoustic and electrical
echoes.
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G.723.1 Provides speech compression for Voice over IP and
video conferencing over standard telephone lines.
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Caller ID and Call Waiting Identifies to the party being called the
Caller ID telephone number of the calling party, whether
or not the party being called is already engaged
in another call.
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Call Progress Tone Detects standard telephony signals during the
Detection progress of a telephone call.
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DTMF Signaling Detects and generates touch tone (DTMF)
signals that comply with telephone industry
frequency standards.
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Speech Prompts Provides the ability to stamp a message
with a time and date and vocal operating
instructions prompts.
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Variable Speed Playback Permits playback of recorded speech at different
(FlexiSpeech(R)) speeds without distorting the natural sound of
the speech.
- --------------------------------------------------------------------------------
Voice Operated Switch Detects human speech and stops recording during
("VOX") (Smart-Vox(R)) periods of silence, thereby conserving available
memory.
- --------------------------------------------------------------------------------
Alpha Least Cost Routing Automatically chooses from a number of telephone
("LCR")/Super LCR service providers in order to select the lowest
available rates.
- --------------------------------------------------------------------------------
Voice Recognition Allows a user to operate a telephone or
answering machine device by giving voice commands.
- --------------------------------------------------------------------------------
The first integrated digital telephony speech processors were introduced
by DSP Group in 1989. Since then, we have shipped approximately 47 million units
of speech processors to original equipment manufacturers (OEMs), of which
approximately 12 million were shipped in 1999. Our IDT speech processor sales
accounted for approximately 62% of our total revenues in 1999.
In 1999, we started the shipment of the D16000 family of fully integrated
speech processors, which combine the components of a mixed signal system on a
single chip. Each speech processor in the D16000 family contains a DSP core,
converters that transform analog signals into digital signals and vice versa,
and
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various signal amplifiers, all embedded on a single chip. In addition to
implementing DSP algorithms, including compression, caller ID and full-duplex
speaker phone, these speech processors also perform tasks that would typically
be handled by a separate central processing unit (CPU) chip. The D16000
processors provide high value to telephony product vendors by eliminating the
need for almost any other electronic components and thus reducing materials and
manufacturing costs.
The following table presents the main features of the primary IDT speech
processors that we currently offer:
DSP Group's IDT Speech Processors
D16559 D16529 D6571 D6587
------ ------ ----- -----
Process Geometry (microns) ................ 0.5 0.5 0.5 0.5
Minutes Record, 4 Mbit Memory .............. 22-25, 22-25, 22-25, 22-25,
10,15 10,15 10,15 10,15
Memory Type ................................ Flash Flash Flash Flash
Advanced Features:
Speech Prompts ........................... Yes Yes Yes Yes
Variable Speed Playback .................. Yes Yes Yes Yes
Full Duplex Speakerphone ................. Yes -- Yes Yes
Caller ID and Call Waiting Caller ID...... Yes Yes Yes Yes
Voice Recognition ........................ Yes
System On Chip-included peripherals:
Microcontroller .......................... Yes Yes -- --
Line Coder ............................... Yes Yes -- --
Speaker Coder ............................ Yes -- -- --
Amplifiers ............................... Yes Yes -- --
The following is a list of IDT manufacturers and resellers whose products
incorporate our IDT speech processors:
IDT Manufacturers and Resellers
IDT Manufacturers IDT Resellers
------------------------------------ --------------------------
Alcatel Panasonic Bell South
Ascom Philips Bosch Telecom
CCT Telecom Sagem British Telecom
Daewoo Samsung France Telecom
D&B Electronics Sanyo GE
Ericsson Siemens/Infinion German Telecom
Giant Smoothline Loewe-Binatone
HPF Ascom Sony Southwestern Bell
I.N.T. Corp. Taifeng Swiss Telecom
Kinpo Thomson
L.G. Electronics Tiptel
Matra Uniden
Maxon
Voice over IP Speech Co-Processors
Our Voice over IP speech co-processors were developed for use in
conjunction with other microprocessors to transmit voice over packet-based
public and private networks, including the Internet,
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local area networks (LANs), frame relay networks, cable networks and other data
networks and combined data/voice networks. "Voice over IP" refers to the
transmission of voice signals over networks using the Internet Protocol (IP),
which involves dividing the signals into numerous small data packets that are
individually transmitted over the network and reassembled in the correct order
at their destination. They also can be used to implement the speech component of
video conferencing applications.
These speech co-processors take advantage of G.723.1, a speech compression
algorithm that has been incorporated into various international communications
standards, which is more fully discussed below, to provide cost-effective, high
quality speech compression. The following table sets forth other features of the
Voice over IP speech co-processors that we currently offer:
DSP Group's Voice over IP Speech Co-Processors
<TABLE>
<CAPTION>
CT8016 CT8021 CT8022
-------------- --------------- --------------
<S> <C> <C> <C>
DSP Core.................................... PineDSPCore OakDSPCore OakDSPCore
Process Geometry (microns).................. 0.5 0.5 0.5
TrueSpeech Algorithm........................ 8.5, 6.3, 5.3, 8.5, 6.3, 5.3, 8.5, 6.3, 5.3,
Data Rate, Kilobits Per Second.............. 4.8 & 4.1 4.8 & 4.1 4.8 & 4.1
ITU-T Standard Speech Coders................ G.729A+B G.723.1, G.722, G.723.1,
G.728, G.729A+B G.729A+B
Features:
Full Duplex Speakerphone................... Yes Yes Yes
Variable Speed Message Playback............ Yes Yes --
Full Duplex DSVD........................... Yes Yes Yes
Video Conferencing......................... -- Yes Yes
Internet Telephony......................... Yes Yes Yes
</TABLE>
Future Speech and Telephony Processors
We are currently developing our next generation of IDT speech processors
and Voice over IP speech co-processors to include a number of enhancements and
improvements.
First, we intend to design and manufacture our future IDT speech
processors using a 0.25 micron CMOS technology, so that the conductive paths on
the circuits inside these chips will be 0.25 microns wide. By reducing these
line widths we can place more transistors in the same amount of space and as a
result provide more power at the same cost. We expect that this design will
increase our competitiveness in the price-sensitive IDT business.
Second, we intend to add new features to our next generation of IDT speech
processors and Voice over IP speech co-processors. For example, we intend to
enhance our IDT speech processors with additional capabilities, including
improved speech quality, full duplex speakerphone, advanced voice recognition
and text to speech algorithms and our integrated 900 MHz spread spectrum base
band processor. In addition, we intend to use the TeakLiteTM DSP core, which is
more powerful than our PineDSPCore and OakDSPCore(R), to provide additional
processing power for these new features.
Cordless Telephony
In the beginning of 1999, DSP Group acquired two integrated groups of
engineers, one located in Israel and the other in the United States. These
twenty-five engineers specialize in the design of integrated
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circuits for wireless communications. In addition, we acquired technology and
products, including associated intellectual property, related to 900 Megahertz
narrow-band cordless telephones (the transmissions between the handset and base
unit of these telephones are at or near a frequency of 900 Megahertz) and 900
Megahertz spread spectrum cordless telephones (the transmissions between the
handset and base unit of these telephones are "spread" in a pseudrandom pattern
over a range of frequencies).
During 1999, we also finalized the design and began to sell a cordless
telephony solution consisting of two chips - a base band chip and an RF chip -
that allow telephone vendors to build 900 Megahertz cordless telephones with
limited technical understanding, shortening the time it takes for the product to
reach the market. In the second half of 1999, we started development of the DSPG
Elite(TM) device with an RF and power amplifier that we believe will provide a
high performance, cost effective solution for 900 Megahertz spread spectrum
technology.
DSP Cores
DSP Group has developed proprietary, DSP core architecture and designs
that provide low-power, high performance, cost-effective solutions for current
and emerging digital signal processing applications. Our DSP cores are
incorporated in our own family of speech, cordless and telephony processors and
also are licensed to more than 50 entities, including Adaptec, DSP
Communications (a subsidiary of Intel), Fujitsu, Kawasaki, LSI Logic, NEC, Oki,
Seiko Epson, Siemens/Infinion, Sony, Temic and VLSI, a subsidiary of Philips.
We currently offer four families of DSP SmartCores(TM), --PineDSPCore(R),
OakDSPCore(R), TeakDSPCore(R) and PalmDSPCore(R). Together, they cover a wide
range of applications, from low end applications, including digital answering
machines, hard disk controllers, low speed modems and Voice over IP
applications, to high performance applications such as digital subscriber line
(DSL), third generation (3G) cellular communications, broadband modems,
multimedia and Voice over IP gateways.
Digital signal processing chips and software are being used more and more
in high volume communication and computing products. We believe that our cores
can provide cost-effective DSP solutions for chips used in these applications,
because our cores are:
o Flexible and Portable. The DSP cores are designed as "soft cores,"
so the cores are foundry independent and can be implemented in any
of the various manufacturing processes used by different
semiconductor fabrication facilities. The cores also can be produced
by manufacturers in different geometries. Furthermore, universal
design rules are used in the DSP core designs to allow easy
implementation across multiple semiconductor process technologies.
o Efficient to design. The designs are highly efficient, with variable
data size of 16/20/24 bits, general purpose DSPs with adjacent
modular RAM and ROM and general I/O blocks to provide for a flexible
layout and design.
o Power efficient. During the design of the cores, special mechanisms
were inserted throughout the different phases of design, from
architecture definition to the implementation, to reduce the power
consumption of the core. In addition, our cores operate at different
voltages, ranging from 5 volts down to 1.1 volts. The lower the
voltage and the lower the power requirements, then the less it
consumes battery life.
o Inexpensive to manufacture. The DSP cores, which in the past could
only be used on processors designed for a 1.0 micron CMOS process,
can now be implemented on 0.25 and
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0.18 micron processes. We believe these size reductions in
manufacturing can reduce the product cost, while increasing product
performance.
o Open Architecture - Our DSP cores technology is widely adopted by
semiconductors, ASIC vendors and OEMs.
The efficient processing, increasing performance, flexible design and
scaleable memories of our DSP core designs allow for the development of
powerful, smaller and lower cost DSP solutions, which shorten time to market for
new products and product enhancements.
With each new core, we have added features and enhanced performance. Our
first core, the PineDSPCore, was released in 1992 and was developed for use in
our IDT speech processor products. It also gained success in other DSP
applications as well as hard disk driver applications. In 1994, we introduced
our OakDSPCore, an enhanced version of the PineDSPCore that, among other things,
achieves a higher processing speed through improved architecture and includes an
advanced, more efficient instruction set. The OakDSPCore is especially
well-suited for use in personal communication products and higher level
processing applications, including digital cellular telephones, high bit rate
modems, video telephone conferencing applications and DSVD modems, which send
compressed voice and data signals at the same time over a regular telephone
line. Algorithms that use the PineDSPCore instruction set also can be run on the
OakDSPCore. OakDSPCore became the standard de-facto licensable DSP core on the
market.
In 1999, we introduced the TeakDSPCore - a family of two low power, cost
effective cores: the TeakLite(TM) and the Teak(R). These cores were designed in
a new methodology to achieve a higher frequency. Teak contains two arithmetic
units functioning in parallel (Dual MAC), which improve the performance of a
notable portion of the application that requires DSP technology. The TeakDSPCore
is aimed at emerging applications in the digital cellular communications,
including products implementing the Global System for Mobile communications
(GSM), half-rate GSM, Time Division Multiple Access (TDMA) and Code Division
Multiple Access (CDMA) standards. We also have targeted this core for use in
advanced wired line modems, including those using the V.90 standard, products
implementing emerging digital audio standards and formats such as AC3 and MPEG2,
and Voice over IP and telecommunications products.
In 1999, we also introduced the first silicon of our high performance
PalmDSPCore. The PalmDSPCore is a family of three cores, each core version meets
a different market segment. The wide range of high performance applications,
including third generation cellular communications, digital subscriber lines
(DSL), VoIP gateways and consumer multimedia.
The following table shows a comparison of our DSP core designs:
DSP Group's DSP Core Designs
<TABLE>
<CAPTION>
PineDSPCore OakDSP Core TeakLite Teak PalmDSPCore
----------- ----------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
Data Word Length .............. 16 bit 16 bit 16 bit 16 bit 16/20/24 bit
Process Geometry (microns)..... 0.5 0.35 0.25 0.25 0.2
Performance ................... Single MAC Single MAC Single MAC Dual MAC Dual MAC &
Instruction
Level
Parallelism
Voltage ....................... 5.0V 3.3V 2.5V 2.5V 2.5V
Advanced Instruction Set....... Average Advanced Advanced Parallel Parallel
Capability Capability
</TABLE>
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In addition to incorporating our DSP core designs in our speech and
telephony processors, we also license them to third parties, together with
advanced software tools, so that these licensees can incorporate our DSP core
designs into their semiconductor chip products. These licenses are generally
granted in exchange for an upfront license fee payment. This fee is generally
recognized by us upon shipment of the deliverables for the core, provided that
no significant vendor or post-contract support obligations remain outstanding
and that collection of the resulting receivable is deemed probable. The
licensees also pay a monthly support fee, which is typically paid for a period
of one or two years, and ongoing per-unit royalties based on the number of units
of products containing the core that are shipped by the licensee. The timing and
amount of royalties that DSP receives from its core licensees depend on the
timing of each licensee's product development and the degree of market
acceptance of each licensee's products, neither of which are within our control.
In 1999, royalties paid by four PineDSPCore and OakDSPCore licensees for
shipment of products utilizing these cores increased from the previous year.
We also know that one of the important issues to a potential licensee is
the quality of our customer support. With good customer support the licensee
achieves faster time to market for their products. To provide this high quality
support, we have geographically located our support network all over the world,
as well as offering online technical support. In addition, special training
classes are given to each of our licensees, by our expert R&D personnel.
We believe that it is a great benefit for our licensees that DSP Group is
the developer of both the DSP cores and the supporting development tools. This
dual function is the reason that we are able to provide our customers with
advanced and optimized development tools: assemblers, linkers, simulators,
emulators and optimized C/C++ compilers. New releases of the development tools
occur periodically and include updates and new features.
The following is a partial list of companies who have licensed our DSP
core designs and representative applications for which they use our DSP core
designs:
DSP Core Design Licenses
Licensees Representative Applications
- ----------------------------- --------------------------------------
Adaptec Disk Drives
Atmel ASIC, Communications
DSP Communications
(a subsidiary of Intel) Digital Cellular Telephones
Fujitsu ASIC, ADSL, Communications
Hyundai ASIC, Audio, Communications
Kawasaki ASIC, Communications
Kenwood Audio Products
LSI Logic ASIC, Communications, DAB
Mitel ASIC, Communications
National Semiconductors Communications
NEC ASIC, Communications
Oki Communications
ROHM ASIC, Communications
Samsung ASIC, Communications and Multimedia
Seiko-Epson ASIC, Communications
Siemens/Infinion Communications
Sony Multimedia
TDK Semiconductor Modems
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Licensees Representative Applications
- ----------------------------- --------------------------------------
TEMIC DAB, Communications
TSMC ASIC Library
VLSI Technology
(a subsidiary of Philips) ASIC, Communications
Xemics Low Voltage applications
In order to assist existing licensees of our DSP core designs, and to
enhance the attractiveness of these cores to potential licensees, we have
entered into agreements with leading developers of semiconductor design and
simulation software, including Cadence, Mentor Graphics and Synopsys. These
companies have adapted certain of their software applications to support our
cores, enabling such software to be used to design and simulate semiconductor
products containing these cores. In addition, a number of independent software
vendors, among them Ensigma, Espico, Prairiecomm, Vocal Technologies and
VoicePump, have developed digital signal processing algorithms that operate on
our PineDSPCore and OakDSPCore for a variety of communications and multimedia
applications. In 1999, these companies expanded their software product lines and
began to implement software on our most recently announced cores: TeakDSPCore
and PalmDSPCore. We believe that these developments and the large software
installed-base, make our DSP cores more attractive to potential licensees. In
addition, we believe that these technology providers help to establish our cores
as industry standards.
In 1999, the number of our core licensees increased as a result of several
contracts signed for our newest products, TeakLite, Teak and PalmDSPCore. Prior
to 1999, most of our licensees licensed our cores for the cellular market. In
1999, the PalmDSPCore was selected by leading companies as the platform for the
xDSL (full-rate and G.Lite) market.
TrueSpeech Products
TrueSpeech is a family of high-quality, cost-effective speech compression
technologies based on complex mathematical algorithms that are derived from the
way airflow from the lungs is shaped by the throat, mouth and tongue during
speech. This shaping of bursts of air is what the ear interprets as speech.
TrueSpeech converts this speech into digital data and then selectively
eliminates and enhances certain sound data to replicate human speech.
Originally developed for consumer telephone applications, we also have
enhanced TrueSpeech for use in the computer telephony and Voice over IP markets.
We incorporated our TrueSpeech technology in our speech and telephony processors
and also license TrueSpeech to computer telephony, personal computer and Voice
over IP companies for inclusion in their products.
Our TrueSpeech technology has become one of the leading digital speech
compression solutions in several markets. In the personal computer market,
Microsoft has incorporated a TrueSpeech algorithm in Windows 95, Windows 98 and
NT. In February 1995, the International Telecommunications Union established its
G.723.1 standard for low bit rate speech compression, which incorporates the
TrueSpeech 6.3 and 5.3 algorithms. In March 1997, the International Multimedia
Teleconferencing Consortium, a nonprofit industry group, recommended the G.723.1
standard as a default low bit rate audio compression technology for all voice
transmissions over the Internet and for conferencing products conforming the
International Telecommunication Union's H.323 standard for packet-based
multimedia communications systems. G.723.1 is also part of the International
Telecommunication Union's H.324 standard for video conferencing over standard
telephone lines. Since its adoption and endorsement by the International
Telecommunications Union and the International Multimedia Teleconferencing
Consortium, the G.723.1 standard has gained considerable momentum in the video
and audio conferencing industry.
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We believe that the principal advantages of TrueSpeech, as compared with
other currently available digital speech compression technologies, are as
follows:
o Industry Acceptance and Field proof. As described above, a
TrueSpeech algorithm, the G.723, was adopted as a standard by the
International Telecommunications Union and was recommended as the a
default speech algortihm for Voice over IP by the International
Multimedia Teleconferencing Consortium. This enabled a broad usage
of the algorithm especially in Voice over IP and video conferencing
applications.
o High Quality Speech. Another advantage of TrueSpeech is that it
reproduces high quality speech playback with minimum distortion by
selectively eliminating nonessential and background sound data
without significant loss of speech quality. TrueSpeech has received
high scores for speech quality from a number of independent
evaluators. For example, TrueSpeech scored the highest on the ITU's
intricately structured test used to numerically rate the quality of
the five competing speech compression algorithms submitted for
adoption as the G.723.1 standard for video telephones. In
independently conducted tests performed by Dynastat, Inc., a company
specializing in the performance evaluation of voice communication
systems, TrueSpeech 6.3 received a Mean Opinion Score of 3.98, while
regular telephone quality is based upon a Mean Opinion Score of 4.0.
o Cost Effectiveness. TrueSpeech's ability to achieve high speech
compression with lower computational complexity provides it with a
competitive cost advantage. As an example, competing speech
compression algorithms evaluated by the ITU use 20% to 50% more
computing power for the same compression and transmission rates, and
more memory for storage and operation. Consequently, competing
speech compression algorithms require larger, more expensive DSPs
and result in higher cost solutions.
Our TrueSpeech licensees include, among others, 8x8, Analog Devices,
Cirrus Logic, Creative Labs, Dialogic, IBM, Intel, Microsoft, Philips,
Siemens/Infinion, Smith Micro, Texas Instruments, Unisys, US Robotics, Winbond
and White Pine Software. In addition, we have ported our TrueSpeech algorithms
to certain DSP platforms offered by Analog Devices, Motorola and Texas
Instruments, three leading merchant vendors of programmable DSP chips.
Sales, Marketing and Distribution
We market and distribute our products through our direct sales and
marketing organization, as well as through a network of distributors and
independent manufacturers' representatives. A marketing and sales team located
in our headquarters in Santa Clara, California and in Israel pursues business
with our customers in North America and closely monitors new markets, trends and
customer needs to shape our strategic decisions. In Japan, we operate from a
marketing and support office in Tokyo and through Tomen Electronics, a local
distributor. In the rest of Asia, we operate through sales representatives in
China, Hong Kong, South Korea and Taiwan. To handle sales and distribution in
Europe, we operate a marketing and support office located in France and have
sales representatives in Denmark, Germany, Israel, Spain, Sweden and the United
Kingdom. Our sales representatives and distributors are not subject to minimum
purchase requirements and can cease marketing our products at any time. The loss
of one or more representatives or their failure to renew agreements with us upon
expiration could harm our business, financial condition and results of
operations.
Sales to Tomen Electronics comprised 47% of our total revenues in 1999,
45% in 1998 and 33% in 1997.
Export sales accounted for 97% of our total revenues in 1999, 95% in 1998
and 92% in 1997. Due to our export sales, we are subject to the risks of
conducting business internationally, including
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unexpected changes in regulatory requirements, fluctuations in exchange rates
that could increase the price of our products in foreign markets, delays
resulting from difficulty in obtaining export licenses for certain technology,
tariffs, other barriers and restrictions and the burden of complying with a
variety of foreign laws. All of our export sales are denominated in United
States dollars. See Note 3 of the Notes to Consolidated Financial Statements of
our Annual Report to Stockholders for the year ended December 31, 1999, for a
summary of our operations within various geographic areas.
Manufacturing and Design Methodology
Since our products are based on our proprietary DSP core designs, which
are not dependent upon a particular foundry's library cells, these products can
be manufactured at a number of independent foundries. Accordingly, all of our
manufacturing occurs at independent foundries. We contract fabrication services
for speech and telephony processors from Taiwan Semiconductor Manufacturing
Company, Sony and UMC. Under non-exclusive agreements, these independent
foundries normally provide us with either finished, packaged and tested speech
processors at variable prices depending on the volume of units purchased or at
sorted good wafers level. We customarily pay for fully-tested products meeting
predetermined specifications. To ensure the integrity of quality assurance
procedures, we develop detailed testing procedures and specifications for each
product and require each foundry to use these procedures and specifications
before shipping us finished products.
We intend to continue to use independent foundries to manufacture digital
speech processors, cordless devices and other products for the consumer
telephone and computer telephony markets. To obtain an adequate supply of
wafers, we are considering various alternative production sites. Our reliance on
independent foundries involves a number of risks, including the foundries'
achievement of acceptable manufacturing yields and allocation of capacity to us.
In addition to our speech processors, our IDT speech processors require an
external component, including analog random access memory circuits (ARAMs) and
flash memory that are supplied by third party manufacturers. Temporary
fluctuations in the pricing and availability of these components could
negatively impact sales of our IDT speech processors, which could in turn harm
our business, financial condition and results of operations.
Competition
The markets in which we operate are extremely competitive and we expect
that competition will increase. In each of our business activities, we face
current and potential competition from competitors that have significantly
greater financial, technical, manufacturing, marketing, sales and distribution
resources and management expertise than we do. Our future prospects will depend
greatly on our ability to successfully develop and introduce new products that
are responsive to market needs. We cannot assure you that we will be able to
successfully develop or market any of these products.
The principal competitive factors in the IDT speech processors market
include price, speech quality, compression ratio, value-added features including
variable speed message playback and speakerphone, the level of mixed signal
integration, customer support and the timing of product introductions by us and
our competitors. We believe that we are competitive with respect to each of
these factors. Our principal competitors in the IDT market include Lucent
Microelectronics, Macronix, Philips, Sanyo, Siemens/Infinion and Toshiba.
The principal competitive factors in the cordless telephony market include
price, system integration level, range, customer support and the timing of
product introductions by us and our competitors. We believe that we are
competitive with respect to most of these factors. Our principal competitors in
the Cordless market include Conexant, Level 1, Philips and Siemens/Infinion.
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The principal competitive factors in the DSP core designs market for high
volume, low cost applications include such features as small size, low power,
flexible I/O blocks and associated development tools. Our DSP core designs
compete with companies such as LSI Logic and Siemens/Infinion, which license DSP
platforms, and Analog Devices, Lucent Microelectronics, Motorola, and Texas
Instruments, which sell their own complete general purpose DSP solutions.
Several digital speech compression technologies exist and are currently
being developed that may be promoted by competitors as industry standards for
the computer telephony and personal computer markets. Our TrueSpeech algorithms
compete with ADPCM, and the speech compression technologies used in GSM and
VSELP protocols, each of which is available in the public domain. There are many
versions of these algorithms that have been developed by different parties,
including AT&T, which has been actively involved in the development of GSM
protocols, and Motorola, which developed the original VSELP protocols. Although
TrueSpeech has achieved a degree of acceptance in the computer telephony
personal computer and VoIP markets, ADPCM and the speech compression
technologies for GSM and VSELP protocols are widely used in the development and
implementation of new products in the telephony industry. In addition, other
advanced speech compression algorithms have been introduced by competitors that
offer compression ratios comparable or higher than the TrueSpeech algorithms.
Large companies, such as AT&T, Creative Labs, Motorola and Rockwell, have speech
processing technologies that can be applied to speech compression for use in the
same markets for which our products are targeted.
Price competition in the markets in which we currently compete and propose
to compete is intense and may increase, which could harm our business, financial
condition and results of operations. We have experienced and expect to continue
to experience increased competitive pricing pressures for our IDT processors.
During 1999, we were able to completely offset this decrease on an annual basis
through manufacturing cost reductions and a higher level of integration by
combining functions of the telephone, which used to be part of separate chips,
into the our DSP Group chip. However, we cannot assure you that we will be able
to further reduce product costs, or be able to compete successfully as to price
or any other of the key competitive factors.
Research and Development
We believe that continued timely development and introduction of new
products is essential to maintain our competitive position. We currently conduct
most of our product development effort in-house and at December 31, 1999 had a
staff of 93 research and development personnel of which 81 were located in
Israel. We also employ independent contractors to assist with certain product
development and testing activities. We spent approximately $15.4 million in
1999, compared with $10.2 million in 1998, on research and development
activities.
Relationships With Affiliated Companies
We have a $18.4 million equity investment in, and have entered into
license and development arrangements with, AudioCodes Ltd., an Israeli
corporation primarily engaged in design, development, manufacturing and
marketing of hardware and software products that enable simultaneous
transmission of voice and data over networks including Internet, ATM and Frame
Relay. AudioCodes was formed in April 1993 by two of our former employees.
Pursuant to an agreement between DSP Group and AudioCodes, AudioCodes has
granted DSP Group a license to use some of Audiocodes' technology subject to the
payment of royalties. In addition, we signed a development agreement to develop
a new software based on Audiocodes' voice compression technology. We have
established this relationship to complement our in-house product development
efforts.
In May 1999, we exercised our option to purchase approximately 3.5% of the
outstanding stock of AudioCodes for approximately $1.1 million. In the same
month, AudioCodes completed 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. As a result, we
recorded in "Other
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income (expense)" in our consolidated statements of income for 1999 a one-time
capital gain in the amount of $11.8 million. This amount was comprised of $9.4
million, which was from the sale of our shares sold in the IPO and $2.5 million
from the sale of approximately 248,000 of our AudioCodes shares to the
underwriters to cover their over-allotment option. The gross proceeds from our
sale were approximately $3.2 million.
In October 1999, AudioCodes successfully concluded a follow-on public
offering of 3.0 million shares at a price of $41.00 per share. In the follow-on,
AudioCodes issued and sold 1.5 million shares and an additional 1.95 million
shares were sold by shareholders, of which approximately 1,069,000 were sold by
us in two separate transactions. Our proceeds from these transactions were
approximately $42.8 million, and we recorded an additional capital gain in the
amount of $47.1 million. This amount was comprised of $10.8 million, which
resulted in the public offering, and $36.3 million from the sale of
approximately 1,069,000 AudioCodes shares.
As of December 31, 1999, we held approximately 2.9 million of AudioCodes
shares which represented about 15% of its outstanding shares. In January 2000,
we sold an additional 600,000 shares of AudioCodes for approximately $43.8
million, recording in the first quarter of 2000 an additional capital gain in
the amount of $40.0 million. After this sale, we hold approximately 2.3 million
AudioCodes shares, which represent approximately 12% of its outstanding shares.
