<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
-------------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission File Number 0-23006
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DSP GROUP, INC.
---------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-2683643
-------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
3120 SCOTT BOULEVARD, SANTA CLARA, CALIFORNIA 95054
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (408) 986-4300
--------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No __
As of August 31, 2000 there were 26,852,238 shares of Common Stock ($.001 par
value per share) outstanding.
<PAGE>
INDEX
DSP GROUP, INC.
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--June 30, 2000
and December 31, 1999...................................................3
Condensed consolidated statements of income--Three and six
months ended June 30, 2000 and 1999.....................................4
Condensed consolidated statements of cash flows--Six
months ended June 30, 2000 and 1999.....................................5
Condensed consolidated statements of Stockholders' Equity--
Three and six months ended June 30, 2000 and 1999.......................6
Notes to condensed consolidated financial statements--
June 30, 2000...........................................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation...............................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................18
PART II. OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings........................................................19
Item 2. Changes in Securities....................................................19
Item 3. Defaults upon Senior Securities..........................................19
Item 4. Submission of Matters to a Vote of Security Holders......................19
Item 5. Other Information........................................................19
Item 6. Exhibits and Reports on Form 8-K.........................................19
SIGNATURES ..........................................................................19
</TABLE>
Page 2
<PAGE>
PART 1. FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
DSP GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 72,811 $ 20,778
Marketable securities and cash deposits 158,600 140,593
Trade receivables, net 12,032 10,435
Inventories 2,346 3,283
Deferred income taxes 1,802 1,707
Other accounts receivable and prepaid expenses 3,758 1,362
--------- ---------
TOTAL CURRENT ASSETS 251,349 178,158
Property and equipment, at cost: 17,122 16,230
Less accumulated depreciation and amortization (11,841) (9,282)
--------- ---------
5,281 6,948
Other investments, net of accumulated amortization 14,143 18,433
Other assets, net of accumulated amortization 4,133 1,250
Severance pay fund 1,573 1,390
--------- ---------
TOTAL ASSETS $ 276,479 $ 206,179
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payable $ 4,404 $ 6,079
Other current liabilities 20,324 8,332
--------- ---------
TOTAL CURRENT LIABILITIES 24,728 14,411
LONG TERM LIABILITIES
Accrued severance pay 1,664 1,431
Deferred income taxes 6,380 6,380
Minority interest 1,389 --
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common Stock 27 12
Additional paid-in capital 144,845 119,163
Retained earnings 97,446 64,782
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 242,318 183,957
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 276,479 $ 206,179
========= =========
</TABLE>
Note: The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date. See notes to condensed consolidated financial
statements.
Page 3
<PAGE>
DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Product sales $ 20,181 $ 12,673 $ 38,543 $ 19,195
Licensing, royalties and other 5,532 4,029 10,556 7,969
-------- -------- -------- --------
TOTAL REVENUES 25,713 16,702 49,099 27,164
COST OF REVENUES:
Cost of product sales 11,727 7,148 22,202 10,899
Cost of licensing, royalties and other 210 11 533 86
-------- -------- -------- --------
TOTAL COST OF REVENUES 11,937 7,159 22,735 10,985
-------- -------- -------- --------
GROSS PROFIT 13,776 9,543 26,364 16,179
OPERATING EXPENSES:
Research and development 4,806 3,741 9,482 7,102
Sales and marketing 3,056 2,201 5,909 4,117
General and administrative 1,594 1,304 2,886 2,556
Unusual items -- -- 14,154 --
-------- -------- -------- --------
TOTAL OPERATING EXPENSES 9,456 7,246 32,431 13,775
-------- -------- -------- --------
OPERATING INCOME (LOSS) 4,320 2,297 (6,067) 2,404
OTHER INCOME (EXPENSE):
Interest and other income 3,207 1,222 6,001 2,352
Interest expense and other (39) (78) (80) (182)
Equity in income of affiliates 703 575 1,140 1,017
Minority interest in loss of subsidiary 148 -- 148 --
Minority gain in subidiary's stock issue (100) -- (100) --
Capital gain from realization
of investments 17,584 11,780 57,593 11,780
-------- -------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 25,823 15,796 58,635 17,371
Provision for income taxes 8,568 2,087 25,971 2,480
-------- -------- -------- --------
NET INCOME $ 17,255 $ 13,709 $ 32,664 $ 14,891
======== ======== ======== ========
NET EARNINGS PER SHARE:
Basic $ 0.65 $ 0.59 $ 1.24 $ 0.67
Diluted $ 0.59 $ 0.56 $ 1.13 $ 0.65
SHARES USED IN PER SHARE COMPUTATIONS:
Basic 26,684 23,122 26,412 22,334
Diluted 29,076 24,332 28,911 23,004
</TABLE>
See notes to condensed consolidated financial statements.