In July 1996, we invested $2.0 million of cash for approximately 40% of
the equity interest in Aptel Ltd., an Israeli company. In connection with the
investment, we incurred a one-time write-off of acquired in-process technology
of $1.5 million. In October 1997, we invested approximately $176,000 in
convertible debentures issued by Aptel. In December 1997, we converted our
debentures and Aptel's shareholders, including us, exchanged their shares in
Aptel for shares in Nexus Telecommunications Systems Ltd., an Israeli company
registered and traded on the Nasdaq SmallCap Market. In April 1998, we sold all
of our Nexus shares in a private transaction for approximately $1.3 million and
realized a pre-tax one time gain on marketable equity securities of
approximately $1.1 million. This one time gain was included under "Other income
(expenses)" in our consolidated statements of income for the year ended December
31, 1998.
Licenses, Patents and Trademarks
We have been granted twelve United States patents, one Canadian patent and
one Israeli patent, and have twenty-seven patents pending in the United States,
two patents pending in Japan, one patent pending in Taiwan, thirteen patents
pending in Israel and one patent pending in Europe. We actively pursue foreign
patent protection in other countries of interest to us. Our policy is to apply
for patents or for other appropriate statutory protection when we develop
valuable new or improved technology. The status of patents involves complex
legal and factual questions, and the breadth of claims allowed is uncertain.
Accordingly, we cannot assure you that any patent application filed by us will
result in a patent being issued, or that our patents, and any patents that may
be issued in the future, will afford adequate protection against competitors
with similar technology; nor can we provide assurance that patents issued to us
will not be infringed or designed around by others. In addition, the laws of
certain countries in which our products are or may be developed, manufactured or
sold, including Hong Kong, Japan and Taiwan, may not protect our products and
intellectual property rights to the same extent as the laws of the United
States.
We attempt to protect our trade secrets and other proprietary information
through agreements with our customers, suppliers, employees and consultants, and
through other security measures. Although we intend to protect our rights
vigorously, we cannot provide assurance that these measures will be successful.
The semiconductor and software industries are subject to frequent
litigation regarding patent and other intellectual property rights. While we
have not been involved in any material patent or other intellectual property
rights litigation to date, we cannot provide assurance that third parties will
not assert claims against us with respect to existing or future products or that
we will not need to assert claims against
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third parties to protect our proprietary technology. For example, AT&T has
asserted that G.723.1, which is primarily composed of a TrueSpeech algorithm,
includes certain elements covered by patents held by AT&T and has requested that
video conferencing equipment manufacturers license this technology from AT&T. If
litigation becomes necessary to determine the validity of any third party claims
or to protect our proprietary technology, it could result in significant expense
to us and could divert the efforts of our technical and management personnel,
whether or not the litigation is determined in our favor. In the event of an
adverse result in any litigation, we could be required to expend significant
resources to develop non-infringing technology or to obtain licenses to the
technology that is the subject of the litigation. We cannot provide assurance
that we would be successful in developing non-infringing technology or that any
licenses would be available on commercially reasonable terms.
We have been issued registered trademarks for the use of the PineDSPCore,
OakDSPCore, TeakDSPCore, Teak, PalmDSPCore, OCEM and TrueSpeech trademarks. In
addition, we applied for trademarks for Full Duplex SpeakerPhone, TeakLite,
Triple Rate Coder, PalmAssyst, Assyst, SpeechOnChip, DSPeech, SpeeChip and
SmartCores.
While our ability to compete may be affected by our ability to protect our
intellectual property, we believe that, because of the rapid pace of
technological change in the industry, our technical expertise and ability to
innovate on a timely basis will be more important in maintaining our competitive
position than protection of our intellectual property. We believe that, because
of the rapid pace of technological change in the consumer telephone, computer
telephony and personal computer industries, patents and trade secret protection
are important but must be supported by other factors, including the expanding
knowledge, ability and experience of our personnel, new product introductions
and frequent product enhancements. Although we continue to implement protective
measures and intend to defend our intellectual property rights, we cannot
provide assurance that these measures will be successful.
Backlog
At December 31, 1999, our backlog was approximately $28.8 million compared
with approximately $8.7 million at December 31, 1998. We include in our backlog
all accepted product purchase orders with respect to which a delivery schedule
has been specified for product shipment within one year and fees specified in
executed licensing contracts. Our business in IDT speech processors is
characterized by short-term order and shipment schedules. Product orders in our
current backlog are subject to changes in delivery schedules or to cancellation
at the option of the purchaser without significant penalty. Accordingly,
although useful for scheduling production, backlog as of any particular date may
not be a reliable measure of our sales for any future period.
Employees
At December 31, 1999, we had 161 employees, including 93 in research and
development, 32 in marketing and sales and 36 in corporate and administration
and manufacturing coordination. Competition for personnel in the semiconductor,
software and personal computer industries in general is intense. We believe that
our future prospects will depend, in part, on our ability to continue to attract
and retain highly-skilled technical, marketing and management personnel, who are
in great demand. In particular, there is a limited supply of highly-qualified
engineers with digital signal processing experience. None of our employees is
represented by a collective bargaining agreement, nor have we ever experienced
any work stoppage. We believe that our employee relations are good.
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Factors that may affect future operating results
Our quarterly operating results may fluctuate significantly
We experience, and will continue to experience, significant fluctuations
in sales and operating results from quarter to quarter. Our quarterly results
fluctuate due to a number of factors:
o fluctuations in volume and timing of product orders;
o timing of recognition of license fees;
o level of per unit royalties;
o changes in demand for our products due to seasonal customer buying
patterns and other factors;
o timing of new product introductions by us or our customers,
licensees or competitors;
o changes in the mix of products sold by us;
o fluctuations in the level of sales by OEMs and other vendors of
products incorporating our products; and
o general economic conditions, including the changing economic
conditions in Asia.
Each of the above factors is difficult to forecast and thus could have a
material adverse effect on our business, financial condition and results of
operations.
Through 2000, 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 totally dependent upon the success of our third
party licensees in introducing products utilizing our technology and the success
of those third party 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 IDT
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 IDT market which is highly competitive
Sales of IDT products comprise a substantial portion of our product sales.
Any adverse change in the IDT market or in our ability to compete and maintain
our position in that market would have a material adverse effect on our
business, financial condition and results of operations. The IDT 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 expertise than we do.
It is possible that we may one day be unable to respond to increased price
competition for IDT 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.
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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 IDT 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. For example, foundries in Taiwan produce a
significant portion of our wafer supply. As a result, earthquakes, aftershocks
or other natural disasters in Asia, could preclude us from obtaining an adequate
supply of wafers to fill customer orders and could harm our business, financial
condition and results of operations.
We may need to increase our research and development efforts to remain
competitive
The DSP Cores market is experiencing extensive efforts by some of our
competitors to use new technologies to manipulate the chip design programming to
increase the parallel processing of the chip. One such technology used is Very
Long Instruction Word (VLIW), which some of our competitors possess elements of,
but which we do not possess at the present time. If such technology continues to
improve the programming processing of these chips, then we may need to further
our research and development to obtain such technology to remain competitive in
the market.
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. For example, we have noticed a trend of
decreasing sales for the product models based on the 900 Megahertz digital
spread spectrum RF and base band technology we acquired in 1999. We are in the
process of developing new RF and base band models, but there is no assurance
that we will be successful or that our developments will be accepted by the
market. Additionally, future acquisitions may require substantial capital
resources, which may require us to seek additional debt or equity financing. The
occurrence of any of these events could harm our business, financial condition
or results of operations.
We depend on international operations, particularly in Israel
We are dependent on sales to customers outside the United States. We
expect that international sales will continue to account for a significant
portion of our net product and license sales for the foreseeable future. As a
result, the occurrence of any negative international, political, economic or
geographic events could result in significant revenue shortfalls. The shortfalls
could cause our business, financial condition and results of operations to be
harmed. Some of the risks of doing business internationally include:
o unexpected changes in regulatory requirements;
o fluctuations in the exchange rate for the U.S. dollar;
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o imposition of tariffs and other barriers and restrictions;
o burdens of complying with a variety of foreign laws;
o political and economic instability; and
o 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 December 31, 1999, 121 of
our 161 employees were located in Israel, including 81 of our 93 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 generally high rate of inflation. The rate of
inflation in Israel was 1.3% in 1999 and 8.6% in 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, sales and marketing 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 harm our business, financial condition and
results of operations.
We depend on third parties and their suppliers to obtain required complementary
components
Some of the raw materials, components and subassemblies included in the
products manufactured by our third party 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 harm our business and
results of operations due to the delay or discontinuance of orders for our
products by customers until the other 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 continuing 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.
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 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 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.
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If it appears necessary or desirable, we may try to obtain licenses under
those patents or intellectual property rights that we are allegedly infringing.
Although holders of these types 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.
Our stock price may be volatile
Announcements of developments related to our business, announcements by
competitors, quarterly fluctuations in our financial results and general
conditions in 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.
We have made forward-looking statements in this Annual Report on Form 10-K
The information contained in this Annual Report on Form 10-K and in the
other documents referenced herein contains forward-looking statements that
involve a number of risks and uncertainties. Forward-looking statements can be
identified by the use of forward-looking terminology, including "believes,"
"expects," "may," "will," "should" or "anticipates," or the negative of these
terms or other variations or comparable terminology, or by discussions of
strategy that involve risks and certainties. Numerous factors, including
economic and competitive conditions, timing and volume of incoming orders,
shipment volumes, product margins, and foreign exchange rates, could cause
actual results to differ materially from those described in these statements.
These forward-looking statements are based on current expectations and we assume
no obligation to update this information.
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Item 2. PROPERTIES.
DSP Group's operations in the United States are located in an
approximately 15,700 square foot leased facility in Santa Clara,
California. This facility houses our marketing and support, North American
sales, operations, manufacturing coordination and administrative
personnel. This facility is leased through June 2001. DSP Group's
operations in Israel are located in approxiamately 29,800 square feet of
leased facilities, with the primary leased facility located in Herzelia
Pituach, Israel. These facilities are leased through November 2003.
Item 3. LEGAL PROCEEDINGS.
From time to time, we may become involved in litigation relating to claims
arising from our ordinary course of business. We believe that there are no
claims or actions pending or threatened against us, the ultimate
disposition of which would have a material adverse effect on us.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information contained in the section labeled "Price Range of Common
Stock" appearing on page 16 of DSP Group's Annual Report to Stockholders
for the year ended December 31, 1999 is incorporated herein by reference.
Item 6. SELECTED FINANCIAL DATA.
The information contained in the section labeled "Selected Consolidated
Financial Data" appearing on page 15 of DSP Group's Annual Report to
Stockholders for the year ended December 31, 1999 is incorporated herein
by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information contained in the section labeled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
on pages 17 through 23 of DSP Group's Annual Report to Stockholders for
the year ended December 31, 1999 is incorporated herein by reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RATE.
The information contained in the section labeled "Quantitative and
Qualitative Disclosures About Market Risk" appearing on page 20 of DSP
Group's Annual Report to Stockholders for the year ended December 31, 1999
is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and related notes and independent
auditors report appearing on pages 24 through 45 of DSP Group's Annual
Report to Stockholders for the year ended December 31, 1999 are
incorporated herein by reference.
The information contained in the section labeled "Quarterly Data"
appearing on page 15 of DSP Group's Annual Report to Stockholders for the
year ended December 31, 1999 is incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The section labeled "Directors, Executive Officers and Key Personnel" of
DSP Group's definitive Proxy Statement to be filed shortly hereafter for the
annual meeting of stockholders to be held on May 16, 2000 is incorporated herein
by reference.
Item 11. EXECUTIVE COMPENSATION.
The section labeled "Executive Compensation and Other Information" of DSP
Group's definitive Proxy Statement to be filed shortly hereafter for the annual
meeting of stockholders to be held on May 16, 2000 is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The section labeled "Security Ownership of Certain Beneficial Owners and
Management" of DSP Group's definitive Proxy Statement to be filed shortly
hereafter for the annual meeting of stockholders to be held on May 16, 2000 is
incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section labeled "Certain Relationships and Related Transactions" of
DSP Group's definitive Proxy Statement to be filed shortly hereafter for the
annual meeting of stockholders to be held on May 16, 2000 is incorporated herein
by reference.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents have been filed as a part of this Annual
Report on Form 10-K.
1. Index to Financial Statements.
The following consolidated financial statements and related notes
and auditor's report are included in DSP Group's Annual Report to
Stockholders for the year ended December 31, 1999 and are
incorporated into this Form 10-K by reference.
Description:
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Report of Kost Forer & Gabbay, a member of Ernst & Young
International, Independent Auditors
2. Index to Financial Statement Schedules.
The following financial statement schedules and related auditor's
report are filed as part of this Annual Report on Form 10-K:
Page in this
Annual Report
Description on Form 10-K
- ----------- ------------
Schedule II: Valuation and Qualifying Accounts (included at page 33)
Consent of Kost Forer & Gabbay, a member of Ernst & Young Exhibit 23.1
International, Independent Auditors (included at page 32)
All other schedules are omitted because they are not applicable or the required
information is included in the consolidated financial statements or the related
notes incorporated into this Form 10-K by reference to DSP Group's Annual Report
to Stockholders for the year ended December 31, 1999.
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3. List of Exhibits:
Exhibit
Number Description
------- ----------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation (filed as
Exhibit 3.1B to the Registrant's Registration Statement on Form
S-1, file no. 33-73482, as declared effective on February 11,
1994 and incorporated herein by reference).
3.2 Amended and Restated Bylaws, as of November 11, 1999.
3.3 Certificate of Determination of Preference of Series A Preferred
Stock of the Registrant, filed with the Secretary of State of
the State of Delaware on June 6, 1997 (filed as Exhibit 3.1 to
the Registrant's Current Report on Form 8-K filed on June 6,
1997).
3.4 Specimen Rights Certificate (filed as Exhibit 1.1 to the
Registrant's Current Report on Form 8-K filed on June 6, 1997).
3.5 Amended and Restated Rights Agreement, dated as of November 9,
1998, between the Registrant and Norwest Bank Minnesota, N.A.,
as Rights Agent (filed as Exhibit 3.6 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999, and
incorporated herein by reference).
3.6 Amendment No. 1, dated May 19, 1999, to the Amended and Restated
Rights Agreement, dated as of November 9, 1998, between the
Registrant and Norwest Bank Minnesota, N.A., as Rights Agent.
4.1 Registration Rights Agreement, dated as of February 2, 1999, by
and between the Registrant and Magnum Technology Limited (filed
as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999, and incorporated herein by
reference).
10.1 1991 Employee and Consultant Stock Plan and forms of option
agreements thereunder (filed as Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1, file no. 33-73482, as
declared effective on February 11, 1994 and incorporated herein
by reference).
10.2 Israeli Stock Option Plan and form of option agreement
thereunder (filed as Exhibit 10.3 to the Registrant's
Registration Statement on Form S-1, file no. 33-73482, as
declared effective on February 11, 1994 and incorporated herein
by reference).
10.3 1993 Directors Stock Option Plan (filed as Exhibit 10.4 to the
Registrant's Registration Statement on Form S-1, file no.
33-73482, as declared effective on February 11, 1994 and
incorporated herein by reference).
10.4 1993 Employee Stock Purchase Plan and form of subscription
agreement thereunder (filed as Exhibit 10.5 to the Registrant's
Registration Statement on Form S-1, file no. 33-73482, as
declared effective on February 11, 1994 and incorporated herein
by reference).
10.5 Technology Assignment and License Agreement, dated January 7,
1994, by and between the Registrant and DSP Telecommunications,
Ltd. (filed as Exhibit 10.24 to the Registrant's Registration
Statement on Form S-1, file no. 33-73482, as declared effective
on February 11, 1994 and incorporated herein by reference).
24
<PAGE>
Exhibit
Number Description
------- ----------------------------------------------------------------
10.6 ACL Technology License Agreement, dated June 24, 1994, by and
between the Registrant and AudioCodes, Ltd. (filed as Exhibit
10.12 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994, and incorporated herein by
reference).
10.7 Investment Agreement, dated June 16, 1994, by and between the
Registrant and AudioCodes Ltd. (see Exhibit 10.30 for Appendix B
to Investment Agreement) (filed as Exhibit 10.39 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994, and incorporated herein by reference).
10.8 Form of Indemnification Agreement for directors and executive
officers (filed as Exhibit 10.1 to the Registrant's Registration
Statement on Form S-1, file no. 33-73482, as declared effective
on February 11, 1994, and incorporated herein by reference).
10.9 Employment Agreement, dated April 22, 1996, by and between the
Registrant and Eli Ayalon (filed as Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, and incorporated herein by reference).
10.10 Assignment and Assumption Agreement, dated October 9, 1996, by
and between the Registrant and Dialogic Corporation, relating to
the Registrant's facility located at 3120 Scott Boulevard in
Santa Clara, California (filed as Exhibit 10.24 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference).
10.11 Sublease, dated October 18, 1996, as amended on December 4,
1996, by and between Dialogic Corporation and the Registrant,
relating to the Registrant's facility located at 3120 Scott
Boulevard in Santa Clara, California (filed as Exhibit 10.25 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference).
10.12 Lease, dated November 28, 1996, by and between DSP
Semiconductors Ltd. and Gav-Yam Lands Company Ltd., relating to
the property located on Shenkar Street, Herzlia Pituach, Israel
(filed as Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997, and
incorporated herein by reference).
10.13 Amendment to Employment Agreement with Eliyahu Ayalon, dated as
of November 3, 1997 (filed as Exhibit 10.26 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997,
and incorporated herein by reference).
10.14 Amendment to 1993 Directors Stock Option Plan, as adopted
November 3, 1997 (filed as Exhibit 10.28 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997,
and incorporated herein by reference).
10.15 Separation and Consulting Agreement between the Registrant and
Martin M. Skowron, dated May 31, 1998 (filed as Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, and incorporated herein by reference).
25
<PAGE>
Exhibit
Number Description
------- ----------------------------------------------------------------
10.16 Consulting Agreement between the Registrant and Millard Phelps,
dated as of June 29, 1998 (filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998, and incorporated herein by reference).
10.17 Lease, dated September 13, 1998, between DSP Group, Ltd. and
Bayside Land Corporation Ltd., relating to the property located
on Shenkar Street, Herzlia Pituach, Israel (filed as Exhibit
10.22 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998, and incorporated herein by
reference).
10.18 1998 Non-Officer Employee Stock Option Plan (filed as Exhibit
10.23 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998, and incorporated herein by
reference).
10.19 Stock Purchase Agreement, dated as of February 2, 1999, by and
between the Registrant and Magnum Technology Limited (filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999, and incorporated herein by
reference).
10.20 1991 Employee and Consultant Stock Plan, as amended and restated
July 19, 1999 (filed as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1999, and incorporated herein by reference).
10.21 1993 Director Stock Option Plan, as amended and restated July
19, 1999 (filed as Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999,
and incorporated herein by reference).
10.22 Second Amendment to Sublease, dated February 11, 1999, by and
between Dialogic Corporation and the Registrant, relating to the
Registrant's facility located at 3120 Scott Boulevard in Santa
Clara, California.
10.23 Employment Agreement, dated May 1, 1999, by and between the
Registrant and Moshe Zelnik.
10.24 Employment Agreement, dated May 1, 1999, by and between the
Registrant and Boaz Edan.
10.25 Appendix Agreement, dated May 5, 1999, by and between DSP Group,
Ltd. and Bayside Land Corporation Ltd., relating to the property
located on Shenkar Street, Herzlia Pituach, Israel.
10.26 Amendment to Employment Agreement with Eliyahu Ayalon, effective
as of November 11, 1999.
10.27 Amendment to Employment Agreement with Igal Kohavi, effective as
of November 11, 1999.
10.28 Separation Agreement between the Registrant and Igal Kohavi,
dated January 24, 2000.
11.1 Statements regarding computation of per share earnings (included
at page 30).
13.1 Portions of the Annual Report to Stockholders for the year ended
December 31, 1999.
21.1 Subsidiaries of DSP Group (included at page 31).
23.1 Consent of Ernst & Young LLP, Independent Auditors (included at
page 32).
26
<PAGE>
Exhibit
Number Description
------- ----------------------------------------------------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K in Fourth Quarter.
The Company did not file any reports on Form 8-K during the three months
ended December 31, 1999.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DSP GROUP, INC.
By: /s/ Eliyahu Ayalon
-----------------------------------------
Eliyahu Ayalon
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
Date: March 30, 2000
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Eliyahu Ayalon and Moshe Zelnik or either of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and re-substitution, for him and in his name, place and stead, in
any and all capacities to sign any and all amendments to this Report on Form
10-K, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- ---------------------------- -------------------------------- ---------------
/s/ Eliyahu Ayalon Chairman of the Board March 30, 2000
- ---------------------------- and Chief Executive Officer
Eliyahu Ayalon (Principal Executive Officer)
/s/ Moshe Zelnik Vice President of Finance, Chief March 30, 2000
- ---------------------------- Financial Officer and Secretary
Moshe Zelnik (Principal Financial Officer
and Principal Accounting
Officer)
/s/ Zvi Limon Director March 30, 2000
- ----------------------------
Zvi Limon
/s/ Yair Shamir Director March 30, 2000
- ----------------------------
Yair Shamir
/s/ Saul Shani Director March 30, 2000
- ----------------------------
Saul Shani
28
<PAGE>
/s/ Louis Silver Director March 30, 2000
- ----------------------------
Louis Silver
/s/ Patrick Tanguy Director March 30, 2000
- ----------------------------
Patrick Tanguy
29
<PAGE>
Exhibit 11.1
DSP GROUP, INC.
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Numerator:
Net income ...................................... $54,579 $14,415 $11,034
======= ======= =======
Denominator:
Weighted average number of common shares
outstanding during the period used to compute
basic earnings per share ...................... 11,734 9,768 9,736
======= ======= =======
Incremental shares attributable to exercise of
outstanding options (assuming proceeds would be
used to purchase treasury stock) .............. 987 248 467
------- ------- -------
Weighted average number of shares of common
stock used to compute diluted earnings per
share ......................................... 12,721 10,016 10,203
======= ======= =======
Basic net income per share ............................ $ 4.65 $ 1.48 $ 1.13
======= ======= =======
Diluted net income per share .......................... $ 4.29 $ 1.44 $ 1.08
======= ======= =======
</TABLE>
30
<PAGE>
Exhibit 21.1
LIST OF SUBSIDIARIES
Name of Subsidiary Jurisdiction of Incorporation
- ------------------------------------ --------------------------------
1. DSP Group Europe SARL France
2. DSP Group Ltd. Israel
3. Nihon DSP K.K. Japan
4. RF Integrated Systems, Inc. Delaware, U.S.
5. Voicecom Ltd. Israel
31
<PAGE>
Exhibit 23.1
CONSENT OF KOST FORER & GABBAY,
A MEMBER OF ERNST & YOUNG INTERNATIONAL, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of DSP Group, Inc. of our report dated January 23, 2000 (except for Note
9, as to which the date is March 1, 2000), included in the 1999 Annual Report to
Stockholders of DSP Group, Inc.
Our audits also included the consolidated financial statement schedule of
DSP Group, Inc. listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the consolidated financial statement schedule referred
to above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 33-83456, 33-87390, 333-53129, and 333-69289)
pertaining to the 1991 Employee and Consultant Stock Plan, the 1991 DSP Group,
Inc. Israeli Stock Option Plan, the 1993 Director Stock Option Plan, the 1993
Employee Stock Purchase Plan and the 1998 Non-Officer Employee Stock Option
Plan, of our report dated January 23, 2000 (except for Note 9, as to which the
date is March 1, 2000), with respect to the consolidated financial statements
and schedule incorporated herein by reference or included in this Annual Report
(Form 10-K) for the year ended December 31, 1999.
/s/ Kost Forer & Gabbay,
a member of Ernst & Young
International
Tel Aviv, Israel
March 30, 2000
32
<PAGE>
Schedule II
DSP GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Charged to
Balance at (deducted
Beginning from)
of Costs and Balance at
Period Expenses End of
Description Deduction Period
- ---------------------------------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful accounts 71 60 61(1) 70
Sales returns reserve 377 345 600(2) 122
Year ended December 31, 1998:
Allowance for doubtful accounts 70 10 80
Sales returns reserve 122 -- -- 122
Year ended December 31, 1999:
Allowance for doubtful accounts 80 60 -- 140
Sales returns reserve 122 400 -- 522
</TABLE>
- ----------
(1) write-offs of uncollectible amounts
(2) sales returns applied against revenue
33
<PAGE>
================================================================================
BYLAWS
OF
DSP GROUP, INC.
(a Delaware corporation)
Amended and restated as of November 11, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I CORPORATE OFFICES..................................................1
1.1 REGISTERED OFFICE........................................1
1.2 OTHER OFFICES............................................1
ARTICLE II MEETINGS OF STOCKHOLDERS..........................................1
2.1 PLACE OF MEETINGS........................................1
2.2 ANNUAL MEETING...........................................1
2.3 SPECIAL MEETING..........................................3
2.4 NOTICE OF STOCKHOLDERS' MEETINGS.........................3
2.5 MANNER OF GIVING NOTICE, AFFIDAVIT OF NOTICE.............3
2.6 QUORUM...................................................4
2.7 ADJOURNED MEETING; NOTICE................................4
2.8 VOTING...................................................4
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE, CONSENT........5
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING..5
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING
CONSENTS.................................................6
2.12 PROXIES..................................................6
2.13 INSPECTORS OF ELECTION...................................7
ARTICLE III DIRECTORS........................................................7
3.1 POWERS...................................................7
3.2 NUMBER AND TERM OF OFFICE................................7
3.3 CLASSES OF DIRECTORS.....................................8
3.4 RESIGNATION AND VACANCIES................................8
3.5 REMOVAL..................................................9
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.................9
3.7 FIRST MEETINGS..........................................10
3.8 REGULAR MEETINGS........................................10
3.9 SPECIAL MEETINGS; NOTICE................................10
3.10 QUORUM..................................................10
3.11 WAIVER OF NOTICE........................................11
3.12 ADJOURNMENT.............................................11
i
<PAGE>
3.13 NOTICE OF ADJOURNMENT...................................11
3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.......11
3.15 FEES AND COMPENSATION OF DIRECTORS......................11
3.16 APPROVAL OF LOANS TO OFFICERS...........................12
ARTICLE IV COMMITTEES.......................................................12
4.1 COMMITTEES OF DIRECTORS.................................12
4.2 MEETINGS AND ACTION OF COMMITTEES.......................12
ARTICLE V OFFICERS..........................................................13
5.1 OFFICERS................................................13
5.2 ELECTION OF OFFICERS....................................13
5.3 SUBORDINATE OFFICERS....................................13
5.4 REMOVAL AND RESIGNATION OF OFFICERS.....................13
5.5 VACANCIES IN OFFICES....................................14
5.6 CHAIRMAN OF THE BOARD...................................14
5.7 CHIEF EXECUTIVE OFFICER.................................14
5.8 VICE PRESIDENTS.........................................14
5.9 SECRETARY...............................................14
5.10 CHIEF FINANCIAL OFFICER.................................15
ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER
AGENTS .....................................................................15
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS...............15
6.2 INDEMNIFICATION OF OTHERS...............................16
6.3 INSURANCE...............................................16
ARTICLE VII RECORDS AND REPORTS.............................................16
7.1 MAINTENANCE AND INSPECTION OF RECORDS...................16
7.2 INSPECTION BY DIRECTORS.................................17
7.3 ANNUAL STATEMENT TO STOCKHOLDERS........................17
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS..........17
ARTICLE VIII GENERAL MATTERS................................................17
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING...17
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS...............18
ii
<PAGE>
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED.......18
8.4 STOCK CERTIFICATES; PARTLY PAID SHARES..................18
8.5 SPECIAL DESIGNATION ON CERTIFICATES.....................19
8.6 LOST CERTIFICATES.......................................19
8.7 CONSTRUCTION; DEFINITIONS...............................19
ARTICLE IX AMENDMENTS.......................................................19
ARTICLE X DISSOLUTION.......................................................20
ARTICLE XI CUSTODIAN........................................................20
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES.............20
11.2 DUTIES OF CUSTODIAN.....................................21
iii
<PAGE>
BYLAWS
OF
DSP GROUP, INC.
(a Delaware corporation)
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be fixed in the Certificate
of Incorporation of the corporation.
1.2 OTHER OFFICES
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
2.2 ANNUAL MEETING
(a) The annual meeting of stockholders shall be held each year on a
date and at a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the third
Tuesday of May in each year at 10:00 a.m. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding full business day. At the meeting, directors shall be elected, and
any other proper business may be transacted.