Page 4
<PAGE>
DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
--------------------
2000 1999
-------- --------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 13,740 $ 2,261
INVESTING ACTIVITIES
Purchase of marketable securities and cash deposits (63,825) (39,395)
Maturity of marketable securities
and cash deposits 45,273 24,925
Purchases of equipment (894) (3,999)
Proceeds from sale of investment - net 46,723 3,224
Investment in subsidiary -- (1,143)
Cash acquired in acquisition of
consolidated subsidiary 106 --
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 27,383 (16,388)
-------- --------
FINANCIAL ACTIVITIES
Sale of Common Stock for cash upon
exercise of options and employee
stock purchase plan 10,800 1,910
Purchase of treasury stock -- (2,710)
Issue of Common Stock to investor -- 34,425
Issuance of sharse to minority shareholders in
consolidated subsidiaries 110 --
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,910 33,625
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS $ 52,033 $ 19,498
======== ========
Non-cash investing and financing information:
Liabilities assumed in connection with asset acquisitions $ -- $ 590
======== ========
Capitalized software acquisition in exchange
for license sale $ -- $ 2,000
======== ========
Income tax liability from sale of investment $ 7,100 $ --
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
Page 5
<PAGE>
DSP GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
RETAINED
EARNINGS
ADDITIONAL (ACCUMULATED TREASURY TOTAL
THREE MONTHS ENDED COMMON STOCK PAID-IN EARNINGS STOCK AT STOCKHOLDERS'
JUNE 30, 2000 SHARES AMOUNT CAPITAL (DEFICIT) COST EQUITY
--------- --------- ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 2000 26,443 $ 26 $ 141,733 $ 80,191 $ -- $ 221,950
Net income -- -- -- 17,255 -- 17,255
Comprehensive income -- -- -- -- -- 17,255
Exercise of Common Stock
options by employees 351 1 3,112 -- -- 3,113
--------- --------- --------- --------- --------- ---------
Balance at June 30, 2000 26,794 $ 27 $ 144,845 $ 97,446 $ -- $ 242,318
--------- --------- --------- --------- --------- ---------
THREE MONTHS ENDED
JUNE 30, 1999 -------------------------------------------------------------------------
Balance at March 31, 1999 11,534 $ 12 $ 110,035 $ 13,150 $ (14,301) $ 108,896
Net income -- -- -- 13,709 -- 13,709
Comprehensive income -- -- -- -- -- 13,709
Exercise of Common Stock
options by employees -- -- (57) -- -- (57)
Sale of Common Stock under
employee stock purchase
plan -- -- -- -- --
Issue of treasury stock upon
exercise of stock options 106 -- 271 (342) 1,734 1,663
Purchase of treasury stock -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance at June 30, 1999 11,640 $ 12 $ 110,249 $ 26,517 $ (12,567) $ 124,211
--------- --------- --------- --------- --------- ---------
SIX MONTHS ENDED
JUNE 30, 2000 -------------------------------------------------------------------------
Balance at December 31, 1999 12,671 $ 12 $ 119,163 $ 64,782 $ -- $ 183,957
Net income -- -- -- 32,664 -- 32,664
Comprehensive income -- -- -- -- -- 32,664
Issue of Common Stock, upon
purchase of subsidiary 261 -- 14,897 -- -- 14,897
Exercise of Common Stock
Options by employees 778 1 10,502 -- -- 10,503
Sale of Common Stock under
Employee stock purchase
plan 15 1 296 -- -- 297
Stock split adjustment 13,069 13 (13) -- -- --
--------- --------- --------- --------- --------- ---------
Balance at June 30, 2000 26,794 $ 27 $ 144,845 $ 97,446 $ -- $ 242,318
--------- --------- --------- --------- --------- ---------
SIX MONTHS ENDED
JUNE 30, 1999 -------------------------------------------------------------------------
Balance at December 31, 1998 9,406 $ 9 $ 75,610 $ 12,129 $ (12,053) $ 75,695
Net income -- -- -- 14,891 -- 14,891
Comprehensive income -- -- -- -- -- 14,891
Sale of Common Stock, net of
issuance cost 2,300 3 34,425 -- -- 34,428
Exercise of Common Stock
options by employees 10 -- (57) (54) 172 61
Sale of Common Stock under
employee stock purchase
plan 18 -- -- (107) 290 183
Issue of treasury stock upon
exercise of stock options
Purchase of treasury stock 106 -- 271 (342) 1,734 1,663
Purchase of treasury stock (200) -- -- -- (2,710) (2,710)
--------- --------- --------- --------- --------- ---------
Balance at June 30, 1999 11,640 $ 12 $ 110,249 $ 26,517 $ (12,567) $ 124,211
--------- --------- --------- --------- --------- ---------
</TABLE>
Page 6
<PAGE>
DSP GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and six months ended June
30, 2000, are not necessarily indicative of the results that may be expected for
the year ended December 31, 2000. For further information, reference is made to
the consolidated financial statements and footnotes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 1999.