(b) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (A) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (B) otherwise properly brought before the meeting by
or at the direction of the Board of Directors, or (C) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a stockholder, the stockholder must have given timely
notice thereof in writing to the Secretary of the corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation not
1
<PAGE>
less than one hundred twenty (120) calendar days in advance of the date
specified in the corporation's proxy statement released to stockholders in
connection with the previous year's annual meeting of stockholders: provided,
however, that in the event that no annual meeting was held in the previous year
or the date of the annual meeting has been changed by more than thirty (30) days
from the date contemplated at the time of the previous year's proxy statement,
notice by the stockholder to be timely must be so received a reasonable time
before the solicitation is made. A stockholder's notice to the Secretary shall
set forth as to each matter the stockholder proposes to bring before the annual
meeting: (i) a brief description of the business desired to be brought before
the annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and address, as they appear on the corporation's books,
of the stockholder proposing such business, (iii) the class and number of shares
of the corporation which are beneficially owned by the stockholder, (iv) any
material interest of the stockholder in such business and (v) any other
information that is required to be provided by the stockholder pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934
Act"), in his capacity as a proponent to a stockholder proposal. Notwithstanding
the foregoing, in order to include information with respect to a stockholder
proposal in the proxy statement and form of proxy for a stockholder's meeting,
stockholders must provide notice as required by the regulations promulgated
under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at any annual meeting except in accordance with the
procedures set forth in this paragraph (b). The chairman of the annual meeting
shall, if the facts warrant, determine and declare at the meeting that business
was not properly brought before the meeting and in accordance with the
provisions of this paragraph (b), and, if he should so determine, he shall so
declare at the meeting that any such business not properly brought before the
meeting shall not be transacted.
(c) Only persons who are nominated in accordance with the procedures
set forth in this paragraph (c) shall be eligible for election as Directors.
Nominations of persons for election to the Board of Directors of the corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the corporation entitled to vote in the
election of Directors at the meeting who complies with the notice procedures set
forth in this paragraph (c). Such nominations, other than those made by or at
the direction of the Board of Directors, shall be made pursuant to timely notice
in writing to the Secretary of the corporation in accordance with the provisions
of paragraph (b) of this Section 2.2. Such stockholder's notice shall set forth
(i) as to each person, if any, whom the stockholder proposes to nominate for
election or reelection as a Director: (A) the name, age, business address and
residence address of such person, (B) the principal occupation or employment of
such person, (C) the class and number of shares of the corporation which are
beneficially owned by such person, (D) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nominations are to
be made by the stockholder, and (E) any other information relating to such
person that is required to be disclosed in solicitations of proxies for
elections of Directors, or is otherwise required, in each case pursuant to
Regulation 14A under the 1934 Act (including without limitation such person's
written consent to being named in the proxy statement, if any, as a nominee and
to serving as a Director if elected); and (ii) as to such stockholder giving
notice, the information required to be provided pursuant to paragraph (b) of
this Section 2.2. At the request of the Board of Directors, any person nominated
by a stockholder for election as a Director shall furnish to the Secretary of
the corporation that
2
<PAGE>
information required to be set forth in the stockholder's notice of nomination
which pertains to the nominee. No person shall be eligible for election as a
Director of the corporation unless nominated in accordance with the procedures
set forth in this paragraph (c). The chairman of the meeting shall, if the facts
warrants, determine and declare at the meeting that a nomination was not made in
accordance with the procedures prescribed by these Bylaws, and if he should so
determine, he shall so declare at the meeting, and the defective nomination
shall be disregarded.
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, or in the absence of the
chairman of the board by the chief executive officer. No other person or persons
are permitted to call a special meeting.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the chairman of the board, the president, chief
executive officer, or the secretary of the corporation. No business may be
transacted at such special meeting otherwise than specified in such notice. The
officer receiving the request shall cause notice to be promptly given to the
stockholders entitled to vote, in accordance with the provisions of Sections 2.4
and 2.5, that a meeting will be held at the time requested by the person or
persons who called the meeting, not less than thirty-five (35) nor more than
sixty (60) days after the receipt of the request. If the notice is not given
within twenty (20) days after the receipt of the request, the person or persons
requesting the meeting may give the notice. Nothing contained in this paragraph
of this Section 2.3 shall be construed as limiting, fixing, or affecting the
time when a meeting of stockholders called by action of the board of directors
may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
Except as set forth in Section 2.3, all notices of meetings of
stockholders shall be sent or otherwise given in accordance with Section 2.5 of
these bylaws not less than ten (10) nor more than sixty (60) days before the
date of the meeting. The notice shall specify the place, date, and hour of the
meeting and (i) in the case of a special meeting, the general nature of the
business to be transacted (no business other than that specified in the notice
may be transacted) or (ii) in the case of the annual meeting, those matters
which the board of directors, at the time of giving the notice, intends to
present for action by the stockholders (but any proper matter may be presented
at the meeting for such action). The notice of any meeting at which directors
are to be elected shall include the name of any nominee or nominees who, at the
time of the notice, the board intends to present for election.
2.5 MANNER OF GIVING NOTICE, AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the shareholder to the
corporation for the purpose of notice. If no such address appears on the
corporation's books or is
3
<PAGE>
given, notice shall be deemed to have been given if sent to that stockholder by
mail or telegraphic or other written communication to the corporation's
principal executive office, or if published at least once in a newspaper of
general circulation in the county where that office is located. Notice shall be
deemed to have been given at the time when delivered personally or deposited in
the mail or sent by telegram or other means of written communication.
If any notice addressed to a stockholder at the address of that
stockholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the stockholder
at that address, then all future notices or reports shall be deemed to have been
duly given without further mailing if the same shall be available to the
stockholder on written demand of the stockholder at the principal executive
office of the corporation for a period of one (1) year from the date of the
giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.6 QUORUM
The presence in person or by proxy of the holders of a majority of the
shares entitled to vote thereat constitutes a quorum for the transaction of
business at all meetings of stockholders. The stockholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding the withdrawal of enough stockholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
2.7 ADJOURNED MEETING; NOTICE
Any stockholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares represented at that meeting, either in person or by proxy. In the absence
of a quorum, no other business may be transacted at that meeting except as
provided in Section 2.6 of these bylaws.
When any meeting of stockholders, either annual or special, is adjourned
to another time or place, notice need not be given of the adjourned meeting if
the time and place are announced at the meeting at which the adjournment is
taken. However, if a new record date for the adjourned meeting is fixed or if
the adjournment is for more than thirty (30) days from the date set for the
original meeting, then notice of the adjourned meeting shall be given. Notice of
any such adjourned meeting shall be given to each stockholder of record entitled
to vote at the adjourned meeting in accordance with the provisions of Sections
2.4 and 2.5 of these bylaws. At any adjourned meeting the corporation may
transact any business which might have been transacted at the original meeting.
2.8 VOTING
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of
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Sections 217 and 218 of the General Corporation Law of Delaware (relating to
voting rights of fiduciaries, pledgors and joint owners, and to voting trusts
and other voting agreements).
Except as may be otherwise provided in the Certificate of Incorporation,
each outstanding share, regardless of class, shall be entitled to one vote on
each matter submitted to a vote of the stockholders. Any stockholder entitled to
vote on any matter may vote part of the shares in favor of the proposal and
refrain from voting the remaining shares or, except when the matter is the
election of directors, may vote them against the proposal; but, if the
stockholder fails to specify the number of shares which the stockholder is
voting affirmatively, it will be conclusively presumed that the stockholder's
approving vote is with respect to all shares which the stockholder is entitled
to vote.
If a quorum is present, the affirmative vote of the majority of the shares
represented and voting at a duly held meeting (which shares voting affirmatively
also constitute at least a majority of the required quorum) shall be the act of
the stockholders, unless the vote of a greater number or a vote by classes is
required by law or by the Certificate of Incorporation.
2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE, CONSENT
The transactions of any meeting of stockholders, either annual or special,
however called and noticed, and wherever held, shall be as valid as though they
had been taken at a meeting duly held after regular call and notice, if a quorum
be present either in person or by proxy, and if, either before or after the
meeting, each person entitled to vote, who was not present in person or by
proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. The waiver of notice or consent
or approval need not specify either the business to be transacted or the purpose
of any annual or special meeting of stockholders. All such waivers, consents,
and approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that meeting, except when the person objects at the
beginning of the meeting to the transaction of any business because the meeting
is not lawfully called or convened. Attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by law to be
included in the notice of the meeting but not so included, if that objection is
expressly made at the meeting.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise provided in the Certificate of Incorporation, any action
which may be taken at any annual or special meeting of stockholders may be taken
without a meeting and without prior notice, if a consent in writing, setting
forth the action so taken, is signed by the holders of outstanding shares having
not less than the minimum number of votes that would be necessary to authorize
or take that action at a meeting at which all shares entitled to vote on that
action were present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in
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writing. If the action which is consented to is such as would have required the
filing of a certificate under any section of the General Corporation Law of
Delaware if such action had been voted on by stockholders at a meeting thereof,
then the certificate filed under such section shall state, in lieu of any
statement required by such section concerning any vote of stockholders, that
written notice and written consent have been given as provided in Section 228 of
the General Corporation Law of Delaware.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat or entitled to give consent to corporate action
without a meeting, the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) days nor less than ten (10) days before
the date of any such meeting nor more than sixty (60) days before any such
action without a meeting, and in such event only stockholders of record on the
date so fixed are entitled to notice and to vote or to give consents, as the
case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date.
If the board of directors does not so fix a record date:
(a) the record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the business day next preceding the day on which notice is given, or, if notice
is waived, at the close of business on the business day next preceding the day
on which the meeting is held; and
(b) the record date for determining stockholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the board has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action by the board has been taken, shall
be at the close of business on the day on which the board adopts the resolution
relating to that action.
The record date for any other purpose shall be as provided in Article VIII
of these bylaws.
2.12 PROXIES
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(c) of the General Corporation Law of Delaware.
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2.13 INSPECTORS OF ELECTION
Before any meeting of stockholders, the board of directors may appoint an
inspector or inspectors of election to act at the meeting or its adjournment. If
no inspector of election is so appointed, then the chairman of the meeting may,
and on the request of any stockholder or a stockholder's proxy shall, appoint an
inspector or inspectors of election to act at the meeting. The number of
inspectors shall be either one (1) or three (3). If inspectors are appointed at
a meeting pursuant to the request of one (1) or more stockholders or proxies,
then the holders of a majority of shares or their proxies present at the meeting
shall determine whether one (1) or three (3) inspectors are to be appointed. If
any person appointed as inspector fads to appear or fads or refuses to act, then
the chairman of the meeting may, and upon the request of any stockholder or a
stockholder's proxy shall, appoint a person to fill that vacancy.
Such inspectors shall:
(a) determine the number of shares outstanding and the voting power
of each, the number of shares represented at the meeting, the existence of a
quorum, and the authenticity, validity, and effect of proxies,
(b) receive votes, ballots or consents;
(c) hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine when the polls shall close;
(f) determine the result; and
(g) do any other acts that may be proper to conduct the election or
vote with fairness to all stockholders.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and
to any limitations in the Certificate of Incorporation or these bylaws relating
to action required to be approved by the stockholders or by the outstanding
shares, the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the board of
directors.
3.2 NUMBER AND TERM OF OFFICE
The authorized number of directors shall be not less than five (5) nor
more than nine (9). The exact number of directors shall be seven (7) until
changed, within the limits specified above,
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by a bylaw amending this Section 3.2, duly adopted by the board of directors or
by the stockholders. The indefinite number of directors may be changed, or a
definite number may be fixed without provision for an indefinite number, by a
duly adopted amendment to the Certificate of Incorporation or by an amendment to
this bylaw adopted by the vote or written consent of holders of a majority of
the outstanding shares entitled to vote or by resolution of a majority of the
board of directors.
No reduction of the authorized number of directors shall have the effect
of removing any director before that director's term of office expires. If for
any cause, the directors shall not have been elected at an annual meeting, they
may be elected as soon thereafter as convenient at a special meeting of the
stockholders called for that purpose in the manner provided in these Bylaws.
3.3 CLASSES OF DIRECTORS
Following the closing of the corporation's initial public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "1933 Act"), covering the offer and sale of Common Stock
of the corporation (the "Initial Public Offering"), the Directors shall be
divided into three classes designated as Class I, Class II and Class III,
respectively. Directors shall be assigned to each class in accordance with a
resolution or resolutions adopted by the Board of Directors. At the first annual
meeting of stockholders following the closing of the Initial Public Offering,
the term of office of the Class I Directors shall expire and Class I Directors
shall be elected for a full term of three years. At the second annual meeting of
stockholders following the closing of the Initial Public Offering, the term of
office of the Class II Directors shall expire and Class II Directors shall be
elected for a full term of three years. At the third annual meeting of
stockholders following the closing of the Initial Public Offering, the term of
office of the Class III Directors shall expire and Class III Directors shall be
elected for a full term of three years. At each succeeding annual meeting of
stockholders, Directors shall be elected for a full term of three years to
succeed the Directors of the class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each Director
shall serve until his successor is duly elected and qualified or until his
earlier death, resignation or removal. No decrease in the number of Directors
constituting the Board of Directors shall shorten the term of any incumbent
Director.
3.4 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.
Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote or
written consent of the stockholders or by court order may be
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filled only by the affirmative vote of a majority of the shares represented and
voting at a duly held meeting at which a quorum is present (which shares voting
affirmatively also constitute a majority of the required quorum), or by the
unanimous written consent of all shares entitled to vote thereon. Each director
so elected shall hold office until the next annual meeting of the stockholders
and until a successor has been elected and qualified.
Unless otherwise provided in the Certificate of Incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 REMOVAL
Subject to any limitations imposed by law, and unless otherwise provided
in the Certificate of Incorporation, the Board of Directors, or any individual
Director, may be removed from office at any time by the affirmative vote of the
holders of at least a majority of the then outstanding shares of the capital
stock of the corporation entitled to vote at an election of Directors.
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the board of directors may be held at any place within
or outside the State of Delaware that has been designated from time to time by
resolution of the board. In the
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absence of such a designation, regular meetings shall be held at the principal
executive office of the corporation. Special meetings of the board may be held
at any place within or outside the State of Delaware that has been designated in
the notice of the meeting or, if not stated in the notice or if there is no
notice, at the principal executive office of the corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
3.7 FIRST MEETINGS
The first meeting of each newly elected board of directors shall be held
at such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
3.8 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice if
the times of such meetings are fixed by the board of directors.
3.9 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, or in the absence of the
chairman of the board by the chief executive officer or any three directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least seven (7) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or telegram, it shall be delivered personally or by telephone or to
the telegraph company at least seventy-two (72) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.10 QUORUM
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.10
of these bylaws. Every act
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or decision done or made by a majority of the directors present at a duly held
meeting at which a quorum is present shall be regarded as the act of the board
of directors, subject to the provisions of the Certificate of Incorporation and
applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.11 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the board of directors.
3.12 ADJOURNMENT
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting to another time and place.
3.13 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours. If
the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.8 of these bylaws, to
the directors who were not present at the time of the adjournment.
3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such action by written
consent shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent and any counterparts thereof shall be filed with
the minutes of the proceedings of the board.
3.15 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.14 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
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3.16 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any committee, to the
extent provided in the resolution of the board, shall have all the authority of
the board, but no such committee shall have the power or authority to (i) amend
the Certificate of Incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the board of directors as provided in Section 151(a) of the
General Corporation Law of Delaware, fix any of the preferences or rights of
such shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the corporation or a revocation
of a dissolution, or (v) amend the bylaws of the corporation; and, unless the
board resolution establishing the committee, the bylaws or the Certificate of
Incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these bylaws, Section
3.5 (place of meetings), Section 3.7 (regular meetings), Section 3.8 (special
meetings and notice), Section 3.9 (quorum), Section 3.10 (waiver of notice),
Section 3.11 (adjournment), Section 3.12 (notice of adjournment), and Section
3.13 (action without meeting), with such changes in the context of
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those bylaws as are necessary to the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a chairman of the board, a chief
executive officer, a secretary and a chief financial officer. The corporation
may also have, at the discretion of the board of directors, a president, one or
more vice presidents, one or more assistant secretaries, one or more assistant
treasurers, and such other officers as may be appointed in accordance with the
provisions of Section 5.3 of these bylaws. Any number of offices may be held by
the same person.
5.2 ELECTION OF OFFICERS
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws,
shall be chosen by the board, subject to the rights, if any, of an officer under
any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except in
case of an officer chosen by the board of directors, by any officer upon whom
such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
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5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall serve as
the corporation's general manager, and shall have general supervision, direction
and control of the corporation's business and its officers, and, if present,
preside at meetings of the stockholders and the board of directors and exercise
and perform such other powers and duties as may from time to time be assigned to
him by the board of directors or as may be prescribed by these bylaws. If there
is no chief executive officer, then the chairman of the board shall also be the
chief executive officer of the corporation and shall have the powers and duties
prescribed in Section 5.7 of these bylaws. The chairman of the board shall
report to the board of directors.
5.7 CHIEF EXECUTIVE OFFICER
Subject to such powers, if any, as may be given by the board of directors
to the chairman of the board, if there be such an officer, the chief executive
officer shall, subject to the control of the chairman of the board, or the board
of directors if there is no chairman of the board, have general supervision,
direction, and control of the business and the officers of the corporation. He
or she shall preside at all meetings of the stockholders and the board of
directors, in the absence or nonexistence of a chairman of the board. He or she
shall have the general powers and duties of management usually vested in the
office of president of a corporation, and shall have such other powers and
duties as may be prescribed by the board of directors or these bylaws.
5.8 VICE PRESIDENTS
In the absence or disability of the president, the vice presidents, if
any, in order of their rank as fixed by the board of directors or, if not
ranked, a vice president designated by the board of directors, shall perform all
the duties of the president and when so acting shall have all the powers of, and
be subject to all the restrictions upon, the president. The vice presidents
shall have such other powers and perform such other duties as from time to time
may be prescribed for them respectively by the board of directors, these bylaws,
the president or the chairman of the board.
5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and stockholders. The minutes shall show the time and place of each
meeting, whether regular or special (and, if special, how authorized and the
notice given), the names of those present at directors' meetings or committee
meetings, the number of shares present or represented at stockholders' meetings,
and the proceedings thereof.
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The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable times
be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He or she shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his or
her transactions as chief financial officer and of the financial condition of
the corporation, and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or these bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted
by the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
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6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware, to indemnify each
of its employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each
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stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall he specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders and its other books and records for a purpose
reasonably related to his or her position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority herein
granted may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the stockholders entitled to receive payment
of any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any other lawful
action (other than action by stockholders by written consent without a meeting),
the board of directors may fix, in advance, a record date, which shall not be
more than sixty (60) days before any such action. In that case, only
stockholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of
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any shares on the books of the corporation after the record date so fixed,
except as otherwise provided by law.
If the board of directors does not so fix a record date, then the record
date for determining stockholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.4 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by, the chairman or vice-chairman
of the board of directors, or the president or vice-president, and by the chief
financial officer, the secretary or an assistant secretary of such corporation
representing the number of shares registered in certificate form. Any or all of
the signatures on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate has ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the corporation
with the same effect as if he or she were such officer, transfer agent or
registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon
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partly paid shares of the same class, but only upon the basis of the percentage
of the consideration actually paid thereon.
8.5 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.6 LOST CERTIFICATES
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.7 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote, provided, however, that the
corporation may, in its Certificate of Incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
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ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the board of directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's becoming
effective in accordance with Section 103 of the General Corporation Law of
Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall have
attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
The Court of Chancery, upon application of any stockholder, may appoint
one or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or
(ii) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs
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of the corporation that the required vote for action by the board of directors
cannot be obtained and the stockholders are unable to terminate this division,
or
(iii) the corporation has abandoned its business and has failed
within a reasonable time to take steps to dissolve, liquidate or distribute its
assets.
11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
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AMENDMENT NO. 1
TO
RIGHTS AGREEMENT
THIS AMENDMENT NO. 1 (this "Amendment"), dated as of May 19, 1999, is
between DSP Group, Inc., a Delaware corporation (the "Corporation"), and Norwest
Bank Minnesota, N.A. (the "Rights Agent").
RECITALS
A. The Corporation and the Rights Agent have previously executed and
delivered that certain Rights Agreement, dated as of June 5, 1997, amended and
restated as of November 9, 1998 (the "Agreement").
B. The Corporation and the Rights Agent wish to enter into this Amendment
and thereby amend the Agreement, in accordance with the terms and provisions set
forth herein.
The parties hereto agree as follows:
AGREEMENT
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. Capitalized terms used herein have the meanings
set forth in the Agreement, unless otherwise defined in this Amendment.
ARTICLE II
AMENDMENT TO RIGHTS AGREEMENT
Section 2.1 Amendment. Section 1(a) of the Rights Agreement shall be
amended to read in its entirety as follows:
(a) "Acquiring Person" shall mean any Person who or which, together
with all Affiliates or Associates of such Person, shall be the Beneficial
Owner of 15% or more of the shares of Company Common Stock then
outstanding. Notwithstanding the foregoing: (i) an "Acquiring Person"
shall not include (A) the Company, (B) any Subsidiary of the Company, (C)
any employee benefit plan maintained by the Company or any of its
Subsidiaries, (D) any trustee or fiduciary with respect to such employee
benefit plan acting in such capacity or a trustee or fiduciary holding
shares of Company Common Stock for the purpose of funding any such plan or
employee benefits, (E) any Person who has reported or is required to
report Beneficial Ownership of Company Common Stock on Schedule 13G under
the Exchange Act (or any comparable or successor report), but only so long
as (x) such Person is eligible to report such ownership on Schedule 13(G)
under the Exchange Act (or any comparable or successor report), (y) such
Person has not reported and is not required to report such ownership on
Schedule 13(D) under the Exchange Act (or any
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comparable or successor report) and such Person does not hold shares of
Company Common Stock on behalf of any other Person who is required to
report Beneficial Ownership of such shares of Company Common Stock on such
Schedule 13(D), and (z) such Person does not beneficially own 20% or more
of the shares of Company Common Stock then outstanding, (F) any Person if
(1) the Board of Directors of the Company determines in good faith that
such Person who would otherwise be an "Acquiring Person" became such
inadvertently (including, without limitation, because (x) such Person was
unaware that it beneficially owned a percentage of Company Common Stock
that would otherwise cause such Person to be an "Acquiring Person" or (y)
such Person was aware of the extent of its Beneficial Ownership of Company
Common Stock but had no actual knowledge of the consequences of such
Beneficial Ownership under this Agreement) and without any intention of
changing or influencing control of the Company, (2) as promptly as
practicable such Person divested or divests itself of Beneficial Ownership
of a sufficient number of shares of Company Common Stock so that such
Person would no longer beneficially own 15% or more of the then
outstanding shares of Company Common Stock, and (3) such Person does not
become the Beneficial Owner of any additional shares of Company Common
Stock after such Person becomes aware that such Person would be an
Acquiring Person (but for the operation of this clause (i)(F)), unless
upon becoming the Beneficial Owner of such additional shares such Person
is the Beneficial Owner of less than 15% of the then outstanding shares of
Company Common Stock, (G) any Person who becomes the Beneficial Owner of
15% or more of the then outstanding shares of Company Common Stock as a
result of the acquisition of shares of Company Common Stock directly from
the Company in one or more transactions approved by the Board of
Directors, (H) Magnum Technology Limited, an international investment fund
("Magnum"), and its subsidiaries with respect to (1) the shares of Company
Common Stock issued in the transaction contemplated by the Stock Purchase
Agreement by and between the Company and Magnum, dated as of February 2,
1999 (the "Magnum Agreement"), and (2) any additional shares of Company
Common Stock purchased by Magnum and its subsidiaries for so long as
Magnum and its subsidiaries own no more than 35% of the outstanding shares
of Company Common Stock; provided, that (w) any subsidiary of Magnum
holding shares of Company Common Stock shall be subject to all obligations
which would be applicable to Magnum if such shares were held by Magnum,
(x) all or substantially all of the capital stock of Magnum shall not have
been transferred to a single person (including, without limitation, an
entity or individual) or a group as defined under the Securities Exchange
Act of 1934, as amended, and the rules and regulations promulgated
thereunder, (y) a direct or indirect change in control of Magnum and of
any subsidiary holding shares of Company Common Stock shall not have
occurred and (z) the shares of the Company shall not constitute all or
substantially all of Magnum's assets, and (ii) no Person shall be deemed
an "Acquiring Person" as a result of the acquisition of shares of Company
Common Stock by the Company which, by reducing the number of shares of
Company Common Stock outstanding, increases the proportional number of
shares beneficially owned by such Person; provided, however, that if (A) a
Person would become an Acquiring Person (but for the operation of this
subclause (ii)) as a result of the acquisition of shares of Company Common
Stock by the Company and (B) after such share acquisition by the Company,
such Person becomes the Beneficial Owner of any additional shares of
Company Common Stock, then such Person shall be
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deemed an Acquiring Person unless upon becoming the Beneficial Owner of
such additional shares such Person is the Beneficial Owner of less than
15% of the then outstanding shares of Company Common Stock. Each Person
identified in subclauses (A), (B), (C) and (D) of this Section (1)(a) is
individually an "Exempt Person" and collectively "Exempt Persons."
ARTICLE III
MISCELLANEOUS
Section 3.1 Governing Law. This Amendment shall be governed by, and
construed in accordance with, the laws of the State of Delaware applicable to
contracts executed in and to be performed entirely in such State.
Section 3.2 Counterparts. This Amendment may be executed (including by
facsimile) in one or more counterparts, and by different parties hereto in
separate counterparts, each of which when executed shall be deemed an original,
but all of which taken together shall constitute one and the same instrument.
Section 3.3 Headings. The headings contained in this Amendment and for
descriptive purposes only and shall not affect in any way the meaning or
interpretation of this Amendment.
Section 3.4 Construction. The terms of this Amendment shall prevail over
any conflicting provision of the Agreement, but both instruments shall otherwise
be construed and interpreted as a single integrated agreement. All references in
the Agreement to such "Agreement" shall be construed as referring to the
Agreement as it has been amended hereby. The Agreement remains in full force and
effect, in accordance with its terms and as amended hereby, and there are no
other amendments, understandings or agreements except as set forth herein.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first written above.
By: /s/ IGAL KOHAVI By: /s/ ELIYAHU AYALON
-------------------------- -------------------------
Name: Igal Kohavi Name: Eliyahu Ayalon
Title: Chairman of the Board Title: President and Chief
Executive Officer
Attest: NORWEST BANK MINNESOTA, N.A.
By: /s/ KARRI L. VAN DELL By: /s/ JOHN BAKER
-------------------------- -------------------------
Name: Karri L. Van Dell Name: John Baker
------------------------ -----------------------
Title: AVP Title: Account Manager
----------------------- ----------------------
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SECOND AMENDMENT TO SUBLEASE
This Amendment dated February 11, 1999, for reference purposes only, is made and
entered into by Dialogic Corporation ("Sublessor") and DSP Group, Inc.
("Sublessee").
RECITALS:
A. The parties have previously entered into a sublease ("Sublease") dated
October 18, 1996 and a First Amendment to Sublease dated December 4, 1996.
NOW THEREFORE, the parties agree as follows:
1. To amend the "Termination Date" as defined in paragraph 7 of Sublease to
be June 30, 2001.
2. To increase the monthly rent as defined in paragraph 9 of Sublease to be
thirty-three thousand six hundred thirty-seven dollars ($33,637.00)
beginning January 1, 2000.
3. To delete paragraph 8 of Sublease in its entirety and substitute the
following: The Sublease shall automatically renew for one month periods
beginning July 1, 2001; provided, however, in no event shall the term of
Sublease extend past April 30, 2004. This month to month extension period
can be terminated by either party by providing at least five (5) months
prior written notice to the other party at any time after February 1, 2001
(i.e., if written notice is delivered on February 1, 2000, such
termination shall be effective July 1, 2001).
4. Except as specifically amended modified by this Second Amendment to
Sublease, all other terms and provisions of the First Amendment to
Sublease and Sublease shall remain unmodified and in full force and
effect.
Sublessor: DIALOGIC CORPORATION Sublessee: DSP GROUP, INC.
By:/s/ THOMAS ARIDAO By: /s/ MICHAEL COHEN
------------------------------ ----------------------------
Title: Chief Financial Officer Title: Director, Administration
-------------------------- -------------------------
Date: 3/15/99 Date: 3/12/99
--------------------------- --------------------------
<PAGE>
OFFICER'S CERTIFICATE
MARCH 30, 2000
------------------------
The undersigned, Eli Ayalon, hereby certifies as follows:
(a) I am the duly elected, qualified, acting and incumbent Chairman
of the Board and Chief Executive Officer of DSP Group, Inc. (the "Company").
(b) Attached hereto is an English translation of an Employment
Agreement, dated as of May 1, 1999, by and between Moshe Zelnik and DSP Group
Ltd., a wholly owned subsidiary of the Company.
(c) To my knowledge, such translation is a fair and accurate
translation as required under Rule 306 of Regulation S-T promulgated by the
Securities and Exchange Commission.
IN WITNESS WHEREOF, the undersigned has duly executed this
Certificate on behalf of the Company as of the date first written above.
DSP GROUP, INC.
/s/ ELI AYALON
----------------------------------------
Eli Ayalon, Chairman of the Board and
Chief Executive Officer
<PAGE>
To: Moshe Zelnik
------------------------
Identity Certificate No._________________________
Address:_________________________________________
_________________________________________________
Re: YOUR EMPLOYMENT WITH DSP GROUP.
We are pleased to offer you to join DSP Group Co. Ltd. (Hereinafter: "The
Company") in accordance with the following terms of employment:
1. DEFINITION OF THE POSITION.
A. Your position in the Company will be VICE PRESIDENT OF
FINANCE, CHIEF FINANCIAL OFFICER AND SECRETARY.
B. You will be directly subordinate to __________________________.
2. TERMS OF EMPLOYMENT
A. SALARY.
1. In consideration for your work for the Company, the Company
will pay you the amount of NIS - (US$105,000) - Gross,
annually. (Hereinafter: "The Salary").
2. Tax will be deducted at source from the Salary as required
by law in accordance with the Income Tax Regulations, as
well as Health Tax And National Insurance. The Salary will
be linked to the cost of living index without any maximum
rate, to which health dues will be attached as required by
law.
B. SENIOR EMPLOYEES INSURANCE PLAN
1. The Company will pay 20.833% of the Salary as detailed in
section 1.A.2 above to a pension fund or a provident fund,
at its discretion, up to the maximum stipulated in the law,
in accordance with the following details:
A) 8.33% of the Salary on account of severance pay -
at the Company's expense;
B) 5% of the Salary on account of recompense payments
- at the Company's expense.
<PAGE>
C) 5% of the Salary on account of recompense payments
- at your expense.
D) 2.5% of the Salary on account of insurance for loss
of work ability - as is customary in the Company
and at the Company's expense.
2. The payments made by the Company for the senior employees
insurance plan, as stipulated in sub section A above, are
instead of any other obligation for the payment of
severance pay / payments made to a pension fund etc.
3. Your consent to section B exempts the Company from the need
to approach the Minister of Labor in order to receive his
permission in accordance with section 14 of the Severance
Compensation Pay Law, although if such a need is created,
for referral for the receiving of the necessary permit,
your signature upon this agreement will constitute
authorization for the Company also to make a referral in
your name.
4. If the Company is obliged in the future, by virtue of the
law and/or an extension order which applies to the whole
economy, to make payments of monies for an arrangement or
comprehensive pension fund or otherwise, the payments will
be made to the new applicable fund or arrangement, instead
of the arrangement as in this agreement, and you will not
be able to withdraw monies on account of the deposits to
the previous arrangement, unless subject to the regulations
of the appropriate fund and/or plan.
C. STUDY FUND
During the period of your employment, the Company will make
payments to a study fund, the payments will be at the rate of
7.5% of the Salary up to the maximum rate, as set down by law,
at the Company's expense and 2.5% of the maximum rate up to
the maximum rate set down by law, at the expense of the
employee.
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D. CAR
1. The Company shall make a Company car available to you,
(Hereinafter: "The Car") commencing from the start of your
employment.
2. All the expenses for the Car shall be paid by the Company,
except for the payment for the value of the use of the Car,
which shall be paid by you, and which shall be deducted by
the Company from your monthly Salary.
E. ANNUAL VACATION LEAVE.
1. During the period of your employment, you will be entitled
to annual vacation leave of 23 days. The date of your
leaving for vacation shall be coordinated with your
superior.
2. The accumulation of vacation days for the period of more
than the total of the vacation days available to you for
two contract years will not be allowed.
3. The Company will be entitled to order you to leave for
annual vacation and to spend up to half of your available
annual vacation days at the date at which the Company's
employees will leave on an organized and collective
vacation leave.
F. ILLNESS
1. You are entitled to 30 days annual sick leave, with the
possibility of accumulating 3 (three) years (i.e. up to
ninety days).
2. The payment of the sick leave will be made from the first
day against presentation of a doctor's certificate.
3. Accumulative sick leave days are not redeemable.
F. MILITARY RESERVE DUTY SERVICE (MILLUIM)
1. Every time you go on active military service you are
obliged to inform the Company upon the receiving of the
call up order.
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2. Wages for the period of the reserve military duty will be
fully paid, as stipulated in this agreement, subject to the
providing of the relevant confirmations concerning the
active military duty.
H. YOUR CANDIDACY FOR THE OPTIONS PROGRAM FOR COMPANY EMPLOYEES.
1. The Company management shall make a recommendation to the
board of directors of DSPG Inc., granting you an option to
purchase 40,000 DSPG shares, subject to the terms of the
share/options program for DSPG employees.
In order to eliminate any doubt, it is clarified that, in any
event, the confirmation of the granting of the options is
subject to the confirmation of the board of directors of the
Company as transpires from the Company's procedures.
I. ANNUAL BONUS.
The Company is accustomed to granting bonuses to some of
the employees, and at the time of the deliberations on the
granting of bonuses, the Company shall decide, at its
discretion, also with respect of your candidature for the
granting of a bonus.
3. THE PERIOD OF THE CONTRACT AND THE TERMINATION THEREOF.
A. This agreement is valid from the date of the signing thereof.
The contract is for a period of time which has not been
specified in advance. The commencement of your employment with
the Company is hereby set as commencing from _________________.
B. Each party shall be entitled to bring this contract to an end
by prior written notice to the other party of ninety (90)
days. The Company has reserved the right not to make use of
the period of prior notice and/or to immediately terminate
your employment. In such a case, you shall be paid prior
notice at the rate of your Salary for the stipulated period,
on the basis of your last known Salary.
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<PAGE>
C. In the following instances the Company shall be entitled to
cease your employment without any prior notice:
1. The perpetrating of a criminal offence connected to the
work and/or an offence which bears an element of disgrace.
2. The breach of the duty of trust with the Company and/or the
performance of an act which has a conflict of interests.
3. The breach of your undertakings of the preserving of
secrecy and non competitiveness as detailed below in this
agreement and the appendices thereto.
4. The causing of malicious damage to the Company or the
causing of damage to the Company as a result of gross
negligence.
4. THE TRANSFERENCE OF PAYMENTS AND RETIREMENT COMPENSATION.
In the event of you being dismissed, except for dismissal for one of
the causes as stated below, the Company will transfer to you the full
payments which have accumulated in your favor in the senior employees
insurance plan policy and/or the endowment and/or fund (Hereinafter:
"The Payments").
As follows is the list of causes which will cancel the transference of
the Payments into your name:
A. The Company has dismissed you for reasons which entitle it to
dismiss you in accordance with the law without severance pay.
B. The breach of your duty of trust and/or the duty of non
competitiveness and/or the breach of the duty of secrecy, in
accordance with this agreement, without derogating from the
generality of that stipulated - the breach of the agreement of
secrecy and non competitiveness attached as APPENDIX A to this
agreement and which constitutes an integral part thereof.
C. The perpetration of a criminal offence connected with the work
and/or an offence which bears an element of disgrace.
5
<PAGE>
D. You ended your work with the Company without providing
sufficient prior notice as detailed in section 3B above.
E. You have concluded your employment with the Company without
passing over your position as detailed in section 7 below.
It is hereby clarified that, your transference from the work set up of
the Company to that of new company which will be set up, if at all,
within the framework of the group and your employment in such a
company, will not be considered as the termination of your employment,
your dismissal and/or your resigning from the Company, for the
transference of the various Payments, including, but without derogating
from the above said, severance pay.
5. WORK HOURS.
A. The accepted working hours in the Company are 44 hours a week
and the accepted working days are Sundays through to Thursday.
B. As your position is regarded as one of those positions which
require a special amount of personal trust, as defined in the
Working Hours and Rest Law - 1951, the provisions of this law
will not apply to you. From time to time, you will be
required, in accordance with the needs of your position, to
work beyond the accepted working hours and on Fridays. In
these cases, you will not be paid extra for your overtime.
6. THE DUTY OF TRUST AND REFRAINING FROM A CONFLICT OF INTERESTS.
A. You are obligated to fulfil your position diligently and in a
trustworthy manner, to make use of all your talents, your
knowledge and experience for the benefit of the Company and
for the progress of the Company and this at the highest and
most efficient level as shall be determined by the Company.
Furthermore, you are obligated to act in accordance with the
Company's instructions with everything concerning the manner
of the performance of the work,
6
<PAGE>
work procedures, discipline and behavior as shall be valid
from time to time.
B. Commencing from the start of your employment on a full time
basis for the Company, as stipulated in section 3A above,
i.e., commencing from (Date):________________ you shall not be
employed in any other employment and/or any other job as a
salaried worker and/or as an adviser and/or as being directly
or indirectly self- employed, unless having received the prior
written consent of the Company.
C. For the full duration of the period of the agreement, you will
not receive any payment or other benefit from any third party,
directly or indirectly involved with your work. It is made
clear to you, that the breach of this provision is a
fundamental breach of this agreement, and that furthermore,
the amount or benefit which is received by you as stipulated,
shall belong to the Company, which shall be entitled to deduct
this amount, from any monies owing to you by the Company.
D. You shall not carry out any act which may harm the trust of
the Company and/or which is likely to place you in a situation
of a conflict of interests with the aims of the Company. You
are obliged to inform the Company immediately and without
delay of any issue or matter in which you have a personal
interest and/or any other action which is likely to place you
in a situation as detailed above.
E. The commencement of your employment in accordance with this
agreement is made conditional on your signing on the agreement
of secrecy and non competitiveness which is attached to this
agreement as Appendix A and which constitutes an integral part
thereof.
F. You are obliged to inform the managing director of the Company
of any business opportunity which has any connection to the
information as defined in Appendix A. You are obliged not to
make
7
<PAGE>
any such opportunity exclusive to yourself, whether directly
or indirectly, unless the prior written approval of the
managing director of the Company has been given to you.
7. THE PASSING OVER OF THE POSITION.
If your employment has terminated or been terminated and/or the
validity of this agreement has expired for any reason whatsoever, you
are obliged to pass over your position, and without derogating from the
generality of that stipulated - all the matters under your care and/or
any information whatsoever available to you and connected in any form
whatsoever to your work for the Company, in an orderly and full fashion
including the disclosure of any important detail with regard to the
business of the Company, as well as forwarding, in a full and orderly
fashion, all the documents, information, equipment, etc. to the
Company, which may have reached you and/or be prepared by you with
regard to your employment with the Company, up until the cessation of
your employment with the Company.
8. DECLARATION OF SECRECY AND NON COMPETITIVENESS.
You are obligated to the safeguarding of secrecy and non
competitiveness, both during the course of your employment with
the Company and thereafter, as detailed in your undertaking to
safeguard secrecy and non competitiveness attached to this
agreement as APPENDIX A and which constitutes an integral part
thereof.
9. PATENTS, INVENTIONS AND COMMERCIAL SECRETS.
A. Copyrights for any invention and/or patent and/or commercial
secret and/or professional secret and/or any innovation, which
you may intend and/or which any of the employees of the
Company who are sub-ordinate to you may invent during the
period of your employment with the Company are the exclusive
property of the Company.
8
<PAGE>
The Company shall be entitled to protect any invention and/or
patent and/or commercial secret as stipulated, by means of
registration, or by any other means, in Israel or anywhere
else.
It is hereby clarified that you will not be entitled to
register any invention and/or patent or commercial secret or
to take any measures with respect thereof, excepting for the
actions which will be required for the above mentioned making
use thereof or registration in the name of the Company or by
the Company.
B. You are obligated to immediately inform the Company in writing
of any invention and/or patent and/or commercial secret which
you may invent and/or which is invented by the Company's
employees who are subject to you.
C. That stipulated in this section completes and compliments that
stipulated in Appendix A.
With your signing upon this personal agreement and your formal joining
of the work staff of the Company we wish you continued satisfaction and
enjoyment of your work.
Here's hoping for years of co-operation and personal benefit as well as
benefit for the Company, its employees and stockholders.
Yours Respectfully,
/s/ LEAH SADEH
Leah Sadeh
Corporate Vice President
Human Resources
DSP Group Ltd.
9
<PAGE>
I have carefully read this letter and I express my consent with the
contents thereof.
I am aware that the terms of wages which have been offered to me above
and those which shall be pertinent for long as I am employed by you are
personal and that this letter constitutes a special personal contract
of employment, which lays down the relations between me and the
Company, and that therefore I confirm that I am aware that no
provisions of any to the agreements will apply to me, and including
collective agreements, between the Company and its employees so long as
this agreement is valid and I undertake to safeguard the secrecy
thereof.
/s/ MOSHE ZELNIK 5/1/99
- ------------------------------ --------------
SIGNATURE DATE
- ------------------------------
I.D.
MOSHE ZELNIK
- ------------------------------
NAME
10
<PAGE>
APPENDIX A TO THE AGREEMENT OF MY EMPLOYMENT WITH
DSP GROUP CO. LTD.
To:
DSP Group Co. Ltd.
5 Shenkar St.
HERZLIA -ON - SEA
Dear Sir/Madam,
Re: UNDERTAKING TO SAFEGUARD SECRECY AND NON-COMPETITIVENESS.
WHEREAS: I seek to be employed by DSP Group Co. Ltd. (a private
registered company No. 51-135472-2 (Hereinafter: "The
Company");
AND WHEREAS: The Company, in the matter of the duty of secrecy and
non-competitiveness in this appendix, also includes the
American holding company of DSP Group Co. Ltd. - DSP
Group, Inc. and also the subsidiary company of DSP Voice
Com. Group Ltd. and the subsidiary company of DSP Group
Inc. - RF Sub Inc.;
AND WHEREAS: During the course of my employment for the Company
information is likely to reach me, in accordance with the
following definition:
Any information which has and/or shall reach me and/or
come to my attention, whether directly and/or indirectly,
during the course of my work or as a result of my work
for the Company, including document (reports, notes and
papers, applications and cheques), drafts, processes,
commercial secrets - including information concerning the
Company's customers, suppliers and business partners
and/or the manufacture or marketing set-up of the Company
or connected to the ties of the Company and/or companies
connected to it, or which control or are controlled or
11
<PAGE>
affiliated with the Company by virtue of and acting with
any third party whatsoever, including customers,
suppliers, banking institutions, governmental bodies,
private entities, public and quasi public entities of any
kind and sort as well as any financial, business and
commercial information, financial reports and balance
sheets before the publication thereof and any internal
information whatsoever which may influence the value of
the Company's shares - formulae, data, plans, patents,
inventions, discoveries, innovations, improvements,
research, and any methods whatsoever, developments and
scientific and technical, economic, commercial or other
developments, applications for patent, prototypes,
models, pictures, descriptions, sketches, drawings,
photostats or blueprints, notebooks, samples and
documents of schedule, lists, documentation, source and
destination codes, films, recordings and other means of
storage, letters, notes, booklets for note taking,
reports and flow charts, as well as information connected
with the business of the Company in the present and/or
business which the Company is about to engage in (as they
shall be developed by the Company and as described by the
Company in the development plan booklet and its business
plans and in the other explanatory material on behalf of
the Company), and any other thing, and all, whether in
writing or verbally, and provided that it is not in the
public domain or that it has not become in the public
domain as a result of the breach of my undertakings in
accordance with this letter or in accordance with law.
(Hereinafter: "The Information").
AND WHEREAS: The Information, as defined above, also includes
Information of commercial, technical and non-technical,
value, written and non-written, data, systems of note
taking, samples, documents of
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<PAGE>
specifications, source and destination codes, processes,
algorithms, computer tapes, recordings and other means of
storage which are to be viewed as intellectual property or
secret material of the Company or of any one of its
predecessors or of the companies connected to it, whether
fully or partially, and including especially without
restriction, computer hardware, programs and computer
software and implementations, matters of prices and
marketing information as well as inventions which are not
restricted in accordance with the definition of invention
as has been determined in the patent laws which are
implemented in Israel or in the U.S.A., and any improvement
or adjustment of that information in question, which has
been developed, sold, or which in respect of which a
license has been given to the Company during the course of
the conducting of the business of the Company, from time to
time, as well as any product in question, whether planned,
developed or attained by or for the Company, directly or
indirectly, and provided that it is not information and/or
a product which is available freely and which constitutes
public domain information or which can be purchased freely
by an independent third party.
AND WHEREAS: As a condition of my employment with the Company and the
receiving of information by me, inter alia, is my
undertaking to safeguard the secrecy and of
non-competitiveness;
THEREFORE, I DECLARE AND UNDERTAKE AS FOLLOWS:
CHAPTER A - SECRECY
1. To keep secret the Information which reaches me or which shall reach me,
or which shall come to my attention, directly or indirectly, during the
course of my employment for the Company and/or my involvement with the
Company,
13
<PAGE>
absolutely secret, and this without any limitation in time, even after the
conclusion of my employment with the Company.
2. Not to disclose and/or to transfer and/or to sell, whether for
remuneration or not and/or to cause the discovery of Information, whether
directly or indirectly, as well as to take all measures to safeguard the
secrecy of the information and the prevention of the delivery thereof or
of its reaching any third party, person, entity or corporation whatsoever,
excepting for my superiors in the Company or in accordance with their
instructions for the Purpose of the performance of my duties as an
employee of the Company.
3. Not to make any use of the Information, whether fully or partially, for my
needs or for the needs of to others, whether directly or indirectly, which
are not for the purpose of to performance of the jobs imposed upon me as
an employee of the Company in accordance with the instruction of my
superiors in the Company.
Not to make any copies of the information in any manner whatsoever
unless in accordance with the Company's instructions or someone who
is authorized to do so on behalf of the Company.
4. I hereby undertake not to accept any materials whatsoever relating to the
Information or the products, or any equipment from the Company without
receiving the express prior written consent of: (1) the president of the
Company or the managing director, or (2) a person authorized in writing to
do so by the president of the Company or the managing director.
5. Without prejudicing the above said, I am aware that I do not have any
intellectual property right and that I shall not have any intellectual
property right in the Information as defined by this agreement.
5A. I hereby declare to disclose to the Company and/or to those replacing
it and/or to the assignees of the Company, regarding the inventions
which shall be made by me during the period of my employment with the
14
<PAGE>
Company and/or as a result of my employment with the Company and
connected to my employment with the Company and/or the information,
and I hereby assign any interest that I have or which I may have in
those inventions in favor of the Company and/or those in place of the
Company and/or its assignees, and all this without further
remuneration and provided that I will not be required to bear any
costs whatsoever involved with such assignment as mentioned above.
In the event of my making an invention, which is registered as a
patent, during the course of my employment with the Company or as
result of my employment with the Company, the Company will register
my name in the patent documents as the inventor, provided that it is
convinced, beyond all doubt, that the invention was indeed made by me
and that such registration shall not prejudice its intellectual
property rights and/or other rights of the Company and/or those in
its stead and/or it assignees, for the invention and/or patent as
detailed above.
5B. I hereby undertake, that for so long as I am required to do so,
including after the termination of my employment for any reason
whatsoever, that I will sign on any document, which, in accordance
with the Company's discretion is required for the lodging of an
application or copyright in accordance with the laws of Israel, the
U.S.A. and/or any other foreign country in order to protect the
interests of the Company in the above mentioned invention.
5C. I hereby declare that apart from that as detailed in section 5C.1
below, I do not have any interest in any application or application
for a patent whatsoever and not even for material which is subject to
copyright, patents and applications for patents which presently
belong to me.
5C.1 Existing patent and/or applications for patents pending and/or
activities in research at the stage of lodging for registration of
patent are as follows:
15
<PAGE>
1.______________________________________________________________
2.______________________________________________________________
3.______________________________________________________________
4.______________________________________________________________
6. I am aware that the forwarding of Information and/or any part thereof
to any third person whatsoever is likely to cause serious damages to
the Company and I hereby undertake that I shall not undertake any
action of transference and/or sale of the Information and/or of the
products developed by the Company and/or existing products and/or
which have been developed whether by myself or in co-operation with
others, including customers of the Company or whether in co-operation
with any third party whatsoever, whether with customers of the
Company or with others.
7. I declare that I am aware, that due to the nature of the Company's
business, it takes upon itself and/or is likely to take upon itself
undertakings with third parties obliging the safeguarding of secrecy
which will also be applicable to its employees, and that the
non-fulfillment of the above undertakings shall, inter alia, be cause
for the breach of the contract between the Company and the third
party. I therefore undertake to fulfil all these undertakings as has
been determined between the Company and the aforesaid third party.
8. I hereby undertake not to harm, whether directly or indirectly, the
reputation of the Company and/or its status amongst its customers in
effect an its potential customers.
9. To keep secret any information relating to aspects of money, fiscal
aspects and economic aspects of the Company's activities, including
ties with banking institutions, customs and excise authorities,
undertakings of the Company and rights toward third parties.
Likewise, I will keep secret
16
<PAGE>
any information which may reach me and connected with entities such
as the center for investments, the Scientist-in-Chief, accountants
and legal advisors of the Company, etc.
10. In order to eliminate any doubt, it is hereby emphasized that my
undertakings in accordance with sections 1 - 9 above shall remain valid
both during the period of my employment with the Company and after the
termination thereof for whatever reason whatsoever, and shall also bind
my legal representatives, and this without any limitation in time.
11. I agree that any document which I have prepared and/or any Information
which I have attained for the purpose of my work with the Company
and/or my work during the period of my employment with the Company is
the property of the Company, which shall be forwarded to the Company
immediately upon the termination of my employment as detailed below.
Likewise, I hereby undertake to return to the Company any Information,
whether written or in any other form whatsoever, which is in my
possession or which shall be in my possession at any time, and this
immediately upon the termination of my employment for any reason
whatsoever or immediately upon the demand of the Company at any time.
CHAPTER B - NON COMPETITIVENESS
12. Furthermore, and without prejudicing my undertakings in this document
and/or my undertakings imposed upon me in accordance with the law or
according to custom, I hereby undertake not to compete with the Company
in any form or manner whatsoever, by any means of undertaking
whatsoever, whether directly or indirectly, by myself or together with
others, and/or to provide advise of any sort whatsoever to a competing
business and/or to be employed for pay or without pay by a competing
business and/or to be active, whether directly or indirectly in the
management and/or activating and/or planning of a competing business.
17
<PAGE>
13. I hereby undertake that upon the conclusion of my employment with the
Company for any reason whatsoever, I will not work, whether for wages
or not and/or for the purpose of advising and/or to be directly or
indirectly active in the execution of work and/or service for a
customer of the Company and/or someone who was a customer of the
Company at the time of my employment with the Company.
14. In order to eliminate any doubt I hereby clarify that my undertakings
in accordance with sections 12 - 13 above, shall remain valid during
the period of my employment with the Company and after the termination
thereof for whatever reason whatsoever for the periods as detailed
below:
14A. For a period of one year after the conclusion of my employment, in the
event of my having worked for the Company for a period of more than 6
months;
14B For a period of two years after the conclusion of my employment, in the
event of my having worked for the Company for a period exceeding two
years.
15. I undertake that upon the conclusion of my employment with the Company,
for whatever reason, I shall not lobby and/or attempt to lobby and/or
attain, whether directly and/or indirectly and/or for another and/or
for any undertaking whatsoever with any customer of the Company and/or
someone who was a customer of the Company at the time of my employment
with the Company.
CHAPTER C - MISCELLANEOUS BREACHES
16. In the event of my breaching my undertakings in accordance with this
writ of undertaking, I will be obliged to compensate the Company for
all the damages and expenses caused to the Company as a result of the
breach, and this without derogating from any of the remedies available
to the
18
<PAGE>
Company against me in accordance with any law as a result of the breach
of my above undertakings.
17. I am aware that the Company has various intellectual property rights,
and the above said shall not prejudice these rights in any manner
whatsoever.
18. The rights of the Company in accordance with this document are
personally negotiable.
19. My undertakings in accordance with this writ, constitute an integral
part of the terms of my employment between me and the Company. My above
undertakings shall not prejudice the undertakings applicable to me in
any way and as an employee of the Company in accordance with the
agreement of employment between me and the Company and/or in accordance
with any law, including collective agreements and/or any custom.
20. My undertakings in accordance with this document cannot be changed and
shall not be brought to an end, fully or partially, unless by virtue of
a document written and signed by an authorized representative on behalf
of the Company.
21. If, for any reason whatsoever, a term of this document is held to be
invalid or unenforceable, the validity and enforceability of the other
provisions of this document shall not be prejudiced.
5/1/99 /s/ MOSHE ZELNIK
- ------------------------ ---------------------------------
DATE EMPLOYEE'S SIGNATURE
19
<PAGE>
OFFICER'S CERTIFICATE
MARCH 30, 2000
-------------------------
The undersigned, Moshe Zelnik, hereby certifies as follows:
(a) I am the duly elected, qualified, acting and incumbent Vice
President of Finance, Chief Financial Officer and Secretary of DSP Group,
Inc., (the "Company").
(b) Attached hereto is an English translation of an Employment
Agreement, dated as of May 1, 1999, by and between Boaz Edan and DSP Group,
Ltd., a wholly owned subsidiary of the Company.
(c) To my knowledge, such translation is a fair and accurate
translation as required under Rule 306 of Regulation S-T promulgated by the
Securities and Exchange Commission.
IN WITNESS WHEREOF, the undersigned has duly executed this
Certificate on behalf of the Company as of the date first written above.
DSP GROUP, INC.
/s/ MOSHE ZELNIK
-------------------------------------
Moshe Zelnik, Vice President of Finance,
Chief Financial Officer and Secretary
<PAGE>
To: BOAZ EDAN
- -----------------------------
Identity Certificate No.______________________________
Address:______________________________________________
______________________________________________________
Re: YOUR EMPLOYMENT WITH DSP GROUP.
We are pleased to offer you to join DSP Group Co. Ltd. (Hereinafter: "The
Company") in accordance with the following terms of employment:
1. DEFINITION OF THE POSITION.
A. Your position in the Company will be VICE PRESIDENT OPERATIONS.
B. You will be directly subordinate to ____________________________.
2. TERMS OF EMPLOYMENT
A. SALARY.
1. In consideration for your work for the Company, the Company
will pay you the amount of NIS - (US$105,000) - Gross,
annually. (Hereinafter: "The Salary").
2. Tax will be deducted at source from the Salary as required
by law in accordance with the Income Tax Regulations, as
well as Health Tax And National Insurance. The Salary will
be linked to the cost of living index without any maximum
rate, to which health dues will be attached as required by
law.
B. SENIOR EMPLOYEES INSURANCE PLAN
1. The Company will pay 20.833% of the Salary as detailed in
section 1.A.2 above to a pension fund or a provident fund,
at its discretion, up to the maximum stipulated in the law,
in accordance with the following details:
A) 8.33% of the Salary on account of severance pay -
at the Company's expense;
B) 5% of the Salary on account of recompense payments
- at the Company's expense.
<PAGE>
C) 5% of the Salary on account of recompense payments
- at your expense.
D) 2.5% of the Salary on account of insurance for loss of
work ability - as is customary in the Company and at
the Company's expense.
2. The payments made by the Company for the senior employees
insurance plan, as stipulated in sub section A above, are
instead of any other obligation for the payment of
severance pay / payments made to a pension fund etc.
3. Your consent to section B exempts the Company from the need
to approach the Minister of Labor in order to receive his
permission in accordance with section 14 of the Severance
Compensation Pay Law, although if such a need is created,
for referral for the receiving of the necessary permit,
your signature upon this agreement will constitute
authorization for the Company also to make a referral in
your name.