NOTE B - 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 (in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Work-in-process $ -- $ 169
Finished goods 2,346 3,114
------ ------
$2,346 $3,283
====== ======
</TABLE>
NOTE C - NET EARNINGS PER SHARE
Basic net income per share is computed based on the weighted average number of
shares of common stock outstanding during the period. For the same periods,
diluted net income per share further includes the effect of dilutive stock
options outstanding during the year, all in accordance with the Financial
Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("SFAS
128"). The following table sets forth the computation of basic and diluted net
income per share (in thousands except per share amounts):
Page 7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net Income $17,255 $13,709 $32,664 $14,891
Denominator:
Weighted average number of shares of common
stock outstanding during the period used to
compute basic earning per share............. 26,684 23,122 26,412 22,334
Incremental shares attributable to exercise
of outstanding options (assuming proceeds
would be used to purchase treasury stock).. 2,392 1,210 2,499 670
------- ------- ------- -------
Weighted average number of shares of common
stock used to compute diluted earnings per
share...................................... 29,076 24,332 28,911 23,004
======= ======= ======= =======
Basic net earnings per share............... $ 0.65 $ 0.59 $ 1.24 $ 0.67
======= ======= ======= =======
Diluted net earnings per share............. $ 0.59 $ 0.56 $ 1.13 $ 0.65
======= ======= ======= =======
</TABLE>
NOTE D - INVESTMENTS
The following is a summary of the held to maturity securities and cash deposits
(in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Obligations of states and
political obligations $ 81,903 $ 96,312
Corporate obligations 61,093 30,440
Cash deposits 66,831 21,961
-------- --------
$209,827 $148,713
======== ========
Amounts included in marketable
Securities and cash deposits $158,600 $140,593
Amounts included in
cash and cash equivalents 51,227 8,120
-------- --------
$209,827 $148,713
======== ========
</TABLE>
At June 30, 2000 and at December 31, 1999, the carrying amount of securities
approximated their fair market value and the amount of unrealized gain or loss
was not significant. Gross realized gains or losses for the three and six months
ended June 30, 2000 and 1999, were not significant. The amortized cost of held
to maturity securities at June 30, 2000, by contractual maturities, is shown
below (in thousands):
Page 8
<PAGE>
<TABLE>
<CAPTION>
Amortized Cost
--------------
<S> <C>
Due in one year or less $131,312
Due after one year to two years 78,515
--------
$209,827
========
</TABLE>
NOTE E - INCOME TAXES
The effective tax rate used in computing the provision for income taxes is based
on projected fiscal year income before taxes, including estimated income by tax
jurisdiction. The difference between the effective tax rate and the statutory
rate is due primarily to foreign tax holiday and tax exempt income in Israel.
NOTE F - SIGNIFICANT CUSTOMERS
Product sales to one distributor accounted for 49% and 50% of total revenues for
the three months ended June 30, 2000 and 1999, respectively. Additionally,
product sales to one distributor accounted for 47% and 38% of total revenues for
the six months ended June 30, 2000 and 1999, respectively. The loss of one or
more major distributors or customers could have a material adverse effect on our
business, financial condition and results of operations.
NOTE G - OTHER INVESTMENTS
Other investments are comprised of:
AudioCodes, Ltd.: AudioCodes, Ltd. ("AudioCodes") is an Israeli corporation
primarily engaged in design, research, development, manufacturing and marketing
of hardware and software products that enable simultaneous transmission of voice
and data over networks such as the Internet, ATM and Frame Relay.
In January 2000, we sold 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. In June 2000, we sold an additional 250,000 shares
of AudioCodes for approximately $19.2 million and recorded in the second quarter
of 2000, an additional capital gain in the amount of $17.6 million. We currently
own approximately 2.1 million of AudioCodes shares, which represents
approximately 11% of the outstanding shares. The condensed consolidated
statements of income for the three months ended June 30, 2000 and 1999 include
equity gains of $703,000 and $575,000, respectively, in our investment in
AudioCodes.