4. If the Company is obliged in the future, by virtue of the
law and/or an extension order which applies to the whole
economy, to make payments of monies for an arrangement or
comprehensive pension fund or otherwise, the payments will
be made to the new applicable fund or arrangement, instead
of the arrangement as in this agreement, and you will not
be able to withdraw monies on account of the deposits to
the previous arrangement, unless subject to the regulations
of the appropriate fund and/or plan.
C. STUDY FUND
During the period of your employment, the Company will make
payments to a study fund, the payments will be at the rate of
7.5% of the Salary up to the maximum rate, as set down by law,
at the Company's expense and 2.5% of the maximum rate up to
the maximum rate set down by law, at the expense of the
employee.
2
<PAGE>
D. CAR
1. The Company shall make a Company car available to you,
(Hereinafter: "The Car") commencing from the start of your
employment.
2. All the expenses for the Car shall be paid by the Company,
except for the payment for the value of the use of the Car,
which shall be paid by you, and which shall be deducted by
the Company from your monthly Salary.
E. ANNUAL VACATION LEAVE.
1. During the period of your employment, you will be entitled
to annual vacation leave of 23 days. The date of your
leaving for vacation shall be coordinated with your
superior.
2. The accumulation of vacation days for the period of more
than the total of the vacation days available to you for
two contract years will not be allowed.
3. The Company will be entitled to order you to leave for
annual vacation and to spend up to half of your available
annual vacation days at the date at which the Company's
employees will leave on an organized and collective
vacation leave.
F. ILLNESS
1. You are entitled to 30 days annual sick leave, with the
possibility of accumulating 3 (three) years (i.e. up to
ninety days).
2. The payment of the sick leave will be made from the first
day against presentation of a doctor's certificate.
3. Accumulative sick leave days are not redeemable.
F. MILITARY RESERVE DUTY SERVICE (MILLUIM)
1. Every time you go on active military service you are
obliged to inform the Company upon the receiving of the
call up order.
3
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2. Wages for the period of the reserve military duty will be
fully paid, as stipulated in this agreement, subject to the
providing of the relevant confirmations concerning the
active military duty.
H. YOUR CANDIDACY FOR THE OPTIONS PROGRAM FOR COMPANY EMPLOYEES.
1. The Company management shall make a recommendation to the
board of directors of DSPG Inc., granting you an option to
purchase 35,000 DSPG shares, subject to the terms of the
share/options program for DSPG employees.
In order to eliminate any doubt, it is clarified that, in any
event, the confirmation of the granting of the options is
subject to the confirmation of the board of directors of the
Company as transpires from the Company's procedures.
I. ANNUAL BONUS.
The Company is accustomed to granting bonuses to some of
the employees, and at the time of the deliberations on the
granting of bonuses, the Company shall decide, at its
discretion, also with respect of your candidature for the
granting of a bonus.
3. THE PERIOD OF THE CONTRACT AND THE TERMINATION THEREOF.
A. This agreement is valid from the date of the signing thereof.
The contract is for a period of time which has not been
specified in advance. The commencement of your employment with
the Company is hereby set as commencing from ___________________.
B. Each party shall be entitled to bring this contract to an end
by prior written notice to the other party of ninety (90)
days. The Company has reserved the right not to make use of
the period of prior notice and/or to immediately terminate
your employment. In such a case, you shall be paid prior
notice at the rate of your Salary for the stipulated period,
on the basis of your last known Salary.
4
<PAGE>
C. In the following instances the Company shall be entitled to
cease your employment without any prior notice:
1. The perpetrating of a criminal offence connected to the
work and/or an offence which bears an element of disgrace.
2. The breach of the duty of trust with the Company and/or the
performance of an act which has a conflict of interests.
3. The breach of your undertakings of the preserving of
secrecy and non competitiveness as detailed below in this
agreement and the appendices thereto.
4. The causing of malicious damage to the Company or the
causing of damage to the Company as a result of gross
negligence.
4. THE TRANSFERENCE OF PAYMENTS AND RETIREMENT COMPENSATION.
In the event of you being dismissed, except for dismissal for one of
the causes as stated below, the Company will transfer to you the full
payments which have accumulated in your favor in the senior employees
insurance plan policy and/or the endowment and/or fund (Hereinafter:
"The Payments").
As follows is the list of causes which will cancel the transference of
the Payments into your name:
A. The Company has dismissed you for reasons which entitle it to
dismiss you in accordance with the law without severance pay.
B. The breach of your duty of trust and/or the duty of non
competitiveness and/or the breach of the duty of secrecy, in
accordance with this agreement, without derogating from the
generality of that stipulated - the breach of the agreement of
secrecy and non competitiveness attached as APPENDIX A to this
agreement and which constitutes an integral part thereof.
C. The perpetration of a criminal offence connected with the work
and/or an offence which bears an element of disgrace.
5
<PAGE>
D. You ended your work with the Company without providing
sufficient prior notice as detailed in section 3B above.
E. You have concluded your employment with the Company without
passing over your position as detailed in section 7 below.
It is hereby clarified that, your transference from the work set up of
the Company to that of new company which will be set up, if at all,
within the framework of the group and your employment in such a
company, will not be considered as the termination of your employment,
your dismissal and/or your resigning from the Company, for the
transference of the various Payments, including, but without derogating
from the above said, severance pay.
5. WORK HOURS.
A. The accepted working hours in the Company are 44 hours a week
and the accepted working days are Sundays through to Thursday.
B. As your position is regarded as one of those positions which
require a special amount of personal trust, as defined in the
Working Hours and Rest Law - 1951, the provisions of this law
will not apply to you. From time to time, you will be
required, in accordance with the needs of your position, to
work beyond the accepted working hours and on Fridays. In
these cases, you will not be paid extra for your overtime.
6. THE DUTY OF TRUST AND REFRAINING FROM A CONFLICT OF INTERESTS.
A. You are obligated to fulfil your position diligently and in a
trustworthy manner, to make use of all your talents, your
knowledge and experience for the benefit of the Company and
for the progress of the Company and this at the highest and
most efficient level as shall be determined by the Company.
Furthermore, you are obligated to act in accordance with the
Company's instructions with everything concerning the manner
of the performance of the work,
6
<PAGE>
work procedures, discipline and behavior as shall be valid from
time to time.
B. Commencing from the start of your employment on a full time
basis for the Company, as stipulated in section 3A above,
i.e., commencing from (Date):________________ you shall not be
employed in any other employment and/or any other job as a
salaried worker and/or as an adviser and/or as being directly
or indirectly self- employed, unless having received the prior
written consent of the Company.
C. For the full duration of the period of the agreement, you will
not receive any payment or other benefit from any third party,
directly or indirectly involved with your work. It is made
clear to you, that the breach of this provision is a
fundamental breach of this agreement, and that furthermore,
the amount or benefit which is received by you as stipulated,
shall belong to the Company, which shall be entitled to deduct
this amount, from any monies owing to you by the Company.
D. You shall not carry out any act which may harm the trust of
the Company and/or which is likely to place you in a situation
of a conflict of interests with the aims of the Company. You
are obliged to inform the Company immediately and without
delay of any issue or matter in which you have a personal
interest and/or any other action which is likely to place you
in a situation as detailed above.
E. The commencement of your employment in accordance with this
agreement is made conditional on your signing on the agreement
of secrecy and non competitiveness which is attached to this
agreement as Appendix A and which constitutes an integral part
thereof.
F. You are obliged to inform the managing director of the Company
of any business opportunity which has any connection to the
information as defined in Appendix A. You are obliged not to
make
7
<PAGE>
any such opportunity exclusive to yourself, whether directly
or indirectly, unless the prior written approval of the
managing director of the Company has been given to you.
7. THE PASSING OVER OF THE POSITION.
If your employment has terminated or been terminated and/or the
validity of this agreement has expired for any reason whatsoever, you
are obliged to pass over your position, and without derogating from the
generality of that stipulated - all the matters under your care and/or
any information whatsoever available to you and connected in any form
whatsoever to your work for the Company, in an orderly and full fashion
including the disclosure of any important detail with regard to the
business of the Company, as well as forwarding, in a full and orderly
fashion, all the documents, information, equipment, etc. to the
Company, which may have reached you and/or be prepared by you with
regard to your employment with the Company, up until the cessation of
your employment with the Company.
8. DECLARATION OF SECRECY AND NON COMPETITIVENESS.
You are obligated to the safeguarding of secrecy and non
competitiveness, both during the course of your employment with the
company and thereafter, as detailed in your undertaking to safeguard
secrecy and non competitiveness attached to this agreement as APPENDIX
A and which constitutes an integral part thereof.
9. PATENTS, INVENTIONS AND COMMERCIAL SECRETS.
A. Copyrights for any invention and/or patent and/or commercial
secret and/or professional secret and/or any innovation, which
you may intend and/or which any of the employees of the
Company who are sub-ordinate to you may invent during the
period of your employment with the Company are the exclusive
property of the Company.
8
<PAGE>
The Company shall be entitled to protect any invention and/or
patent and/or commercial secret as stipulated, by means of
registration, or by any other means, in Israel or anywhere
else. It is hereby clarified that you will not be entitled to
register any invention and/or patent or commercial secret or
to take any measures with respect thereof, excepting for the
actions which will be required for the above mentioned making
use thereof or registration in the name of the Company or by
the Company.
B. You are obligated to immediately inform the Company in writing
of any invention and/or patent and/or commercial secret which
you may invent and/or which is invented by the Company's
employees who are subject to you.
C. That stipulated in this section completes and compliments that
stipulated in Appendix A.
With your signing upon this personal agreement and your formal joining
of the work staff of the Company we wish you continued satisfaction and
enjoyment of your work.
Here's hoping for years of co-operation and personal benefit as well as
benefit for the Company, its employees and stockholders.
Yours Respectfully,
/s/ LEAH SADEH
Leah Sadeh
Corporate Vice President
Human Resources
DSP Group Ltd.
9
<PAGE>
I have carefully read this letter and I express my consent with the
contents thereof.
I am aware that the terms of wages which have been offered to me above
and those which shall be pertinent for long as I am employed by you are
personal and that this letter constitutes a special personal contract
of employment, which lays down the relations between me and the
Company, and that therefore I confirm that I am aware that no
provisions of any to the agreements will apply to me, and including
collective agreements, between the Company and its employees so long as
this agreement is valid and I undertake to safeguard the secrecy
thereof.
/s/ BOAZ EDAN 5/1/99
- ------------------------- ---------------------
SIGNATURE DATE
- -------------------------
I.D.
Boaz Edan
- -------------------------
NAME
10
<PAGE>
APPENDIX A TO THE AGREEMENT OF MY EMPLOYMENT WITH
DSP GROUP CO. LTD.
To:
DSP Group Co. Ltd.
5 Shenkar St.
HERZLIA -ON - SEA
Dear Sir/Madam,
Re: UNDERTAKING TO SAFEGUARD SECRECY AND NON-COMPETITIVENESS.
WHEREAS: I seek to be employed by DSP Group Co. Ltd. (a private
registered company No. 51-135472-2 (Hereinafter: "The
Company");
AND WHEREAS: The Company, in the matter of the duty of secrecy and
non-competitiveness in this appendix, also includes the
American holding company of DSP Group Co. Ltd. - DSP
Group, Inc. and also the subsidiary company of DSP Voice
Com. Group Ltd. and the subsidiary company of DSP Group
Inc. - RF Sub Inc.;
AND WHEREAS: During the course of my employment for the Company
information is likely to reach me, in accordance with the
following definition:
Any information which has and/or shall reach me and/or
come to my attention, whether directly and/or indirectly,
during the course of my work or as a result of my work
for the Company, including document (reports, notes and
papers, applications and cheques), drafts, processes,
commercial secrets - including information concerning the
Company's customers, suppliers and business partners
and/or the manufacture or marketing set-up of the Company
or connected to the ties of the Company and/or companies
connected to it, or which control or are controlled or
11
<PAGE>
affiliated with the Company by virtue of and acting with
any third party whatsoever, including customers,
suppliers, banking institutions, governmental bodies,
private entities, public and quasi public entities of any
kind and sort as well as any financial, business and
commercial information, financial reports and balance
sheets before the publication thereof and any internal
information whatsoever which may influence the value of
the Company's shares formulae, data, plans, patents,
inventions, discoveries, innovations, improvements,
research, and any methods whatsoever, developments and
scientific and technical, economic, commercial or other
developments, applications for patent, prototypes,
models, pictures, descriptions, sketches, drawings,
photostats or blueprints, notebooks, samples and
documents of schedule, lists, documentation, source and
destination codes, films, recordings and other means of
storage, letters, notes, booklets for note taking,
reports and flow charts, as well as information connected
with the business of the Company in the present and/or
business which the Company is about to engage in (as they
shall be developed by the Company and as described by the
Company in the development plan booklet and its business
plans and in the other explanatory material on behalf of
the Company), and any other thing, and all, whether in
writing or verbally, and provided that it is not in the
public domain or that it has not become in the public
domain as a result of the breach of my undertakings in
accordance with this letter or in accordance with law.
(Hereinafter: "The Information").
AND WHEREAS: The Information, as defined above, also includes
Information of commercial, technical and non-technical,
value, written and non-written, data, systems of note
taking, samples, documents of
12
<PAGE>
specifications, source and destination codes, processes,
algorithms, computer tapes, recordings and other means of
storage which are to be viewed as intellectual property or
secret material of the Company or of any one of its
predecessors or of the companies connected to it, whether
fully or partially, and including especially without
restriction, computer hardware, programs and computer
software and implementations, matters of prices and marketing
information as well as inventions which are not restricted in
accordance with the definition of invention as has been
determined in the patent laws which are implemented in Israel
or in the U.S.A., and any improvement or adjustment of that
information in question, which has been developed, sold, or
which in respect of which a license has been given to the
Company during the course of the conducting of the business
of the Company, from time to time, as well as any product in
question, whether planned, developed or attained by or for
the Company, directly or indirectly, and provided that it is
not information and/or a product which is available freely
and which constitutes public domain information or which can
be purchased freely by an independent third party.
AND WHEREAS: As a condition of my employment with the Company and the
receiving of information by me, inter alia, is my
undertaking to safeguard the secrecy and of
non-competitiveness;
THEREFORE, I DECLARE AND UNDERTAKE AS FOLLOWS:
CHAPTER A - SECRECY
1. To keep secret the Information which reaches me or which shall reach me,
or which shall come to my attention, directly or indirectly, during the
course of my employment for the Company and/or my involvement with the
Company,
13
<PAGE>
absolutely secret, and this without any limitation in time, even after
the conclusion of my employment with the Company.
2. Not to disclose and/or to transfer and/or to sell, whether for
remuneration or not and/or to cause the discovery of Information, whether
directly or indirectly, as well as to take all measures to safeguard the
secrecy of the information and the prevention of the delivery thereof or
of its reaching any third party, person, entity or corporation whatsoever,
excepting for my superiors in the Company or in accordance with their
instructions for the Purpose of the performance of my duties as an
employee of the Company.
3. Not to make any use of the Information, whether fully or partially, for my
needs or for the needs of to others, whether directly or indirectly, which
are not for the purpose of to performance of the jobs imposed upon me as
an employee of the Company in accordance with the instruction of my
superiors in the Company.
Not to make any copies of the information in any manner whatsoever
unless in accordance with the Company's instructions or someone
who is authorized to do so on behalf of the Company.
4. I hereby undertake not to accept any materials whatsoever relating to the
Information or the products, or any equipment from the Company without
receiving the express prior written consent of: (1) the president of the
Company or the managing director, or (2) a person authorized in writing to
do so by the president of the Company or the managing director.
5. Without prejudicing the above said, I am aware that I do not have any
intellectual property right and that I shall not have any intellectual
property right in the Information as defined by this agreement.
5A. I hereby declare to disclose to the Company and/or to those replacing
it and/or to the assignees of the Company, regarding the inventions
which shall be made by me during the period of my employment with the
14
<PAGE>
Company and/or as a result of my employment with the Company and
connected to my employment with the Company and/or the information,
and I hereby assign any interest that I have or which I may have in
those inventions in favor of the Company and/or those in place of the
Company and/or its assignees, and all this without further
remuneration and provided that I will not be required to bear any
costs whatsoever involved with such assignment as mentioned above.
In the event of my making an invention, which is registered as a
patent, during the course of my employment with the Company or as
result of my employment with the Company, the Company will register
my name in the patent documents as the inventor, provided that it is
convinced, beyond all doubt, that the invention was indeed made by me
and that such registration shall not prejudice its intellectual
property rights and/or other rights of the Company and/or those in
its stead and/or it assignees, for the invention and/or patent as
detailed above.
5B. I hereby undertake, that for so long as I am required to do so,
including after the termination of my employment for any reason
whatsoever, that I will sign on any document, which, in accordance
with the Company's discretion is required for the lodging of an
application or copyright in accordance with the laws of Israel, the
U.S.A. and/or any other foreign country in order to protect the
interests of the Company in the above mentioned invention.
5C. I hereby declare that apart from that as detailed in section 5C.1
below, I do not have any interest in any application or application
for a patent whatsoever and not even for material which is subject to
copyright, patents and applications for patents which presently
belong to me.
5C.1 Existing patent and/or applications for patents pending and/or
activities in research at the stage of lodging for registration of
patent are as follows:
15
<PAGE>
1.______________________________________________________________
2.______________________________________________________________
3.______________________________________________________________
4.______________________________________________________________
6. I am aware that the forwarding of Information and/or any part thereof
to any third person whatsoever is likely to cause serious damages to
the Company and I hereby undertake that I shall not undertake any
action of transference and/or sale of the Information and/or of the
products developed by the Company and/or existing products and/or
which have been developed whether by myself or in co-operation with
others, including customers of the Company or whether in co-operation
with any third party whatsoever, whether with customers of the
Company or with others.
7. I declare that I am aware, that due to the nature of the Company's
business, it takes upon itself and/or is likely to take upon itself
undertakings with third parties obliging the safeguarding of secrecy
which will also be applicable to its employees, and that the
non-fulfillment of the above undertakings shall, inter alia, be cause
for the breach of the contract between the Company and the third
party. I therefore undertake to fulfil all these undertakings as has
been determined between the Company and the aforesaid third party.
8. I hereby undertake not to harm, whether directly or indirectly, the
reputation of the Company and/or its status amongst its customers in
effect an its potential customers.
9. To keep secret any information relating to aspects of money, fiscal
aspects and economic aspects of the Company's activities, including
ties with banking institutions, customs and excise authorities,
undertakings of the Company and rights toward third parties.
Likewise, I will keep secret
16
<PAGE>
any information which may reach me and connected with entities such
as the center for investments, the Scientist-in-Chief, accountants
and legal advisors of the Company, etc.
10. In order to eliminate any doubt, it is hereby emphasized that my
undertakings in accordance with sections 1 - 9 above shall remain valid
both during the period of my employment with the Company and after the
termination thereof for whatever reason whatsoever, and shall also bind
my legal representatives, and this without any limitation in time.
11. I agree that any document which I have prepared and/or any Information
which I have attained for the purpose of my work with the Company
and/or my work during the period of my employment with the Company is
the property of the Company, which shall be forwarded to the Company
immediately upon the termination of my employment as detailed below.
Likewise, I hereby undertake to return to the Company any Information,
whether written or in any other form whatsoever, which is in my
possession or which shall be in my possession at any time, and this
immediately upon the termination of my employment for any reason
whatsoever or immediately upon the demand of the Company at any time.
CHAPTER B - NON COMPETITIVENESS
12. Furthermore, and without prejudicing my undertakings in this document
and/or my undertakings imposed upon me in accordance with the law or
according to custom, I hereby undertake not to compete with the Company
in any form or manner whatsoever, by any means of undertaking
whatsoever, whether directly or indirectly, by myself or together with
others, and/or to provide advise of any sort whatsoever to a competing
business and/or to be employed for pay or without pay by a competing
business and/or to be active, whether directly or indirectly in the
management and/or activating and/or planning of a competing business.
17
<PAGE>
13. I hereby undertake that upon the conclusion of my employment with the
Company for any reason whatsoever, I will not work, whether for wages
or not and/or for the purpose of advising and/or to be directly or
indirectly active in the execution of work and/or service for a
customer of the Company and/or someone who was a customer of the
Company at the time of my employment with the Company.
14. In order to eliminate any doubt I hereby clarify that my undertakings
in accordance with sections 12 - 13 above, shall remain valid during
the period of my employment with the Company and after the termination
thereof for whatever reason whatsoever for the periods as detailed
below:
14A. For a period of one year after the conclusion of my employment, in the
event of my having worked for the Company for a period of more than 6
months;
14B For a period of two years after the conclusion of my employment, in the
event of my having worked for the Company for a period exceeding two
years.
15. I undertake that upon the conclusion of my employment with the Company,
for whatever reason, I shall not lobby and/or attempt to lobby and/or
attain, whether directly and/or indirectly and/or for another and/or
for any undertaking whatsoever with any customer of the Company and/or
someone who was a customer of the Company at the time of my employment
with the Company.
CHAPTER C - MISCELLANEOUS BREACHES
16. In the event of my breaching my undertakings in accordance with this
writ of undertaking, I will be obliged to compensate the Company for
all the damages and expenses caused to the Company as a result of the
breach, and this without derogating from any of the remedies available
to the
18
<PAGE>
Company against me in accordance with any law as a result of the breach
of my above undertakings.
17. I am aware that the Company has various intellectual property rights,
and the above said shall not prejudice these rights in any manner
whatsoever.
18. The rights of the Company in accordance with this document are
personally negotiable.
19. My undertakings in accordance with this writ, constitute an integral
part of the terms of my employment between me and the Company. My above
undertakings shall not prejudice the undertakings applicable to me in
any way and as an employee of the Company in accordance with the
agreement of employment between me and the Company and/or in accordance
with any law, including collective agreements and/or any custom.
20. My undertakings in accordance with this document cannot be changed and
shall not be brought to an end, fully or partially, unless by virtue of
a document written and signed by an authorized representative on behalf
of the Company.
21. If, for any reason whatsoever, a term of this document is held to be
invalid or unenforceable, the validity and enforceability of the other
provisions of this document shall not be prejudiced.
5/1/99 /s/ BOAZ EDAN
- ------------------------- --------------------------------
DATE EMPLOYEE'S SIGNATURE
19
<PAGE>
OFFICER'S CERTIFICATE
MARCH 30, 2000
-------------------------
The undersigned, Moshe Zelnik, hereby certifies as follows:
(a) I am the duly elected, qualified, acting and incumbent Vice
President of Finance, Chief Financial Officer and Secretary of DSP Group,
Inc., (the "Company").
(b) Attached hereto is an English translation of an Appendix
Agreement to a Lease Contract, dated as of May 5, 1999, by and between
Bayside Land Corporation Ltd. and DSP Group, Ltd., a wholly owned subsidiary
of the Company.
(c) To my knowledge, such translation is a fair and accurate
translation as required under Rule 306 of Regulation S-T promulgated by the
Securities and Exchange Commission.
IN WITNESS WHEREOF, the undersigned has duly executed this
Certificate on behalf of the Company as of the date first written above.
DSP GROUP, INC.
/s/ MOSHE ZELNIK
-------------------------------------
Moshe Zelnik, Vice President of Finance,
Chief Financial Officer and Secretary
<PAGE>
APPENDIX AGREEMENT
DRAWN UP AND SIGNED IN HAIFA ON MAY 5TH 1999
BETWEEN
BAYSIDE LAND CORPORATION LTD.
of 24 Ha'prasim St. Haifa
(hereinafter: "The Lessor")
AND
DSP GROUP LTD.
Company No. 51-135472-2
of 5 Shenkar St. Herzelia Pituach
(hereinafter: "The Lessee")
WHEREAS A Lease Contract was drawn up and signed between the parties
on November 28th 1996, in accordance with which the Lessor
leased to the Lessee an area of 1,688 sq. meters on the 1st
floor of Building No. 1 at the Bayside (Gav - Yam) Center,
according to its definition in the Lease Contract
(hereinafter: "The First Contract");
AND WHEREAS A Lease Contract was drawn up and signed between the parties
on September 13th 1998, in accordance with which the Lessor
leased to the Lessee an additional area of 590 sq. meters on
the 1st floor of Building No. 2 at the Bayside Center
(hereinafter: "The Building"), according to its definition
in the Lease Contract (hereinafter: "The Second Contract");
AND WHEREAS The Lessee requested from the Lessor to lease an additional
part of the Building, in an inclusive area of 355 sq.
meters, in addition to the other leased, located in its
possession, as per the First Contract and the Second
Contract (hereinafter: "The Additional Area");
AND WHEREAS The Lessor declares that it agrees to lease to the Lessee a
part of the Building, in accordance with that stated in this
Contract;
THEREFORE, IT HAS BEEN AGREED AND STIPULATED BETWEEN THE PARTIES, AS FOLLOWS:
1. The preamble to this Agreement shall constitute an integral part
thereof.
<PAGE>
2. According to the agreements, reached by the parties, the Sections of
the Second Contract shall be amended and adjusted as follows:
3. In the fourth "Whereas" of the Agreement, the area of approx. 590 sq.
meters shall be changed to an area of 945 sq. meters.
4. Appendix B of the Second Contract (plans of the leased) shall be
replaced with the plan, attached to this Appendix Agreement, which also
include the Additional Area.
5. The definition of the "leased" in Section 3.1 of the Second Contract
shall be amended and its definition shall read as follows:
"The leased: a part of the Building in an area of approx. 945 sq.
meters, located on the 1st floor of the Building, including the
equipment and the attachments installed therein, all as marked in
yellow in Appendix B.
In order to remove any doubt, the area of the leased, as specified
above, also include a relative part of the entrance lobby, shared by all
the office floors in the Building and also floor's public areas."
6. a. Notwithstanding that stated in Section 4.2 of the Second
Contract, the leased period with respect to the Additional
Area shall commence on September 1st 1999 and it shall end
upon the date of completion of the lease period, as stated in
Section 4.1.1 of the Second Contract, i.e. on November 31st
2003.
b. All the other provisions in Section 4 of the Second Contract,
in reference to the delivery day and/or the delivery date
shall apply to the Additional Area, in a manner which is
adjusted to the date, stated in Section 6.a above, which would
also be viewed as the delivery date or the delivery day of the
Additional Area.
c. Notwithstanding that stated above, it is agreed between the
parties that the actual delivery of the Additional Area to the
Lessee shall be carried out in accordance with Section 5 of
the Second Contract, after the completion of four months from
the date of the filing by the Lessee of
<PAGE>
agreed upon architectural plans, with respect to the
Additional Area, to the Lessor.
d. In order to remove any doubt, it is hereby agreed that the
agreed upon architectural plans, stated in Section 6.c above,
must receive the approval of the safety consultant of the
project.
7. As from September 1st 1999, in Section 8 of the Second Contract, the
heading of which is "The Lease Moneys", the amounts in the following
Sections shall be amended as follows:
In Section 8.1.1, the lease moneys of the offices, in the amount of NIS
31,388 ($8,260), shall be replaced with the amount of NIS 50,274
($13,230).
8. The guarantee of DSP Group Inc., the parent company of the Lessee,
shall also apply to the charges emerging from the provisions of this
Appendix Agreement and the provisions of the Second Contract, which
would also apply to the Additional Area.
9. In order to remove any doubt, it is hereby agreed and declared that the
Lessee shall pay with respect to the Additional Area all the payments
and charges imposed on it in accordance with the Second Contract, as
from the delivery day and not later than September 1st 1999, even if
the leased is not actually delivered to the Lessee by that day.
10. Notwithstanding that stated in Sections 8 and 9 above, it is hereby
agreed that the Lessee shall pay to the Lessor the balance between the
lease moneys, according to Section 8 of the Second Contract, and the
lease moneys, according to Section 7 above, over a three month period,
i.e. an amount of NIS 56,658 ($14,910) upon the date of signature of
this Appendix Agreement.
It is hereby clarified and agreed that the aforementioned amount shall
be paid together with the addition of linkage differences in comparison
with the basic index, as stated in Section 8 of the Second Contract.
11. The amount of the bank guarantee, as stated in Section 17.1 of the
Second Contract shall be adjusted to the amount of the basic lease
moneys, as it was
<PAGE>
amended by means of Section 7 of this Appendix Agreement, that being
for the three months and together with the addition of VAT.
12. The technical specification of the Second Contract shall be amended
accordingly and as required by the Additional Area.
13. In Appendices G and H and in the second "Whereas", instead of "590 sq.
meters" it shall read "945 sq. meters".
IN WITNESS THEREOF, THE PARTIES HAVE SIGNED:
(signature) (signature)
[Stamp of DSP] [Stamp of Bayside Land Corporation Ltd.]
- ------------------------ ----------------------------------------
The Lessor The Lessee
<PAGE>
[DSP Group, Inc. letterhead]
NOVEMBER 17, 1999
Amendment to Employment Agreement
Between DSP Group, Inc., DSP Group, Ltd. and Eli Ayalon. Effective date November
11, 1999.
In the event Mr. Ayalon will desire to terminate the Employment Agreement
without Good Reason, he will have to notify the company one year in advance and
then all his rights under the Employment Agreement would continue for the notice
period plus two years. All options held by Mr. Ayalon will accelerate and
immediately vest after 6 months following the notice date and be exercisable in
whole or in part at any time from vesting of the options for a period of two
years.
/s/ IGAL KOHAVI /s/ ELI AYALON
- -------------------- --------------------
DSP Group, Inc. Eli Ayalon
/s/ ELI AYALON
- --------------------
DSP Group, Inc.
/s/ SHAUL SHANI
-------------------------
Shaul Shani - Chairman of
Compensation Committee
<PAGE>
[DSP Group, Inc. letterhead]
NOVEMBER 17, 1999
Amendment to Employment Agreement
Between DSP Group, Inc., DSP Group, Ltd. and Igal Kohavi. Effective date
November 11, 1999.
In the event Mr. Kohavi will desire to terminate the Employment Agreement
without Good Reason, he will have to notify the company one year in advance and
then all his rights under the Employment Agreement would continue for the notice
period plus two years. All options held by Mr. Kohavi will accelerate and
immediately vest after 6 months following the notice date and be exercisable in
whole or in part at any time from vesting of the options for a period of two
years.
/s/ IGAL KOHAVI /s/ IGAL KOHAVI
- -------------------- --------------------
DSP Group, Inc. Igal Kohavi
/s/ ELI AYALON
- --------------------
DSP Group, Inc.
/s/ SHAUL SHANI
-------------------------
Shaul Shani - Chairman of
Compensation Committee
<PAGE>
SEPARATION AGREEMENT
This Agreement, dated as of January 24, 2000, is between DSP Group, Ltd.
("Employer") and Igal Kohavi ("Employee").
RECITALS
Employee is currently employed as the Chairman of the Board of Employer and of
its parent corporation, DSP Group, Inc. (collectively, the "Company").
Employee desires to terminate his employment with the Company for "Good Reason"
within the meaning of his employment agreement, effective on January 24, 2000
("Effective Date").
This Agreement implements the terms of and supersedes the June 1, 1997
Employment Agreement, the November 3, 1997 Amendment to Employment Agreement,
and the November 17, 1999 Amendment to Employment Agreement.
ACCORDINGLY, the parties agree as follows:
1. Resignation of Duties. As of the Effective Date, Employee resigns as an
officer and director of Employer and from all other positions he holds
with Employer, its parent corporation, and its subsidiaries. As of the
Effective Date, Employee shall cease all work on behalf of the Company.
2. Consideration. Employer agrees to provide Employee with the following
benefits. Except as specifically provided herein, all compensation and
benefits will cease as of the Effective Date.
(a) Salary, Vacation Pay and Manager's Insurance. Employer shall pay
Employee the salary and accrued paid vacation up to the Effective
Date. The sums accumulated in the Manager's Insurance policy
(bituach menehalim) shall be transferred to the Employee on the
Effective Date.
(b) Bonus. Employer shall pay Employee a lump-sum bonus of $200,000,
payable on the Effective Date.
(c) Stock Options. As provided in the November 3, 1998 Amendment to the
Employment Agreement in the case of termination by Employee for Good
Reason, all stock options granted to Employee by DSP Group, Inc. as
of the Effective Date will vest in full on January 24, 2000 and may
be exercised in whole or in part until January 23, 2002.
(d) Indemnification Agreement. The Indemnification Agreement dated
September 21, 1995 between DSP Group, Inc. and Igal Kohavi shall
continue in full force and shall not be affected by this Agreement.
1
<PAGE>
3. Other Obligations of Employee.
(a) Waiver. Employee waives any right to two years of additional
compensation and any right to acquire shares in any subsidiary of
the Company.
(b) Interference with Business. For a period of one (1) year after the
Effective Date, Employee agrees not to engage in any business
activity that directly or indirectly interferes with the Company's
business activities. Such prohibited activities include, but are not
limited to, the following: making disparaging or defamatory
statements about the Company or the Company's officers or employees;
inducing or attempting to induce the Company's employees to resign
from the Company; and creating or assisting in any business that
will directly or indirectly compete with the Company.
(c) Return of Property. On the Effective Date, Employee shall return to
the Company all property of the Company, including, without
limitation, all equipment, tangible proprietary information,
documents, books, records, reports, contracts, lists, computer disks
(or other computer-generated files or data), or copies thereof,
created on any medium, prepared or obtained by Employee in the
course of or incident to his employment with the Company.
4. Potential Joint Venture Between Employee and the Company. A committee
("Committee") of three directors of the parent corporation of Employer,
Eliyahu Ayalon, Zvi Limon and Saul Shani (collectively the "Committee
Members"), will be formed to evaluate the proposal that the Company invest
$7.5 million as a limited partner in a venture capital fund to be formed
with Employee as a general partner. Employee and Employer acknowledge
that, while the Committee Members have indicated that they are favorably
disposed toward such an investment, the Company has no obligation to make
any such investment unless the Committee formally approves the proposal.
5. Mutual Release. Employee and Employer and their respective representatives
(collectively, the "Releasors") waive all claims of any kind, known and
unknown, which either party may now have or have ever had against the
other party, its affiliated, related, parent and subsidiary corporations,
and its and their present and former directors, officers, and employees
(collectively, the "Released Parties"). This release includes all claims
arising from Employee's employment with Employer and the termination of
this employment, including employment discrimination claims under the
California Fair Employment and Housing Act, Title VII, the Age
Discrimination in Employment Act and any other state or federal law.
Because this release specifically covers known and unknown claims, each
party waives its rights under section 1542 of the California Civil Code,
which states: "A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially affected
his settlement to the debtor."
Employer and Employee agree not to initiate or cause to be initiated any
lawsuit, administrative claim, investigation, or proceeding of any kind
concerning the claims released by this
2
<PAGE>
paragraph, or to voluntarily participate in one except as required by law.
Instead, the parties agree that any and all disputes arising out of the
terms of this agreement, their interpretation, and any of the matters
herein being released, shall be resolved by the binding arbitration to be
held in Santa Clara County, California, in accordance with the American
Arbitration Association's California Employment Dispute Resolution Rules.
6. Notices. Any notice or other communication under this Agreement must be in
writing and shall be effective upon delivery by hand or three (3) business
days after deposit in the mail, postage prepaid, certified or registered,
and addressed to Employer or to Employee at the corresponding address
below. Employee shall be obligated to notify Employer in writing of any
change in his address. Notice of change of address shall be effective only
when done in accordance with this Section.
Employer's Notice Address:
DSP Group Ltd.
5 Shenkar Street
46120 Herzelia
ISRAEL
ATTN: Eli Ayalon, President
Employee's Notice Address:
Igal Kohavi
--------------------------
--------------------------
--------------------------
7. Integration. The parties understand and agree that the preceding Sections
recite the sole consideration for this Agreement; that no representation
or promise has been made by Employee, Employer, or any other Released
Party on any subject whatsoever, except as expressly set forth in this
Agreement; and that all agreements and understandings between the parties
on any subject whatsoever are embodied and expressed in this Agreement.
This Agreement shall supersede all prior or contemporaneous agreements and
understandings among Employee, Employer, and any other Released Party,
whether written or oral, express or implied, with respect to any subject
whatsoever, including without limitation, any employment-related agreement
or benefit plan, except to the extent that the provisions of any such
agreement or plan have been expressly referred to in this Agreement as
having continued effect.
8. Amendments; Waivers. This Agreement may not be amended except by an
instrument in writing, signed by each of the parties. No failure to
exercise and no delay in exercising any right, remedy, or power under this
Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, or power under this Agreement
preclude any other or further exercise thereof, or the exercise of any
other right, remedy, or power provided herein or by law or in equity.
3
<PAGE>
9. Assignment; Successors and Assigns. Employee agrees that he will not
assign, sell, transfer, delegate, or otherwise dispose of, whether
voluntarily or involuntarily, or by operation of law, any rights or
obligations under this Agreement. Any such purported assignment, transfer,
or delegation shall be null and void. Employee represents that he has not
previously assigned or transferred any claims or rights released by him
pursuant to this Agreement. Subject to the foregoing, this Agreement shall
be binding upon and shall inure to the benefit of the parties and their
respective heirs, successors, attorneys, and permitted assigns. This
Agreement shall also inure to the benefit of any Released Party. This
Agreement shall not benefit any other person or entity except as
specifically enumerated in this Agreement.
10. Severability. If any provision of this Agreement, or its application to
any person, place, or circumstance, is held by an arbitrator or a court of
competent jurisdiction to be invalid, unenforceable, or void, such
provision shall be enforced to the greatest extent permitted by law, and
the remainder of this Agreement and such provision as applied to other
persons, places, and circumstances shall remain in full force and effect.
11. Attorneys' Fees. In any legal action, arbitration, or other proceeding
brought to enforce or interpret the terms of this Agreement, the
prevailing party shall be entitled to recover reasonable attorneys' fees
and costs.
12. Governing Law. Except as expressly stated otherwise, this Agreement shall
be governed by and construed in accordance with the law of the State of
California.
13. Interpretation. This Agreement shall be construed as a whole, according to
its fair meaning, and not in favor of or against any party. By way of
example and not in limitation, this Agreement shall not be construed in
favor of the party receiving a benefit nor against the party responsible
for any particular language in this Agreement. Captions are used for
reference purposes only and should be ignored in the interpretation of the
Agreement.
14. Representation by Counsel. The parties acknowledge that (i) they have had
the opportunity to consult counsel in regard to this Agreement; (ii) they
have read and understand the Agreement and they are fully aware of its
legal effect; and (iii) they are entering into this Agreement freely and
voluntarily, and based on each party's own judgment and not on any
representations or promises made by the other party, other than those
contained in this Agreement.
4
<PAGE>
The parties have duly executed this Agreement as of the date first written
above.
Igal Kohavi
/s/ IGAL KOHAVI
- --------------------------------
DSP Group, Ltd.
/s/ ELI AYALON /s/ MOSHE ZELNIK
- -------------------------------- ------------------------------------
By: Eli Ayalon By: Moshe Zelnik
---------------------------- --------------------------------
Its: President & CEO Its: VP Finance & CFO
--------------------------- -------------------------------
5
<PAGE>
<TABLE>
<CAPTION>
Selected Consolidated Financial Data
YEAR ENDED DECEMBER 31,
1999 1998 1997 1996 1995
--------------- -------------- --------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues $ 76,433 $ 63,850 $ 61,959 $ 52,910 $ 50,347
Income from continuing operations $ 54,579 $ 14,415 $ 11,034 $ 5,979 $ 7,211
Weighted average number of common shares
outstanding during the period used to
compute basic earnings per share 11,734 9,768 9,736 9,510 9,352
Weighted average number of common shares
outstanding during the period used to
compute diluted earnings per share 12,721 10,016 10,203 9,581 9,658
Net earnings per share - Basic $ 4.65 $ 1.48 $ 1.13 $ .63 $ .77
Net earnings per share - Diluted $ 4.29 $ 1.44 $ 1.08 $ .62 $ .75
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities $161,371 $ 66,989 $ 65,944 $ 42,934 $ 33,828
Working capital $163,747 $ 68,673 $ 66,947 $ 47,851 $ 39,304
Total assets $206,179 $ 85,791 $ 85,826 $ 51,778 $ 55,350
Total stockholders' equity $183,957 $ 75,695 $ 74,170 $ 54,449 $ 47,541
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS BY QUARTER
----------------------------------------------------------------------------------------
1999 1998
------------------------------------------------ ---------------------------------------
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
QUARTERLY DATA: 4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
Revenues $25,973 $23,296 $16,702 $10,462 $14,117 $17,308 $16,749 $15,676
Gross profit $14,418 $12,630 $ 9,543 $ 6,636 $ 8,742 $ 9,041 $ 8,756 $ 7,883
Net income $33,918 $ 5,770 $13,709 $ 1,182 $ 3,468 $ 3,475 $ 4,261 $ 3,211
Net earnings per share - Basic $ 2.70 $ .48 $ 1.19 $ .11 $ .37 $ .36 $ .43 $ .32
Net earnings per share - Diluted $ 2.46 $ .44 $ 1.13 $ .11 $ .36 $ .35 $ .42 $ .31
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
15
<PAGE>
Price Range of Common Stock
DSP Group's common stock trades on the Nasdaq National Market (Nasdaq
symbol "DSPG"). The following table presents for the periods indicated the
intraday high and low sale prices for DSP Group's common stock as reported by
the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
---------------------- --------------------
<S> <C> <C>
1999
First Quarter $22.63 $12.63
Second Quarter $36.00 $14.69
Third Quarter $42.25 $34.50
Fourth Quarter $96.25 $38.00
1998
First Quarter $26.88 $16.75
Second Quarter $25.00 $16.88
Third Quarter $24.75 $13.13
Fourth Quarter $20.88 $9.63
</TABLE>
As of December 31, 1999, there were approximately 61 holders of record
of DSP Group's Common Stock, which DSP Group believes represents approximately
5,578 beneficial holders. DSP Group has not paid cash dividends on its Common
Stock and presently intends to follow a policy of retaining any earnings for
reinvestment in its business.
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
1999 has been a challenging year for DSP Group in all aspects. Our
research and development team successfully completed an ambitious project of
renewing our entire line of products. Our marketing and sales teams introduced
the new products and achieved record high revenue for DSP Group in our product
and licensing markets. In the first quarter of 1999, we entered the wireless
communication product market, which we believe to be synergistic with our
existing markets. We acquired two integrated groups of engineers specializing in
the design of integrated circuits for wireless communication. In addition, we
acquired technology and products, including associated intellectual property,
related to base band and RF for 900 Megahertz digital spread spectrum. Moreover,
our results of operations for 1999 show improved total and product gross
margins. DSP Group's liquidity and working capital continued to improve
significantly throughout 1999 and by year end we achieved new record highs for
DSP Group in cash and marketable securities and working capital. These increases
were attained mainly due to the sale of a portion of our equity investment in
AudioCodes Ltd. as well as to cash provided from our operating activities and
cash received by the issuance and sale of DSP Group common stock to an investor.
Our future operating results will be dependent upon a variety of factors. See
"Factors Affecting Operating Results" in this report and in our Annual Report on
Form 10-K for the year ended December 31, 1999.
TOTAL REVENUES
Our total revenues were $76.4 million in 1999, $63.9 million in 1998 and $62.0
million in 1997. This represents an increase in total revenues of 20% in 1999 as
compared with total revenues in 1998, and a 3% increase in total revenues in
1998 as compared with those in 1997. The increase in revenues in 1999 compared
to 1998 was the result of the introduction of our new line of D16K series
products. Our licensing revenues in 1999 were $19.0 million compared to $14.6
million in 1998, and $10.7 million in 1997. This represents an increase in
licensing revenues of 30% in 1999 as compared with 1998, and an increase of 36%
in our licensing revenues in 1998 as compared with those in 1997.
Export sales, primarily consisting of Integrated Digital Telephony
(IDT) speech processors shipped to manufacturers in Europe and Asia, including
Japan, represented 97% of DSP Group's total revenues in 1999, 95% in 1998 and
92% in 1997. All export sales are denominated in U.S. dollars.
SIGNIFICANT CUSTOMERS
Revenues from one of our distributors, Tomen Electronics, accounted for 47% of
our total revenues in 1999 as compared to 45% in 1998, and 33% in 1997. The loss
of one or more of our major distributors or customers could harm our business,
financial condition and results of operations.
GROSS PROFIT
Gross profit as a percentage of total revenues increased to 57% in 1999, from
54% in 1998 and from 48% in 1997. The increase in gross profit in both 1999
and in 1998 compared to 1998 and 1997 was primarily due to the increase in
our licensing revenues, which have a higher gross profit than product sales.
Product gross profit as a percentage of product sales slightly
increased to 42% in 1999, from 41% in 1998 and from 39% in 1997. This ongoing
increase was primarily due to the decrease in our costs of manufacturing. Our
manufacturing costs have decreased due to improvements in manufacturing
technology and the decreased manufacturing prices obtained from the foundries.
Importantly, this increase in gross profit was achieved even though we continue
to experience competitive, downward pricing pressure for our IDT products.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased significantly to $15.4 million in
1999, from $10.2 million in 1998 and from $8.4 million in 1997. The significant
increase in research and development expenses in 1999 as compared to those in
1998 primarily resulted from the following actions related to our RF cordless
telephone applications: support for our new product line introduction of the
D16K series; the acquisition of products, technology and RF laboratory
equipment; and an increase in our engineering headcount by approximately 20%.
The increase in research and development expenses in 1998 as compared to those
in 1997 was attributable mainly to an increase in the external services provided
to our research and development team, additional mask tapeouts for our new
enhanced line of products, and an increase in our research and development
personnel.
Research and development expenses as a percentage of total revenues
increased to 20% in 1999 from 16% in 1998 and from 14% in 1997.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses increased to $9.3 million in 1999, from $5.2
million in 1998 and from $4.9 million in 1997. The significant increase in 1999
compared to 1998 was due to
17
<PAGE>
our marketing and sales efforts of introducing our new line of IDT products,
the D16K series, and our new RF wireless products, as well as an increase in
our sales commissions, due to the increase in our revenues. The increase in
expenses in 1998 as compared to those in 1997 was due to an increase in our
sales and marketing personnel, which was partially offset by lower sales
commissions and lower consulting costs.
Sales and marketing expenses as a percentage of total revenues
increased in 1999 to 12% from 8% in both 1998 and 1997.
GENERAL AND ADMINISTRATIVE EXPENSES
Our general and administrative expenses increased to $5.5 million in 1999
from $4.6 million in 1998 and from $4.5 million in 1997. General and
administrative expenses increased in 1999 from 1998, mainly due to an
increase in our rented property and associated facility expenses as a result
of the increase in our total headcount. Additionally, we experienced an
increase in costs in connection with an increase in our general legal and
accounting services. However, we are closely monitoring all expenses and
believe that this contributed to our general and administrative expenses as a
percentage of total revenues remaining at 7% in the years 1999, 1998 and 1997.
INTEREST AND OTHER INCOME
Interest and other income increased significantly to $6.0 million in 1999 from
$3.8 million in 1998 and from $2.9 million in 1997. The increase in interest
income in 1999 as compared with 1998 and 1997, is a result of higher levels of
cash equivalents and marketable securities in 1999, mainly due to the issuance
and sale of shares of our common stock to an investor in February 1999, the sale
of a portion of our equity investment in AudioCodes Ltd., as well as higher
yields of financial investments.
Equity in income (loss) of equity method investees was $2,475,000 in
1999, $125,000 in 1998 and ($706,000) in 1997. In 1997 equity in losses of Aptel
Ltd. were included in our results of operations. In December 1997, Aptel's
shareholders, including DSP Group, exchanged their shares in Aptel for shares of
common stock of Nexus Telecommunications Systems Ltd., an Israeli company whose
shares are registered and traded on the Nasdaq SmallCap Market. DSP Group's
results of operations in 1998 do not include any equity gains (losses)
pertaining to Aptel or Nexus.
The equity loss in 1997 was due to our higher equity share in both
Aptel and AudioCodes Ltd., an Israeli corporation. See Note 1 of the Notes to
Consolidated Financial Statements for more information. Equity in income (loss)
of equity method investees also included amortization of the excess of the
purchase price over the net assets acquired for an equity investment in
AudioCodes, Ltd. made in the second quarter of 1994. As of May 1999, we
amortized all of the remaining excess over purchase price over the net assets
acquired.
GAIN ON SALE OF MARKETABLE EQUITY SECURITY
In April 1998, DSP Group sold all of its Nexus shares in a private transaction
and realized a pre-tax one time gain on marketable equity securities of
approximately $1.1 million, which is included under "Other income (expense)" in
our consolidated statements of income for 1998.
CAPITAL GAIN
In May 1999, we exercised our option to purchase approximately 3.5% of the
outstanding stock of AudioCodes for approximately $1.1 million. In the same
month, AudioCodes Ltd. completed 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. As a
result we recorded in "Other income (expense)" in our consolidated statements
of income for 1999 a one-time capital gain in the amount of $11.8 million.
This amount was comprised of $9.4 million, from the sale of our shares sold
in the IPO and $2.5 million from the sale of approximately 247,000 of our
AudioCodes shares to the underwriters to cover their over-allotment option.
The gross proceeds from our sale were approximately $3.2 million. In October
1999, AudioCodes successfully concluded a follow-on public offering of 3.0
million shares at a price of $41.00 per share. In the follow-on, AudioCodes
issued and sold 1.5 million shares and an additional 1.95 million shares were
sold by shareholders, of which approximately 1,069,000 shares were sold by us
in two separate transactions. Our proceeds from these transactions were
approximately $42.8 million, and we recorded an additional capital gain in
the amount of $47.1 million. This amount was comprised of $10.8 million,
which resulted from the public offering and $36.3 million from the sale of
approximately 1,069,000 AudioCodes shares. As of December 31, 1999, we held
approximately 2.9 million AudioCodes shares, which represented about 15% of
its outstanding shares. In January 2000, we sold an additional 600,000 shares
of AudioCodes for approximately $43.8 million, recording in the first quarter
of 2000, an additional capital gain in the amount of $40.0 million. After
this sale, we hold approximately 2.3 million AudioCodes shares, which
represent approximately 12% of its outstanding shares.
PROVISION FOR INCOME TAXES
The effective tax rate was 22% (excluding tax on capital gain) for the year
ended December 31, 1999, 25% for the year ended December 31, 1998 and 20% for
the year ended December 31, 1997. The tax rate for 1999 is lower compared to
1998 due mainly to our utilization of foreign tax holiday benefits. The tax rate
18
<PAGE>
for 1998 is higher than 1997 due to previously unbenefited operating losses
and tax credit carry-forwards utilized in 1997, which were no longer
available in 1998, offset by increased foreign tax holiday benefits in 1998.
DSP Group Ltd., DSP Group's subsidiary in Israel, has been granted
"Approved Enterprise" status by the Israeli government according to four
investment plans. The Approved Enterprise status allows for a tax holiday for a
period of two to four years and a reduced corporate tax rate of 10% for an
additional eight or six years, on the respective investment plans' proportionate
share of taxable income. The tax benefits under these investment plans are
scheduled to gradually expire starting from 2002 through 2009.
Management has assessed the need for a valuation allowance against
deferred tax assets and has concluded that it is more likely than not that $2.2
million deferred tax assets will be realized based on current levels of future
taxable income and potentially refundable taxes.
LIQUIDITY AND CAPITAL RESOURCES
During 1999, DSP Group generated $18.3 million of cash and cash
equivalents from its operating activities as compared to $15.1 million during
1998 and $18.6 million in 1997. The increase in 1999 of cash and cash
equivalents as compared with that in 1998 occurred primarily because of our
significant increase in net income. The increase in cash and cash equivalents
was attributable primarily to the non-cash effects of the increase in
deferred income tax and the cash used by the increase in accounts payable.
However, the increase was mainly offset by the increase in capital gain and
partially offset by the increase in our inventories and an increase in
accounts receivable. The decrease in cash and cash equivalents in 1998
compared to 1997 was attributable primarily to the non-cash effects of
recognizing deferred revenue and the cash used by the increase in accounts
receivables and decrease in accounts payables, which in turn was partially
offset by the decrease in our inventories and in our deferred income tax.
We invest excess cash in short-term cash deposits and marketable
securities of varying maturity, depending on our projected cash needs for
operations, capital expenditures and other business purposes. In 1999, DSP Group
purchased $131.4 million of investments classified as short-term cash deposits
and marketable securities, $60.0 million in 1998 and $77.1 million in 1997. In
addition, DSP Group sold $48.7 million of investments classified as marketable
securities in 1999, $60.6 million in 1998 and $49.3 million in 1997. During
1999, the average maturity for our investments was less than 12 months from the
previous average of approximately 18 months in 1998.
Our capital equipment purchases amounted to $5.2 million in 1999,
$2.3 million in 1998 and $2.2 million in 1997 for computer hardware and
software used in engineering development, engineering test and lab equipment,
leasehold improvements, vehicles, and furniture and fixtures. The
acquisitions of capital equipment during 1999 were primarily for new lab
equipment associated with the RF technology, and other computer equipment,
testing equipment and software for our research and development efforts
during the year.
On February 2, 1999, DSP Group announced that it had entered into a
stock purchase agreement with Magnum Technologies, Ltd., an international
investment fund, in which DSP Group issued and sold 2,300,000 new shares of
DSP Group common stock to Magnum. Based in part on Magnum's representations,
the transaction was exempt from the registration requirements of the
Securities Act of 1933 according to Section 4(2) of the Securities Act. These
shares, representing 19.6% of DSP Group's outstanding common stock at the
time of the transaction, were issued for a price of $15 per share, or an
aggregate of $34.5 million in total net proceeds to DSP Group. As part of the
agreement, Magnum may acquire additional shares of DSP Group in the open
market, but may not bring its total holdings to more than 35% of DSP Group's
outstanding shares of common stock. Furthermore, Magnum agreed to restrict
its sales of the DSP Group shares it purchased for an eighteen-month period
from the date of the transaction under Rule 144(e)(i) of the Securities Act
of 1933, unless it received the prior written approval of DSP Group.
Additionally, DSP Group invited Magnum to appoint two new directors to the
Board of Directors, which currently brings the total number of members of the
Board of Directors to six. In February 2000, Magnum exercised their option to
sell our common stock, and sold 929,000 shares of its holdings. After the
sale, Magnum holds approximately 2.0 million DSP Group shares representing
approximately 15.5% of our outstanding shares of 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. Accordingly, in
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. In 1998, we repurchased 814,000 shares of our common stock at an
average purchase price of $17.53 per share for an aggregate purchase price of
approximately $14.3 million. In 1999, we issued 908,000 shares of our common
stock to employees who have exercised their stock options and in 1998 we issued
106,000 shares.
In 1997, DSP Group invested $176,000 in convertible debentures of
Aptel. Subsequently, in December 1997, Aptel's shareholders, including DSP
Group, exchanged their shares in Aptel for shares in Nexus. In April 1998, DSP
Group sold all of its
19
<PAGE>
Nexus shares in a private transaction for approximately $1.3 million and
realized a pre-tax one time gain on marketable equity securities of
approximately $1.1 million, which is included under "Other income (expense)"
in our consolidated statements of income for the 1998.
Cash received upon the exercise of employee stock options and through
purchases pursuant to DSP Group's employee stock purchase plan in 1999 totaled
$20.4 million as compared with $1.2 million in 1998 and $6.6 million in 1997. In
addition, repayment of stockholders' notes receivable provided cash of $434,000
in 1996.
At December 31, 1999, DSP Group's principal source of liquidity
consisted of cash and cash equivalent deposits totaling $20.8 million and
marketable securities and short-term cash deposits of $140.6 million. DSP
Group's working capital at December 31, 1998 was $163.7 million, an increase
from the working capital of $68.7 million at December 31, 1998.
We believe that our current cash, cash equivalent, cash deposits and
marketable securities will be sufficient to meet our cash requirements
through at least the next 12 months. As part of DSP Group's 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. However, we cannot
provide assurance that we will consummate any of these transactions.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. It is DSP Group's policy not to enter into derivative
financial instruments. DSP Group does not currently have any significant foreign
currency exposure since it does not transact business in foreign currencies. Due
to this, DSP Group did not have significant overall currency exposure at
December 31, 1999.
FOREIGN CURRENCY RATE RISK
As nearly all of DSP Group's sales and expenses are denominated in U.S. Dollars,
DSP Group has experienced only insignificant foreign exchange gains and losses
to date, and does not expect to incur significant gains and losses in the next
12 months. DSP Group did not engage in foreign currency hedging activities
during 1999 and 1998.
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.
YEAR 2000 COMPLIANCE
DSP Group was aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approached. The "Year 2000" problem
is concerned with whether computer systems will properly recognize date
sensitive information when the year changed 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 could have been affected in some way.