VoicePump, Inc.: VoicePump, Inc. ("VoicePump") is an US corporation primarily
engaged in the design, research, development and marketing of software
applications for Voice Over DSL (VoDSL) and Voice Over Internet Protocol (VoIP).
In March 2000, we acquired (1) approximately 1,960,250 shares of Common Stock of
VoicePump from certain shareholders in exchange for approximately 261,000 shares
of our Common Stock and a nominal amount of cash (to pay for fractional shares)
and (2) approximately 1,027,397 shares of VoicePump Common Stock directly from
VoicePump together with warrants to purchase up to 1,027,397 shares of VoicePump
Common Stock at an exercise price of $4.866 per share within two years (of the
issuance of the warrant) and up to 1,027,397 additional shares at an exercise
price of
Page 9
<PAGE>
$4.866 per share within three years (of the issuance of the warrant) for
$5,000,000. The shares acquired from VoicePump and its shareholders (not
including the shares issuable upon exercise of the warrants) represent
approximately 73% of the outstanding shares of VoicePump. In the second quarter
of 2000 our investment in VoicePump was diluted due to exercise of warrants by a
VoicePump shareholder to approximately 71% of the outstanding shares of
VoicePump. The condensed consolidated statements of income for the three months
ended June 30, 2000 include losses in our equity investment in VoicePump of
approximately $545,000 and include the minority interest in those losses in the
amount of $148,000. We also recorded in the second quarter of 2000 a loss of
$100,000 which was the minority gain in VoicePump's stock issue. Our operation
expenses include unusual items in the amount of $11.9 million related to the
acquired in-process research and development which was written off in the first
quarter of 2000.
NOTE H - STOCK DIVIDEND
On January 24, 2000, our Board of Directors declared a stock dividend whereby
each holder of record of Common Stock on February 16, 2000 received one
additional share of common stock for each share then owned. The stock dividend
was paid on March 1, 2000.
NOTE I - CONTINGENCIES
We are involved in certain claims arising in the normal course of business,
including claims that it may be infringing patent rights owned by third parties.
We are unable to foresee the extent to which these matters will be pursued by
the claimants or to predict with certainty the eventual outcome. However, we
believe that the ultimate resolution of these matters will not have a material
adverse effect on our financial position, results of operations or cash flow.
Page 10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
TOTAL REVENUES. Our total revenues increased significantly to $25.7 million in
the second quarter of 2000 from $16.7 million in the second quarter of 1999.
Total revenues in the first half of 2000 increased to $49.1 million from $27.2
million in the same period in 1999. The increases in both three and six months
ended June 30, 2000 compared to the same periods in 1999 were due to our
increased revenues from product sales as well as license sales. Product sales
increased primarily due to the strong demand of our D16K products and also due
to the introduction of our new line of DL16K products in the first quarter of
2000. Our licensing and royalty revenues increased to $5.5 million in the second
quarter of 2000 compared to $4.0 million in the same period of 1999 primarily
due to three new licensees; the Atmel Corporation, the Marvell Technology Group
Ltd. and the Orkit Communication Ltd. Royalty revenues increased in the first
six months ended June 30, 2000 as compared to the same period in 1999.
Export sales, primarily consisting of Integrated Digital Telephony (IDT) speech
processors shipped to manufacturers in Europe and Asia, including Japan, as well
as license fees on DSP core designs, represented 85% of our total revenues for
the three months ended June 30, 2000 and 91% of our total revenues for the three
months ended June 30, 1999. Additionally, these sales represented 88% of our
total revenues for the six months ended June 30, 2000 and 83% of our total
revenues for the six months ended June 30, 1999. All export sales are
denominated in U.S. dollars.
Revenues from a distributor, Tomen Electronics, accounted for 49% and 50% of our
total revenues for the three months ended June 30, 2000 and 1999, respectively.
Additionaly, Tomen Electronics accounted for 47% and 38% of our total revenues
for the six months ended June 30, 2000 and 1999, respectively.
GROSS PROFIT. Gross profit as a percentage of total revenues decreased to 54% in
the second quarter of 2000 from 57% in the second quarter of 1999. The decrease
in gross profit in the second quarter of 2000, was primarily due to an increase
in product sales revenues, which typically generate a lower gross profit than
licening revenues, as a percentage of total revenues. Product gross profit as a
percentage of product sales decrease slightly to 42% in the second quarter of
2000 from 44% in the second quarter of 1999. The Company managed to off-set the
continued decline in average selling prices with a decrease in manufacturing
costs, partially due to technological improvements.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses
increased to $4.8 million in the second quarter of 2000 from $3.7 million in the
second quarter of 1999. In the first half of 2000, research and development
expenses increased to $ 9.5 million from $7.1 million in the first half of 1999.