Beginning in 1997, and continuing in 1998 and 1999, DSP Group utilized
both internal and external resources to identify, correct or reprogram and test
DSP Group's systems for Year 2000 readiness. All reprogramming efforts,
including testing, was completed by December 31, 1999. Our efforts included the
evaluation of both information technology ("IT") and non-IT systems. Non-IT
systems include systems or hardware containing embedded technology such as
microcontrollers. The costs incurred by DSP Group with respect to this project
were not material.
Throughout 1998 and 1999, we took steps to ensure that our products and
services would continue to operate on and after January 1, 2000. We believe that
DSP Group's products being shipped today were Year 2000 ready and we have not
received any notification to the contrary from customers. In addition, we
received confirmations from DSP Group's primary processing vendors that plans
had been developed to address the processing of transactions in the Year 2000.
We also communicated with suppliers and other third parties that DSP Group does
business with to coordinate Year 2000 readiness. We have not experienced any
supply problems because of the year 2000 noncompliance problems with any of our
vendors or suppliers.
Based upon the steps we have taken to address this issue and the
progress to date, we believe that Year 2000 readiness expenses will not have a
material adverse effect on DSP Group's earnings. As a result of the year 2000
changeover, we know of no trend or event that could harm our business, financial
condition and results of operations. However, we will continue to monitor our
vendors manufacturing processors and the transactional based software for
potential embedded year 2000 problems.
20
<PAGE>
SUBSEQUENT EVENTS
SALE OF COMMON STOCK
In February 2000, Magnum exercised its option to sell our common stock and sold
929,000 shares of its holdings. After the sale, Magnum holds approximately 2.0
million DSP Group shares representing approximately 15.5% of our outstanding
shares of common stock.
In January 2000, we sold an additional 600,000 shares of AudioCodes for
approximately $43.8 million, recorded in the first quarter of 2000, for an
additional capital gain in the amount of $40.0 million. After this sale we hold
approximately 2.3 million AudioCodes shares, which represent approximately 12%
of its outstanding shares.
STOCK SPLIT
On January 24, 2000, our Board of Directors declared a two-for-one stock
split of our common stock that was effected in the form of a 100% stock
dividend. The dividend was paid on March 1, 2000 to stockholders of record on
February 16, 2000.
RISK FACTORS AFFECTING OPERATING RESULTS
The stockholders' letter and the discussion in this annual report that concerns
DSP Group's future products, expenses, revenue, liquidity and cash needs as well
as DSP Group's plans and strategies contain forward-looking statements
concerning our future operations and financial results. These forward-looking
statements are based on current expectations and we assume no obligation to
update this information. Numerous factors could cause results to differ from
those described in these statements, and prospective investors and stockholders
should carefully consider the factors set forth below in evaluating these
forward-looking statements.
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 2000, 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 IDT
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 IDT MARKET WHICH IS HIGHLY COMPETITIVE
Sales of IDT products comprise a substantial portion of our product sales. Any
adverse change in the digital IDT 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 IDT 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 expertise than we do. It is possible
that we may one day be unable to respond to increased price competition for IDT
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 also would have a material adverse effect on our business,
financial condition and results of operations.
The 900 Mhz Digital Spread Spectrum RF and Base Band technology
acquired in 1999 from AMD gave us a "cheap entry ticket" to this market. This
technology is not state of the art and the company has noticed a trend of
decreasing sales for the product models which are based on this technology. The
company may not succeed in its development of new RF and Base Band models and
those which are going to be developed
21
<PAGE>
may not be accepted by the market.
Despite the recent success of development and sales of our DSP Cores,
the market needs extensive R&D efforts in new technologies not currently owned
by the company, and we may not succeed in developing such technologies in due
time, which could effect our competitive position.
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 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. For
example, foundries in Taiwan produce a significant portion of our wafer
supply. As a result, earthquakes, aftershocks or other natural disasters in
Asia, could preclude us from obtaining an adequate supply of wafers to fill
customer orders and could harm our business, financial condition, and results
of operations.
WE DEPEND ON INTERNATIONAL OPERATIONS, PARTICULARLY IN ISRAEL
We are dependent on sales to customers outside the United States. We expect that
international sales will continue to account for a significant portion of our
net product and license sales for the foreseeable future. As a result, the
occurrence of any negative international political, economic or geographic
events could result in significant revenue shortfalls. These shortfalls could
cause our business, financial condition and results of operations to be harmed.
Some of the risks of doing business internationally include:
- - 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 December 31, 1999, 121 of our 161
employees were located in Israel, including 81 out of 93 of our 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 generally rate of inflation. The rate of inflation in Israel
was 1.3% in 1999 and 8.6% in 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
22
<PAGE>
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 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 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 types of intellectual property rights commonly
offer these licenses, we cannot assure you 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 harm our financial
position, results of operations, or cash flows.
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.
23
<PAGE>
Report of Independent Auditors
To The Stockholders of
DSP Group, Inc.
We have audited the accompanying consolidated balance sheets of DSP Group, Inc.
and its subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of DSP Group, Inc.
and its subsidiaries as of December 31, 1999 and 1998, and the consolidated
results of their operations and cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles in the United States.
/s/ KOST FORER & GABBY
KOST FORER & GABBAY
A member of Ernst & Young International
Tel Aviv, Israel
January 23, 2000,
Except for Note 9, as to which the date is March 1, 2000
24
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
YEARS ENDED DECEMBER 31,
1999 1998 1997
------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES:
Product sales $57,397 $49,252 $51,238
Licensing, royalties and other 19,036 14,598 10,721
------------------------------------------------------
TOTAL REVENUES 76,433 63,850 61,959
COSTS OF REVENUES:
Product sales 33,051 29,002 31,143
Licensing, royalties and other 155 426 1,169
------------------------------------------------------
TOTAL COST OF REVENUES 33,206 29,428 32,312
------------------------------------------------------
GROSS PROFIT 43,227 34,422 29,647
OPERATING EXPENSES:
Research and development 15,404 10,181 8,420
Sales and marketing 9,309 5,222 4,934
General and administrative 5,511 4,632 4,505
------------------------------------------------------
TOTAL OPERATING EXPENSES 30,224 20,035 17,859
------------------------------------------------------
OPERATING INCOME 13,003 14,387 11,788
Other income (expense):
Interest and other income 6,048 3,810 2,936
Interest expense and other (232) (189) (226)
Gain on sale of available-for-sale marketable securities - 1,086 -
Equity in income (loss) of affiliates 2,475 125 (706)
Capital gains from realization of investments 58,931 - -
------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 80,225 19,219 13,792
Provision for income taxes (25,646) (4,804) (2,758)
------------------------------------------------------
NET INCOME 54,579 $14,415 $11,034
======================================================
NET EARNINGS PER SHARE:
Basic $ 4.65 $ 1.48 $ 1.13
Diluted $ 4.29 $ 1.44 $ 1.08
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
25
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
DECEMBER 31,
1999 1998
-------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $20,778 $9,038
Marketable securities and cash deposits 140,593 57,951
Trade receivable, less allowance for returns and doubtful accounts
of $663 in 1999 and $304 in 1998 10,435 5,721
Deferred income taxes 1,707 1,374
Other accounts receivable and prepaid expenses 1,362 1,608
Inventories 3,283 2,182
-------------------------------------
TOTAL CURRENT ASSETS 178,158 77,874
Property and equipment, net 6,948 4,236
-------------------------------------
Other investments, net of accumulated amortization 18,433 1,834
Other assets, net of accumulated amortization 1,250 135
Severance pay fund 1,390 864
Deferred income taxes -- 848
-------------------------------------
TOTAL ASSETS $206,179 $85,791
=====================================
</TABLE>
THE ACCOMPANYING NOTES ARE INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
26
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
----------------------------------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payable $6,079 $2,360
Accrued compensation and benefits 4,207 2,555
Income taxes payable 1,054 1,909
Accrued royalties 803 647
Deferred revenue 90 36
Accrued expenses and other accounts payable 2,178 1,694
----------------------------------
TOTAL CURRENT LIABILITIES 14,411 9,201
LONG TERM LIABILITIES:
Accrued severance pay 1,431 895
Deferred income taxes 6,380 -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value:
Authorized shares -- 5,000
Issued and outstanding shares -- none - -
Common stock, $0.001 par value:
Authorized shares -- 50,000
Issued and outstanding shares -- 12,671 in 1999
and 9,406 in 1998 12 9
Additional paid-in capital 119,163 75,610
Retained earnings 64,782 12,129
Less cost of treasury stock -- (12,053)
-------------------------------------
TOTAL STOCKHOLDERS' EQUITY 183,957 75,695
-------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 206,179 $ 85,791
=====================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
27
<PAGE>
<TABLE>
<CAPTION>
Statements of Stockholders' Equity
THREE YEARS ENDED COMMON STOCK ADDITIONAL TREASURY STOCK RETAINED ACCUMULATED TOTAL
DECEMBER 31, 1999 SHARES AMOUNT PAID-IN AT COST EARNINGS OTHER STOCKHOLDERS'
CAPITAL (ACCUMULATED COMPREHENSIVE EQUITY
DEFICIT) INCOME
( IN
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 9,540 10 66,781 -- (12,342) -- 54,449
Net income -- -- -- -- 11,034 -- 11,034
Other comprehensive income
unrealized gain on
marketable security -- -- -- -- -- 1,050 1,050
-----------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- -- -- -- 12,084
Exercise of Common Stock
options by employees 526 -- 6,382 -- -- -- 6,382
Sale of Common Stock under
employee stock purchase plan 28 -- 218 -- -- -- 218
Income tax benefit from
stock options exercised -- -- 1,037 -- -- -- 1,037
--------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 10,094 10 74,418 -- (1,308) -- 74,170
Net income -- -- -- -- 14,415 -- 14,415
Other comprehensive income
unrealized gain on
marketable security -- -- -- -- -- (1,050) (1,050)
Total comprehensive income -- -- -- -- -- -- 13,365
Purchase of Treasury Stock (814) (1) -- (14,273) -- -- (14,274)
Exercise of Common Stock
options by employees 94 -- -- 1,821 (908) -- 913
Sale of Common Stock under
employee stock purchase plan 32 -- -- 399 (70) -- 329
Income tax benefit from
stock options exercised -- -- 1,192 -- -- -- 1,192
--------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 9,406 $ 9 $ 75,610 $ (12,053) $ 12,129 $-- $ 75,695
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income -- -- -- -- 54,579 54,579
Total comprehensive income -- -- -- -- 54,579
Purchase of Treasury Stock (200) -- -- (2,710) -- -- (2,710)
Issue of Common Stock to -- -- 34,369
investor 2,300 2 34,367 --
Exercise of Common Stock -- 5,640
options by employees 256 -- 5,640 -- --
Issue of Treasury Stock upon (1,813) 14,408
exercise of stock options 879 1 1,948 14,272
Issue of Treasury Stock upon (113) 385
purchase of ESPP shares 30 -- 7 491 --
Income tax benefit from
stock options exercised -- -- 1,591 -- -- -- 1,591
-----------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 12,671 $ 12 $ 119,163 $-- $ 64,782 $-- $ 183,957
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
29
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31,
1999 1998 1997
--------------------------------------------------
OPERATING ACTIVITIES (IN THOUSANDS)
<S> <C> <C> <C>
Net income $54,579 $14,415 $11,034
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,455 1,572 1,797
Amortization of software development costs - - 322
Increase (decrease) in deferred revenue 54 (2,324) 2,360
Increase (decrease) in deferred income tax, net 8487 2,470 (1,459)
Gain on sale of marketable equity security - (1,086) -
Capital gain from realization of investments (43,328) - -
Acquired assets and workforce (2,000) - -
Amortization of acquired assets 885 - -
Equity in (income) loss of affiliates (2,475) (125) 706
Changes in operating assets and liabilities:
Decrease (increase) in trade receivable (4,714) (2,127) 1,267
Decrease (increase) in inventories (1,101) 1,934 (1,159)
Decrease (increase) in other current assets 246 (167) (84)
Decrease (increase) in other assets - 15 (84)
Increase (decrease) in accounts payable 3,719 (959) 1,891
Increase in accrued compensation and benefits 1,652 384 432
Increase in severance pay - net 10 31 -
Increase (decrease) in income taxes payable (855) 218 783
Increase (decrease) in accrued royalties 156 476 (5)
Increase (decrease) in accrued expenses and other 484 408 779
accounts payable
--------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $18,254 $15,135 $18,580
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
30
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31,
1999 1998 1997
--------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
INVESTING ACTIVITIES
Purchase of marketable securities and cash deposits $(131,357) $(59,980) $(77,135)
Sale and maturity of marketable securities and cash deposits 48,715 60,648 49,278
Purchases of property and equipment (5,167) (2,320) (2,160)
Proceeds from sale of equipment - - 166
Realization of investment in an investee 30,445 1,262 -
Investment in an investee (1,241) - (176)
--------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (58,605) (390) (30,027)
--------------------------------------------------
FINANCING ACTIVITIES
Issuance of Common Stock for cash upon exercise
of options, warrants, and employee stock
purchase plan 20,432 1,240 6,600
Issuance of Common Stock to investor 34,369 - -
Purchase of treasury stock (2,710) (14,273) -
--------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 52,091 (13,033) 6,600
--------------------------------------------------
Increase (decrease) in cash and cash equivalents 11,740 1,713 (4,847)
Cash and cash equivalents at beginning of year 9,038 7,325 12,172
--------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $20,778 $9,038 $7,325
==================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes $17,300 $1,530 $3,148
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1: GENERAL
DSP Group, Inc. (the "Company") is involved in the development and marketing of
digital signal processing cores used in a wide range of applications for
industries such as wireless communications, telephony and personal computing. By
combining its DSP core technology with its advanced speech processing
algorithms, DSP Group also delivers a wide range of enabling
application-specific Integrated Circuits (ICs), such as ICs for fully featured
Integrated Digital Telephony (IDT), for 900 MHz Spread Spectrum wireless
telephony products and for IP telephony applications. The Company has five
wholly owned subsidiaries: DSP Group Ltd. ("DSP Group Israel"), an Israeli
corporation primarily engaged in research, development, marketing, sales,
technical support and certain general and administrative functions; RF
Integrated Systems Inc. ("RF US"), a USA corporation primarily engaged in
research and development of RF technology for wireless products; Nihon DSP K.K.
("DSP Japan"), a Japanese corporation primarily engaged in marketing and
technical support activities; DSP Group Europe SARL, a French corporation
primarily engaged in marketing and technical support activities; and Voicecom
Ltd. ("Voicecom"), an Israeli corporation primarily engaged in research and
development for 900 MHz Spread Spectrum wireless telephony products.
Revenues derived from the Company's largest reseller Tomen Electronics
represented 47%, 45% and 33% of the Company's revenues for 1999, 1998 and 1997,
respectively.
2: SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
REVENUE RECOGNITION
PRODUCT SALES
Product sales of integrated digital telephony ("IDT") processors for
communications applications, telephony and other products are recognized upon
shipment. The Company has no ongoing commitments after shipment other than for
warranty and sales returns/exchanges by distributors. The Company accrues
estimated sales returns/exchanges upon recognition of sales. The Company has not
experienced significant warranty claims to date, and accordingly, the Company
provides for the costs of warranty when specific problems are identified.
LICENSING AND ROYALTY REVENUES
Revenues from software license agreements are recognized upon delivery of the
software in accordance with Statement of Position 97-2 (SOP 97-2) "Software
Revenue Recognition", (as amended by SOP 98-4), when: (1) collection is
probable; (2) all license payments are due within one year; (3) the license
fee is otherwise fixed and determinable; (4) vendor specific evidence exists
to allocate the total fee to the undelivered elements of the arrangements;
and (5) persuasive evidence of an arrangement exists. Revenues from
maintenance contracts are recognized ratably over the term of the agreement.
Costs related to insignificant obligations, primarily telephone support, are
accrued upon shipment and are included in cost of revenues. Certain royalty
agreements provide for per unit royalties to be paid to the Company based on
shipments by customers of units containing the Company's products. Revenue
under such agreements is recognized at the time of shipment by the customer
as they report to the Company.
In December 1998, the AICPA issued Statement of Position 98-9 ("SOP 98-9"),
"Modification of SOP 97-2, Software Revenue Recognition, With respect to Certain
Transactions". SOP 98-9 amends SOP 98-4 to extend the deferral to the
application of certain passages of SOP 97-2 provided by SOP 98-4 through fiscal
years beginning on or before March 15, 1999. All other provisions of SOP 98-9
are effective for transactions entered into in fiscal years beginning after
March 15, 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments", requires
disclosures about the fair value of financial instruments. The carrying values
of cash and cash equivalents, marketable securities, trade receivables and trade
payables approximate fair values due to the short-term maturities of these
instruments.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Intercompany transactions and balances, including profits from
intercompany sales not yet realized outside the group, have been eliminated in
consolidation.
32
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives, at the following annual
rates:
<TABLE>
<CAPTION>
<S> <C>
%
- -------------------------------------------------------------------------------
Computers and peripheral equipment 33
- -------------------------------------------------------------------------------
Office furniture and equipment 7-10
- -------------------------------------------------------------------------------
Motor vehicles 15
- -------------------------------------------------------------------------------
Leasehold improvements (over the terms of the lease)
- -------------------------------------------------------------------------------
</TABLE>
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the average cost method. The Company periodically evaluates
the quantities on hand relative to current and historical selling prices and
historical and projected sales volume. Based on these evaluations, provisions
are made in each period to write inventory down to its net realizable value.
Inventories are composed of the following
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31,
1999 1998
---------------------
<S> <C> <C>
Work-in-process $ 169 $ --
Finished goods 3,114 2,182
---------------------
$3,283 $2,182
=====================
</TABLE>
OTHER INVESTMENTS
Other investments are comprised of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
---------------------
<S> <C> <C>
Equity method investments:
Investment in AudioCodes Ltd., net of accumulated
amortization of $1,142 in 1999 and $891 in 1998 $ 18,335 $ 1,834
Cost method investments:
Other investments 98 --
---------------------
$ 18,433 $ 1,834
=====================
</TABLE>
AUDIOCODES, LTD.
AudioCodes, Ltd. ("AudioCodes") is an Israeli corporation primarily engaged in
design, research, development, manufacturing and marketing hardware and software
products that enable simultaneous transmission of voice and data over networks
including Internet, ATM and Frame Relay. The Company acquired an approximate 35%
ownership in AudioCodes in two separate transactions in 1993 and 1994. In July
1997, AudioCodes completed a private placement of additional equity securities
without the participation of the Company and, as a result, the Company's equity
ownership interest in AudioCodes was diluted from 35% to approximately 29%. The
Company also has an option under certain conditions to purchase up to an
additional 5% of the outstanding stock of AudioCodes.
The Company accounts for its ownership in AudioCodes using the equity method.
The Company's original investment in AudioCodes included the excess of purchase
price over net assets acquired (approximately $1,907,000 at the date of
purchase), which was attributed to developed technology to be amortized over
seven years. The private placement by AudioCodes in July 1997 was at a price per
share greater than the Company's then current investment in AudioCodes. As a
result, even though the Company's ownership interest decreased from 35% to 29%,
the Company's proportionate share of the net assets of AudioCodes increased from
$816,000 to $1,481,000 at the date of the private placement. This increase in
the Company's proportionate share of the net assets of AudioCodes reduced the
remaining unamortized excess of purchase price
33
<PAGE>
over net assets acquired from $1,080,000 to $415,000 as of the date of the
private placement.
In May 1999, the Company exercised its option to purchase approximately 3.5%
of the outstanding stock of AudioCodes for approximately $1.1 million. In the
same month AudioCodes completed 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. As a
result, the Company recorded in "Other income (expense)" in its consolidated
statements of income for 1999 a one-time capital gain in the amount of $11.8
million. This amount was comprised of $9.4 million, which was sold in the IPO
and $2.5 million from the sale of approximately 248,000 AudioCodes shares to
the underwriters, to cover their over-allotment option. The gross proceeds to
the Company from this sale were approximately $3.2 million. In October 1999,
AudioCodes successfully concluded a follow-on public offering of 3.0 million
shares at a price of $41.00 per share. In the follow-on, AudioCodes issued
and sold 1.5 million shares and an additional 1.95 million shares were sold
by shareholders, of which approximately 1,069,000 shares were sold by the
Company in two separate transactions. The gross proceeds to the Company from
these transactions were approximately $42.8 million, and were recorded as
additional capital gain in the amount of $47.1 million. This amount was
comprised of $10.8 million, which resulted in the public offering and $36.3
million from the sale of approximately 1,069,000 AudioCodes shares. As of
December 31, 1999, the Company held approximately 2.9 million of AudioCodes
shares which represents about 15% of the outstanding shares of AudioCodes.
In January 2000, the Company sold an additional 600,000 shares of AudioCodes for
approximately $43.8 million and recorded in the first quarter of 2000, an
additional capital gain in the amount of $40.0 million. After this sale, the
Company holds approximately 2.3 million of AudioCodes shares, which represents
approximately 12% of the outstanding shares of AudioCodes.
The Company's equity in the net income (loss) of AudioCodes was $2,475,000 in
1999, $230,000 in 1998, and ($103,000) in 1997. As of December 31, 1999, the
Company amortized all the remaining portion of the excess of purchase price over
net assets.
APTEL LTD. AND NEXUS TELECOMMUNICATIONS SYSTEMS LTD.
In July 1996, the Company invested in Aptel Ltd. ("Aptel"), which is located in
Israel. The Company accounted for its investment in Aptel using the equity
method. The Company's equity in the net losses of Aptel, including amortization
of related intangibles, was $408,000 in 1997. As of June 30, 1997, the Company
had fully written-off its investment in Aptel.
In December 1997, Aptel's shareholders, including the Company exchanged their
shares in Aptel for ordinary shares of Nexus Telecommunications Systems Ltd.
("Nexus"). Nexus is an Israeli company whose shares are registered and traded on
the Nasdaq SmallCap Market under the symbol NXUSF. In October 1997, the Company
invested $176,000 in a convertible debenture in Aptel which was converted into
ordinary shares of Aptel prior to the closing of the Nexus transaction. The
Company received approximately 297,000 ordinary shares of Nexus in the exchange
transaction amounting to approximately 3% ownership interest in Nexus. The
Company's basis in the Nexus stock received is $176,000 and the Company
accounted for the investment using the cost method. At December 31, 1997, the
Company's investment in Nexus was presented in the Company's consolidated
balance sheet at the market value of $1,226,000, with the unrealized gain of
$1,050,000 recorded as other comprehensive income, as a separate component of
stockholder's equity. In April 1998, the Company sold all of its Nexus shares in
a private transaction for approximately $1.3 million and realized a pre-tax gain
on marketable equity securities of approximately $1.1 million, which is included
under "Other income (expense)" in the Company's consolidated statements of
income for 1998.
CAPITALIZED ASSETS AND WORKFORCE
In the beginning of 1999, the Company acquired two integrated groups of
engineers, one located in Israel and the other in the United States. These
twenty-five engineers specialize in the design of integrated circuits for
wireless communications. In addition, the Company acquired technology and
products, including associated intellectual property, related to 900 Megahertz
narrow-band cordless telephones and 900 Megahertz spread spectrum cordless
telephones.
In connection with the above, the Company capitalized approximately $2.0 million
of acquired assets and work force. This amount is amortized over approximately 3
years. As of December 31, 1999, the net balance of these capitalized assets and
workforce was approximately $1.1 million.
FOREIGN CURRENCY TRANSLATIONS
The financial statements of certain subsidiaries and other entities reported
using the equity method of accounting, whose functional currency is not the
U.S. dollar, have been remeasured into U.S. dollars, in accordance with FASB
Statement No. 52, "Foreign Currency Translation". Accordingly, monetary
accounts are remeasured using the foreign exchange rate at the balance sheet
date. Operations accounts and nonmonetary balance sheet accounts are
remeasured at the rate in effect at the date of transaction. The effects of
foreign currency remeasurement are reported in current operations and have
not been significant to date.
34
<PAGE>
NET EARNINGS PER SHARE
Basic net earnings 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 earnings per share further includes the effect of dilutive stock
options outstanding during the year, all in accordance with the Financial
Accounting Standards Board Statement No. 128, "Earnings per Share" ("SFAS 128").
The following table sets forth the computation of basic and diluted net earning
per share (in thousands except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Numerator:
Net Income $ 54,579 $ 14,415 $ 11,034
----------
----------
Denominator:
Weighted average number of shares of common stock
outstanding during the period used to compute basic
earning per share....................................... 11,734 9,768 9,736
Incremental shares attributable to exercise of
outstanding options (assuming proceeds would be used to
purchase treasury stock)................................ 987 248 467
----------
Weighted average number of shares of common stock used
to compute diluted earnings per share................... 12,721 10,016 10,203
==========
Basic net earnings per share............................ $4.65 $1.48 $1.13
==========
Diluted net earnings per share.......................... $4.29 $1.44 $1.08
==========
</TABLE>
Options outstanding to purchase approximately 91,000, 657,000 and 210,000 shares
of common stock for the years ended December 31, 1999, 1998 and 1997,
respectively, were not included in the computation of diluted net earning per
share, because option exercise prices were greater than the average market price
of the common shares and therefore, the effect would be antidilutive.
CONCENTRATION OF CREDIT RISK
SFAS No. 105, "Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk", requires disclosures of any significant off-balance-sheet and
credit risk concentrations. The Company has no significant off-balance-sheet
concentration of credit risk such as foreign exchange contracts, option
contracts or other foreign hedging arrangements. Financial instruments that
potentially subject the Company to concentrations of credit risk consist
principally of cash equivalents, marketable security and cash deposits,
short-term bank deposits and trade receivables.
The Company's cash and cash equivalents are invested in short-term deposits with
major U.S. and Israeli banks. Management believes that the financial
institutions holding the Company's investments are financially sound, and
accordingly, minimal credit risk exists with respect to these investments. The
majority of the Company's sales of products are to distributors who in turn sell
to manufacturers of consumer electronics products. The Company's licensing
revenues are primarily from customers that have licensed rights to use the
Company's DSP Core microprocessor architectures and speech compression
technology. No collateral is required from the Company's customers; however,
some of the customers pay using letters of credit. Write-offs for bad debts have
not been significant to date.
CONCENTRATION OF OTHER RISKS
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
35
<PAGE>
manufacturing yields, quality levels and costs, and to allocate to the
Company sufficient portion of foundry capacity to meet the Company's needs in
a timely manner. To meet the Company's increased wafer requirements, the
Company has added additional independent foundries to manufacture its
processors. Revenues could be materially and adversely affected should any of
these foundries fail to meet the Company's request for products due to a
shortage of production capacity, process difficulties, low yield rates or
financial instability. For example, foundries in Taiwan produce a significant
portion of our wafer supply. As a result, earthquakes, aftershocks or other
natural disasters in Asia, could preclude us from obtaining an adequate
supply of wafers to fill customer orders and could harm our business,
financial condition, and results of operations. Additionally, certain of the
raw materials, components, and subassemblies included in the products
manufactured by the Company's OEM customers, which also incorporate the
Company's products, are obtained from a limited group of suppliers.
Disruptions, shortages, or termination of certain of these sources of supply
could occur.
CASH EQUIVALENTS
The Company considers all highly liquid investments which are readily
convertible to cash with an original maturity of three months or less when
purchased to be cash equivalents.
MARKETABLE SECURITIES AND CASH DEPOSITS
At December 31, 1999, all marketable securities have been designated as held to
maturity under Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS 115"). The
amortized cost of held to maturity securities is adjusted for the amortization
of premiums and accretion of discounts to maturity. Such amortization is
included in interest and other income. Realized gains and losses and declines in
value judged to be other-than-temporary on held to maturity securities are
included in interest and other income. The cost of securities sold is based on
the specific identification method. Interest and dividends on securities
classified as held to maturity are included in interest and other income. Cash
deposits originally purchased with a maturity of over three months are
considered as short-term investments and are presented as part of the marketable
securities.
The following is a summary of held to maturity securities and cash deposits at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
(in thousands) AMORTIZED COST
1999 1998
-------------------------------
<S> <C> <C>
Obligations of states and
political subdivisions $96,312 $25,290
Corporate obligations 30,440 33,218
Cash deposits 21,961 --
-------------------------------
$148,713 $58,508
===============================
Amounts included in marketable
securities and cash deposits $140,593 $57,951
Amounts included in cash and
cash equivalents 8,120 557
-------------------------------
$148,713 $58,508
===============================
</TABLE>
At December 31, 1999 and 1998, the carrying amount of securities approximated
the fair value and the amount of unrealized gain or loss was not significant.
Gross realized gains or losses for 1999, 1998, and 1997 were not significant.
The amortized cost of held to maturity debt and securities at December 31, 1999,
by contractual maturities, are shown below (IN THOUSANDS):
<TABLE>
<CAPTION>
AMORTIZED
COST
-------------
<S> <C>
Due in one year or less $100,656
Due after one year to two years 39,937
-------------
$140,593
=============
</TABLE>
36
<PAGE>
SEVERANCE PAY
The Company's subsidiaries, DSP Group Israel and Voicecom, have liability for
severance pay pursuant to Israeli law, based on the most recent salary of the
employees multiplied by the number of years of employment as of the balance
sheet date for all employees. The Company's liability is fully provided by
monthly deposits with severance pay funds and insurance policies.
The deposited funds include profits accumulated up to the balance sheet date.
The deposited funds may be withdrawn only upon the fulfillment of the obligation
pursuant to Israeli severance pay law or labor agreements. The value of these
policies is recorded as an asset in the Company's balance sheet.
Severance expenses for the years ended December 31, 1999, 1998 and 1997, were
approximately $593,000, $367,000 and $135,000, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has chosen to continue accounting for stock-based compensation in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
("APB-25"), "Accounting for Stock Issued to Employees". Under APB-25, when
the exercise price of the employee's options equals or is higher than the
market price of the underlying Company stock on the date of grant, no
compensation expense is recognized. The pro-forma information with respect to
the fair value of the options is provided in accordance with the provisions
of statement No. 123 (see Note 4).
In accounting for warrants granted to those other than employees, the provisions
of Statement of Financial Accounting Standards Board No. 123, "Accounting for
Stock-Based Compensation", were applied. The fair value of these warrants was
estimated at the grant date using the Black-Scholes option pricing model (see
Note 4).
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued No.
133, "Accounting for Derivative instruments and Hedging Activities" ("SFAS No.
133"). This statement established accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. The statement also requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. The FASB has issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133". The Statement defers the effective date of SFAS No.
133 for one year. The rule will apply to all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company does not expect the impact of this
new statement on the Company's consolidated balance sheets or results of
operations to be material.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". This
statement prescribes the use of the liability method, whereby deferred tax asset
and liability account balances are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. The Company provides a valuation allowance, if
necessary, to reduce deferred tax assets to their estimated realizable value.
3. PROPERTY AND EQUIPMENT
Composition of assets, grouped by major classifications, is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31,
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Computers and peripheral equipment $ 12,216 $ 8,209
Office furniture and equipment 985 808
Motor vehicles 1,163 933
Leasehold improvements 1,866 1,380
-------------- --------------
16,230 11,330
Less accumulated depreciation 9,282 7,094
-------------- --------------
$ 6,948 $ 4,236
============== ==============
</TABLE>
37
<PAGE>
4. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Board of Directors has the authority, without any further vote or action by
the stockholders, to provide for the issuance of up to 5,000,000 shares of
Preferred Stock in one or more series with such designations, rights,
preferences, and limitations as the Board of Directors may determine, including
the consideration received, the number of shares comprising each series,
dividend rates, redemption provisions, liquidation preferences, sinking fund
provisions, conversion rights, and voting rights.
DIVIDEND POLICY
At December 31, 1999, the Company had retained earnings of approximately $64.8
million. The Company has never paid dividends on its Common Stock and presently
intends to follow a policy of retaining any earnings for reinvestment in its
business.
STOCK ISSUE TO INVESTOR
On February 2, 1999, the Company announced that it had entered into a stock
purchase agreement with Magnum Technologies, Ltd., an international investment
fund, in which the Company issued and sold 2,300,000 new shares of the Company's
common stock to Magnum. Based in part on Magnum's representations, the
transaction was exempt from the registration requirements of the Securities Act
of 1933 according to Section 4(2) of the Securities Act. These shares,
representing 19.6% of the Company's outstanding common stock at the time of the
transaction, were issued for a price of $15 per share, or an aggregate of $34.4
million in total net proceeds to the Company. As part of the agreement, Magnum
may acquire additional shares of the Company in the open market, but may not
bring its total holdings to more than 35% of the Company's outstanding shares of
common stock. Furthermore, Magnum agreed to restrict its sales of the Company's
shares it purchased for an eighteen-month period from the date of the
transaction under Rule 144(e)(i) of the Securities Act of 1933, unless it
received the prior written approval of the Company. Additionally, the Company
invited Magnum to appoint two new directors to the Board of Directors, which
currently brings the total number of members of the Board of Directors to six.
In February 2000, Magnum exercised its option and sold 929,000 shares of the
Company's Common Stock. After the sale, Magnum holds approximately 2.0 million
shares representing approximately 15.5% of the Company's outstanding shares of
common stock.
SHARE REPURCHASE PROGRAM
In March 1999, the Company's Board of Directors authorized a new plan
to repurchase up to an additional 1,000,000 shares of the Company's 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.
Accordingly, in 1999 and 1998, the Company repurchased 200,000 and 814,000
shares, respectively, of its common stock at an average purchase price of $13.55
and $17.53 per share, respectively, for an aggregate purchase price of
approximately $2.7 million and $14.3 million, respectively. In 1999 and 1998,
the Company issued 908,000 and 106,000 shares, respectively, of the Company's
common stock to employees who have exercised their stock options.
Such repurchases of common shares are accounted for as treasury stock, and
result in a reduction of stockholders' equity. When treasury shares are
reissued, the Company charges the excess of the repurchase cost over issuance
price using the weighted average method to retain earnings.
STOCK PURCHASE PLAN AND STOCK OPTION PLANS
The Company has various stock plans under which employees, consultants,
officers, and directors may be granted options to purchase the Company's Common
Stock. A summary of the various plans is as follows:
1991 EMPLOYEE AND CONSULTANT STOCK PLAN In 1991, the Company adopted the 1991
Employee and Consultant Stock Plan (the "1991 Plan"). Under the 1991 Plan,
employees and consultants may be granted incentive or non-qualified stock
options or stock purchase rights for the purchase of the Company's Common Stock.
The 1991 Plan expires in 2001 and currently provides for the purchase of up to
4,300,000 shares of the Company's Common Stock.
The exercise price of options under the 1991 Plan shall not be less than the
fair market value of the Common Stock for incentive stock options and not less
than 85% of the fair market value of the common stock for nonqualified stock
options at the date of grant, as determined by the Board of Directors.
Options under the 1991 Plan are generally exercisable over a 48-month period
beginning twelve months after issuance or as determined by the Board of
Directors. Options under the 1991 Plan expire up to seven years after the date
of grant.
1993 DIRECTOR STOCK OPTION PLAN Upon the closing of the Company's initial public
offering, the Company adopted the 1993 Director Stock Option Plan (the
"Directors' Plan"). Under the Directors' Plan the Company is authorized to issue
nonqualified stock options to purchase up to 275,000 shares of the Company's
Common Stock at an exercise price equal to the
38
<PAGE>
fair market value of the Common Stock on the date of grant. The Directors'
Plan, following certain amendments in 1996 approved by the Company's
stockholders, provides that each person who is an outside director on the
effective date of the Directors' Plan and each outside director who
subsequently becomes a member of the Board of Directors shall automatically
be granted an option to purchase 15,000 shares (the First Option).
Additionally, each outside director shall automatically be granted an option
to purchase 5,000 shares (a Subsequent Option) on January 1 of each year if,
on such date, he/she shall have served on the Board of Directors for at least
six months.
Options granted under the Directors' Plan generally have a term of ten years.
The First Option is 25% exercisable after the first year (one-third after the
first year for options granted after May 1996) and in quarterly installments
over the ensuing three years (one-third at the end of each twelve-month period
for options granted after May 1996). Each Subsequent Option becomes exercisable
in full on the fourth anniversary from the date of grant (one-third at the end
of each twelve-month period from the date of grant for options granted after May
1996).
1993 ISRAELI PLAN In 1993, the Company adopted the 1993 DSP Group, Inc. Israeli
Stock Option Plan (the "1993 Israeli Plan") under which the Company is
authorized to issue nonqualified stock options to purchase up to 167,000 shares
of the Company's Common Stock at an exercise price equivalent to fair market
value. Options are immediately exercisable and expire five years from the date
of grant. All options and shares are held in a trust until the later of 24
months from the date of grant or the shares are vested based on a vesting
schedule determined by a committee appointed by the Board of Directors.
1998 NON-OFFICER EMPLOYEE STOCK OPTION PLAN In 1998, the Company adopted the
1998 Non-Officer Employee Stock Option Plan (the "1998 Plan"). Under the 1998
Plan, employees may be granted non-qualified stock options for the purchase of
the Company's Common Stock. Officers and directors of the Company are excluded
from participating under the 1998 Plan. The 1998 Plan expires in 2008 and
currently provides for the purchase of up to 1,550,000 shares of the Company's
Common Stock.
The exercise price of options under the 1998 Plan shall not be less than the
fair market value of the Common Stock for nonqualified stock options, as
determined by the Board of Directors.
Options under the 1998 Plan are generally exercisable over a 48-month period
beginning twelve months after issuance or as determined by the Board of
Directors. Options under the 1998 Plan expire up to seven years after the date
of grant.
A summary of activity under the 1991 Plan, the 1993 Israeli Plan, the Directors'
Plan, and the 1998 Plan is as follows:
<TABLE>
<CAPTION>
(SHARES IN THOUSANDS) OPTIONS OUTSTANDING
----------------------------------------
SHARES SHARES WEIGHTED
AVAILABLE UNDER AVERAGE
FOR GRANT OPTION EXERCISE PRICE
---------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 621 1,475 $10.94
Granted (797) 797 $21.67
Exercised - (526) $12.12
Canceled 429 (429) $11.18
-----------------------------------
BALANCE AT DECEMBER 31, 1997 253 1,317 $16.87
-----------------------------------
Authorized 1,950 - $ -
Granted (812) 812 $ 18.54
Exercised - (94) $ 9.95
Canceled 136 (136) $ 13.59
-----------------------------------
BALANCE AT DECEMBER 31, 1998 1,527 1,899 $18.17
-----------------------------------
Authorized 1,200 - $ -
Granted (1,800) 1,800 $28.66
Exercised - (1,136) $17.67
Canceled 158 (158) $19.86
-----------------------------------
BALANCE AT DECEMBER 31, 1999 1,085 2,405 $26.14
-----------------------------------
</TABLE>
39
<PAGE>
A summary of the average fair exercise price and the number of options
exercisable for the years 1999, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Number of options excisable as of
December 31, (options in thousands)
39 469 375
- ----------------------------------------------------------------------------
Weighted average exercise price of
options granted during the year
$ 28.71 $ 18.54 $ 21.67
- ----------------------------------------------------------------------------
</TABLE>
A summary of the Company's stock option activity and related information as of
December 31, 1999, is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- --------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES OUTSTANDING LIFE PRICE OPTIONS PRICE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 7.63 - $14.63 406,950 5.34 Years 12.50 10,815 9.72
$15.13 -$18.48 456,253 6.28 Years 18.27 2,066 15.35
$18.56 -$18.81 153,125 5.50 Years 18.57 0 0
$18.88 -$18.88 585,462 6.07 Years 18.88 6,878 18.88
$19.25 -$38.00 466,716 5.98 Years 29.71 19,693 22.33
$38.75- $66.88 337,000 7.21 Years 64.43 0 0
----------------------------------------------------------------------------------------
2,405,506 6.09 Years $26.14 39,452 $17.90
========================================================================================
</TABLE>
Weighted average fair value of options whose exercise price is equal or less
than the market price of the shares at date of grant are as follows:
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Weighted average fair value of options grants 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Exercise price equals to fair value at date of grants $10.61 $9.65 $9.90
-----------------------------------------
</TABLE>
1993 EMPLOYEE STOCK PURCHASE PLAN Upon the closing of the Company's initial
public offering, the Company adopted the 1993 Employee Stock Purchase Plan (the
"1993 Purchase Plan"). The Company has reserved an aggregate amount of 350,000
shares of Common Stock for issuance under the 1993 Purchase Plan. The 1993
Purchase Plan provides that substantially all employees may purchase stock at
85% of its fair market value on specified dates via payroll deductions. There
were approximately 30,000, 32,000 and 28,000 shares issued under the Purchase
Plan in 1999, 1998 and 1997, respectively.
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
Shares of Common Stock of the Company reserved for future issuance at December
31, 1999, are as follows (in thousands):
<TABLE>
<S> <C>
Employee Stock Purchase Plan 220
Stock Options 3,490
Undesignated Preferred Stock 5,000
-----------
8,710
===========
</TABLE>
40
<PAGE>
STOCK BASED COMPENSATION
Pro forma information regarding net income and earnings per share is required
by Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123"), which requires the use of option
valuation models that were not developed for use in valuing employee stock
options. For example, the Black-Scholes option valuation model was developed
for use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option models require
the input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
The fair value of the Company's employee stock options was estimated at the date
of grant using a Black-Scholes multiple option pricing model with the following
weighted average assumptions; risk-free interest rates of 5.5%, 5.02% and 6.15%
for 1999, 1998 and 1997, respectively; a dividend yield of 0.0% for each of
those years; a volatility factor of the expected market price of the Company's
Common Stock of 0.76, for 1999, 0.77 for 1998 and 0.70 for 1997; and a
weighted-average expected life of the option of 2.9 years for 1999, 3.0 years
for 1998 and 3.1 years for 1997. The weighed average net fair value of options
granted in 1999, 1998 and 1997 was $10.61, $9.65 and $9.90 per share,
respectively.
The Company does not recognize compensation cost related to employee stock
purchase rights under the Employee Stock Purchase Plan. To comply with the pro
forma reporting requirements of SFAS 123, compensation cost is estimated for the
fair value of the employees' stock purchase rights using the Black-Scholes model
with the following assumptions for those rights granted in 1999, 1998 and 1997;
dividend yield of 0.0%; an expected life ranging up to 0.5 years; expected
volatility factor of 0.70 in 1999, 0.71 in 1998 and 0.75 in 1997; and a risk
free interest rate of 6.33% in 1999, 4.84% in 1998, 5.49% in 1997. The weighted
average fair value of those purchase rights granted in January 1999, July 1999,
January 1998, July 1998, January 1997 and July 1997 were $6.33, $17.05, $10.70,
$9.57, $2.45 and $8.21, respectively.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
Net income as reported $ 54,579 $ 14,415 $ 11,034
Pro forma net income $ 47,513 $ 10,428 $ 8,485
Pro forma basic earnings per share $ 4.05 $ 1.07 $ 0.87
Pro forma diluted earnings per share $ 4.05 $ 1.07 $ 0.85
</TABLE>
41
<PAGE>
5. INDUSTRY SEGMENT REPORTING
The Company operates in one business segment approach, principally the
development of affordable, high performance, cost effective DSP-based software,
integrated circuits, and circuit boards.
Operations outside the United States include research, development, sales,
marketing and certain general and administrative functions. The Company's
Israeli subsidiary performs research, development, sales, marketing,
technical support, and certain general and administrative functions. The
Company's Japanese and French subsidiaries perform marketing and technical
support activities. The following is a summary of operations within
geographic areas:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Sales to unaffiliated customers:
United States $ 9,649 $31,436 $57,364
Israel 66,784 32,414 4,595
----------------------------------------------
$76,433 $63,850 $61,959
==============================================
Revenues:
United States $ 7,098 $ 3,821 4,688
Export:
Japan 43,758 35,711 23,402
Europe 6,226 10,591 10,357
Asia 15,392 12,616 21,644
Israel 3,959 1,111 1,868
----------------------------------------------
$76,433 $63,850 $ 61,959
==============================================
Long-lived assets:
United States $21,694 $2,085 $2,252
Israel 4,742 4,783 4,751
Other 61 66 77
----------------------------------------------
$26,497 $6,934 $7,080
==============================================
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases certain equipment and facilities under noncancelable
operating leases. The Company has significant leased facilities in Herzelia
Pituach, Israel and in Santa Clara, California. In 1996, the Company negotiated
the assignment of certain of its Santa Clara facility use obligations to another
company (the "Assignee"). The Company received payments from the Assignee in the
Santa Clara facility, of $322,000 in both 1999 and 1998 and will receive
$322,000 in 2000. In addition, commencing January 1, 1997, the Company began
subleasing a new space in the same building from the Assignee under a separate
sublease agreement that expires in December 1999. In August 1997, the Company
entered into a new lease for its Israel facilities in Herzelia Pituach. The
lease agreement is effective until November 2003. In December 1999, May 1999 and
September 1998, the Company entered into three new leases for additional office
space at its Israel facilities in Herzelia Pituach. The lease agreements for the
additional spaces are effective until November 2003.
At December 31, 1999, the Company is required to make the following minimum
lease payments:
<TABLE>
<CAPTION>
(IN THOUSANDS) Year Amount
---- -----------
<S> <C> <C>
2000 $1,214
2001 846
2002 622
2003 570
------
$3,252
======
</TABLE>
42
<PAGE>
Total rental expense for all leases was approximately $736,000 (net of sublease
income of $322,000), $545,000 (net of sublease income of $365,000), $778,000
(net of sublease income of $469,000), for the years ended December 31, 1999,
1998, and 1997, respectively.
CONTINGENCIES
The Company is involved in certain claims arising in the normal course of
business, including claims that it may be infringing patent rights owned by
third parties. The Company is unable to foresee the extent to which these
matters will be pursued by the claimants or to predict with certainty the
eventual outcome. However, the Company believes that the ultimate resolution of
these matters will not have a material adverse effect on its financial position,
results of operations, or cash flows.
7. INCOME TAXES
The provision for income taxes is as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Federal taxes:
Current $ 1,080 $ 2,751 $ 3,166
Deferred 6,168 1,181 (1,301)
------------------------------------------
7,248 3,932 1,865
State taxes:
Current 1,140 216 337
Deferred 209 97 (158)
------------------------------------------
1,349 313 179
Foreign taxes:
Current 16,684 559 714
Deferred 365 -- --
------------------------------------------
17,049 559 714
==========================================
==========================================
Provision for income taxes $ 25,646 $ 4,804 $ 2,758
==========================================
</TABLE>
The tax benefits associated with the exercise of stock options reduced taxes
currently payable by $1,591,000 in 1999, $1,192,000 in 1998, and $1,037,000 in
1997. Such benefits were credited to paid in capital when realized.
Pretax income from foreign operations was $14,965,000, $7,330,000 and $3,495,000
in 1999, 1998 and 1997, respectively.
Unremitted foreign earnings that are considered to be permanently invested
outside of the U.S., and on which no deferred taxes have been provided, amount
to approximately $9,600,000 at December 31, 1999. If such amounts were remitted,
the Company would be subject to U.S. income taxes (subject to an adjustment for
foreign tax credits) and additional Israeli corporate income and withholding
taxes of approximately $2,300,000.
43
<PAGE>
A reconciliation between the Company's effective tax rate and the U.S. statutory
rate
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
Tax at U.S. statutory rate $ 27,276 $ 6,534 $ 4,827
State taxes, net of federal benefit 890 207 116
Operating losses utilized - - (1,160)
Tax exempt interest income - - (26)
Foreign income taxed at rates other
than U.S. rate (3,934) (1,806) (813)
Different rate from sale of affiliate 1,179 - -
Tax credits utilized - (264) (480)
Nondeductible losses and expenses of investees - - 247
Other individually immaterial items 235 133 47
--------------------------------------------
$ 25,646 $ 4,804 $ 2,758
============================================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
--------------------------
<S> <C> <C>
Deferred tax assets (liability):
Tax credit carryforwards $ 545 $ 108
Net operating loss carryforwards - 385
Capitalized research and development (229) 222
Reserves and accruals 1,349 690
Other 452 817
Investment in affiliate (6,790) -
--------------------------
Total deferred tax assets (liability) $(4,673) $ 2,222
Income tax payable (1,054) (1,909)
--------------------------
Net deferred tax assets (liability) $(5,727) $ 313
==========================
</TABLE>
Management believes that the deferred tax assets will be realized based on
current levels of future taxable income and potentially refundable taxes. The
valuation allowance decreased by $1,250,000 in 1998.
DSP Group Israel's production facilities have been granted "Approved Enterprise"
status under Israeli law in connection with four separate investment plans.
According to the provisions of such Israeli law, DSP Group Israel has chosen to
enjoy "Alternative plans benefits," which is a waiver of grants in return for
tax exemption. Accordingly, DSP Group Israel's income from an "Approved
Enterprise" is tax-exempt for a period of two or four years and is subject to a
reduced corporate tax rate of 10% for an additional period of eight or six
years, respectively. The tax benefits under these investment plans are scheduled
to gradually expire starting from 2001 through 2009.
DSP Group Israel's first and second plans, which were completed and commenced
operation in 1992 and 1996, respectively, are tax exempt for two and four
years, respectively, and are entitled to a reduced corporate tax rate of 10%
for an additional period of six years. The third and fourth plans were
approved in 1996 and 1998, respectively. They entitle DSP Group Israel to a
corporate tax exemption for a period of two years for each plan and to a
reduced corporate tax rate of 10% for an additional period of eight years.
The period of tax benefits, as detailed above, is subject to limitations of the
earlier of 12 years from commencement of production, or 14 years from receipt of
approval.
The tax exempt income attributable to an "Approved Enterprise" can be
distributed to stockholders without subjecting DSP Group Israel to taxes only
upon the complete liquidation of DSP Group Israel. The Company has determined
44
<PAGE>
that such tax exempt income will not be distributed as dividends.
Accordingly, no deferred income taxes have been provided on income
attributable to DSP Group Israel's "Approved Enterprise."
Through December 31, 1999, DSP Group Israel has met all the conditions required
under these approvals.
Should DSP Group Israel fail to meet such conditions in the future, however, it
could be subject to corporate tax in Israel at the standard rate of 36% and
could be required to refund tax benefits already received.
Income from sources other than the "Approved Enterprise" during the benefit
period will be subject to tax at the standard rate of corporate tax in Israel of
36%.
By virtue of such Israeli law, DSP Group Israel is entitled to claim accelerated
rates of depreciation on equipment used by an "Approved Enterprise" during the
first five tax years from the beginning of such use.
8. RELATED PARTY TRANSACTIONS
In 1993, the Company entered into a development and licensing agreement with
AudioCodes (see Note 2 Other Investments). Under the agreement, AudioCodes is
to perform certain research and development services for the Company. Upon
development of the technology, the Company is to pay AudioCodes a service fee
and additional royalty fees of 15% to 50% of the net revenue and 3% to 10% of
the gross margin realized from the sale of the technology incorporated in the
Company's products. In 1999, 1998 and 1997 the Company recorded the following:
<TABLE>
<CAPTION>
-----------------------------------
(IN THOUSANDS) 1999 1998 1997
RELATED PARTY TRANSACTIONS -----------------------------------
REVENUES:
- ------------------------------------
<S> <C> <C> <C>
Product sales $861 $944 $1,542
Licensing $ 92 $ 82 $206
COST OF REVENUES:
- ------------------------------------
Cost of products $324 $384 $291
Cost of licensing $ 63 $160 $268
OPERATING EXPENSES:
- ------------------------------------
Research and development $358 $345 $340
LIABILITIES AS OF DECEMBER 31, $109 $121 $107
</TABLE>
9. SUBSEQUENT EVENTS
In February 2000, Magnum exercised its option and sold 929,000 shares of the
Company's Common Stock. After the sale, Magnum holds approximately 2.0 million
shares representing approximately 15.5% of the Company's outstanding shares of
Common Stock.
On January 24, 2000, our Board of Directors declared a two-for-one stock split
of our Common Stock that was effected in the form of a 100% stock dividend. The
dividend was paid on March 1, 2000 to stockholders of record on February 16,
2000.
45
<PAGE>
<PAGE>
CORPORATE DIRECTORY
OFFICERS AND KEY EMPLOYEES
ELI AYALON
Chairman of the Board
& Chief Executive Officer
BOAZ EDAN
Vice President, Products Division
Manager
RAFI FRIED
Vice President,
Research & Development
ROSS HAYDEN
Vice President, Sales
LEAH SADE
Vice President, Human Resources
GIDEON WERTHEIZER
Executive Vice President
MOSHE ZELNIK
Secretary, Vice President,
Finance & Chief Financial Officer
DIRECTORS
ELI AYALON
Chairman of the Board & CEO
DSP Group
ZVI LIMON
Chairman
Limon Holdings Ltd.
YAIR SHAMIR
President
VCON Telecommunications Ltd.
SHAUL SHANI
Managing Director
Limon Holdings Ltd.
PATRICK TANGUY
CEO, Technal S.A.
LOUIS SILVER
Counsel
Discount Bank & Trust Co.
INDEPENDENT AUDITORS
Kost, Forer & Gabai
A Member of Ernst & Young international
Tel Aviv, Israel
GENERAL LEGAL COUNSEL
Morrison & Foerster LLP
San Francisco, California
REGISTRAR AND TRANSFER AGENT
Northwest Bank Minnesota,
St. Paul, Minnesota
CORPORATE HEADQUARTERS
DSP Group, Inc.
3120 Scott Boulevard
Santa Clara, CA 95054
Tel. 408-986-4300
Fax. 408-986-4323
http://www.dspg.com
DSP Group Ltd.
5 Shenkar Street
Herzeliya, 46120, Israel
Tel. 972-9-9529696
Fax. 972-9-9541234
SALES, MARKETING AND SUPPORT OFFICES
U.S.A.:
DSP Group, Inc.
3120 Scott Boulevard
Santa Clara, CA 95054
Tel. 408-986-4300
Fax. 408-986-4323
http://www.dspg.com
ISRAEL:
DSP Group Ltd.
5 Shenkar Street
Herzeliya, 46120, Israel
Tel. 972-9-9529696
Fax. 972-9-9541234
http://www.dspg.com
EUROPE:
DSP Group Europe, SARL
18 rue de l'Effort Mutuel
91300, Massy, France
Tel. 33-607-686754
Fax. 33-1-6010-5187
JAPAN:
Nihon DSP K.K.
Yasuda Kasai Bldg.
2-3-1, Higashi-Gotanda
Shinagawa-Ku
Tokyo, 141, Japan
Tel. 81-3-3449-7863
Fax. 81-3-3449-8006
KOREA:
DSP Technology
Seoul, Korea
Tel. 82-2-554-7494
Fax. 82-2-554-7495
CHINA:
Beijing Link Televideo
Technology Co., Ltd.
Unit 2104, Landmark Tower 2,
8 North Donganhaun Road, Chaoyang
District, Beijing 100004, PR China
Tel. (8610) 6590 6372
Fax. (8610) 6590 6367
HONG KONG:
DSP Solutions Ltd.
Kowloon, Hong Kong
Tel. 852-2795-7421
Fax. 852-2305-0640
TAIWAN:
DSP Applications
Taipei, Taiwan, R.O.C.
Tel. 886-2-698-4320
Fax. 886-2-698-4133
SEC Form 10-K A copy of the company's Annual Report to the Securities and
Exchange Commission on Form 10-K is available without charge by writing to:
DSP Group, Inc.
Attn: Investor Relations
3120 Scott Boulevard
Santa Clara, CA 95054, USA
QUARTERLY EARNINGS RELEASE
Quarterly earnings releases will be made available to stockholders upon
request. Please note that quarterly reports to stockholders will no longer be
published.
ANNUAL MEETING
The Annual Meeting of stockholders will be held on May 16, 2000 at 9:00 a.m.
local time at DSP Group, Inc. Corporate Headquarters in the U.S.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE ANNUAL REPORT ON FORM 10-K OF DSP GROUP FOR THE YEAR
ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 20,778
<SECURITIES> 140,593
<RECEIVABLES> 11,098
<ALLOWANCES> 663
<INVENTORY> 3,283
<CURRENT-ASSETS> 178,158
<PP&E> 16,230
<DEPRECIATION> 9,282
<TOTAL-ASSETS> 206,179
<CURRENT-LIABILITIES> 14,411
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 183,945
<TOTAL-LIABILITY-AND-EQUITY> 206,179
<SALES> 57,397
<TOTAL-REVENUES> 76,433
<CGS> 33,051
<TOTAL-COSTS> 33,206
<OTHER-EXPENSES> 15,404
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 232
<INCOME-PRETAX> 80,225
<INCOME-TAX> 25,646
<INCOME-CONTINUING> 54,579
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,579
<EPS-BASIC> 4.65
<EPS-DILUTED> 4.29
</TABLE>