The increase in the first half of 2000 compared to the same period in 1999 was
primarily due to increased research and development personnel to enforce our new
research and development projects in connection with the existing new line of
products the D16K and a new DL16K series. The expense increase was also
attributed to higher levels of depreciation, due to our acquisition of
research and development computers and lab equipment. Our research and
development expenses as a percentage of total revenues were 19% in the three
months ended June 30, 2000 and 22% in the three months ended June 1999. The
decrease was attributed to our lower revenues in the three months ended June 30,
1999, as compared with the same period in 2000.
Page 11
<PAGE>
SALES AND MARKETING EXPENSES. Our sales and marketing expenses increased to $3.1
million from $2.2 million in the second quarter of 2000 as compared to the same
quarter in 1999. In the first six months ended June 30, 2000 sales and marketing
expenses were $5.9 million compared with $4.1 million in the same period ended
June 30, 1999. Sales commissions increased in the second quarter of 2000
compared with the same period in 1999, due to higher sales. Our sales and
marketing expenses as a percentage of total revenues was 12% in the three months
ended June 30, 2000 and 13% in the three months ended June 30, 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. Our general and administrative expenses
were $1.6 million in the three months ended June 30, 2000 and $1.3 million in
the three months ended June 30, 1999. Additionally, in the first half of 2000
general and administrative expenses were $2.9 million compared to $2.6 million
in the comparable period in 1999. These expenses in the second quarter of 2000
as a percentage of total revenues decreased to approximately 6% in second
quarter of 2000, compared to 8% in the second quarter of 1999. The decrease was
attributed to our lower revenues in the second quarter in 1999, as compared with
the same period in 2000.
UNUSUAL ITEMS. In the first quarter of 2000 we recorded two unusual expense
items amounting to approximately $14.2 million. A write off amount of $11.9
million was recorded relating to the acquired in-process research and
development in connection with the acquisition of approximately 73% of the
outstanding shares of Voicepump, Inc. An expense of $2.2 million was recorded
relecting the accelerated amortization of acquired assets and intangibles
related to the 1999 acquisition of 900 MHz RF and baseband technology from
Applied Micro Devices, Inc.
OTHER INCOME (EXPENSE). Interest and other income and interest expenses, net for
the six months ended June 30, 2000 increased to $5.9 compared to $2.2 million
for the six months ended June 30, 1999. The increase was primarily the result of
higher levels of cash, cash equivalents, marketable securities and cash deposits
in 2000 as compared with 1999, as well as higher yields.
EQUITY IN INCOME (LOSS) OF EQUITY METHOD INVESTEES, NET. Equity in income (loss)
of equity method investees, net was a $703,000 gain for the three months ended
June 30, 2000 as compared to a $575,000 gain in the comparable period ended June
30, 1999. In the first half of 2000 equity in income (loss) of equity method
investees, net was $1.1 million gain, as compared with a $1.0 million gain in
the same period in 1999. In the three months ended June 30, 2000 we recorded
VoicePump's losses in results of operations in our statements of income of
approximately $545,000 and included the minority interest in those losses in the
amount of $148,000.
CAPITAL GAIN. In January 2000, we sold 600,000 shares of AudioCodes for
approximately $43.8 million and recorded in the first quarter of 2000, a capital
gain in the amount of $40.0 million. In June 2000 we sold an addition 250,000
shares of AudioCodes for approximately $19.2 million and recorded in the second
quarter of 2000, an additional capital gain in the amount of $17.6 million. We
currently own approximately 2.1 million of AudioCodes shares, which represents
approximately 11% of the outstanding shares.
PROVISION FOR INCOME TAXES. In 2000 and 1999, we benefited for federal and state
tax purposes from foreign tax holiday and tax exempt income in Israel.
Page 12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. During the six months ended June 30, 2000, we generated
$13.7 million of cash and cash equivalents from our operating activities as
compared to $2.3 million during the six months ended June 30, 1999. This
Increase is mainly due to a significant increase in net income during the six
months ended June 30, 2000 as compared to the previous period as well as to the
increase in the non-cash effect of amortization of in-process research and
development costs. These increases were offset mainly by the recognition of
capital gain on the sales of the Audiocodes' shares, in the first six months of
2000 compared with the same period in 1999.
INVESTING ACTIVITIES. 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 the first
six months of 2000, we purchased $63.8 million of investments classified as
short-term cash deposits and marketable securities. In the same period, $45.3
million of investments classified as marketable securities matured. Our capital
equipment purchases in the first six months of 2000, primarily of research and
development software and computers, totaled $894,000.
FINANCING ACTIVITIES. During the six months ended June 30, 2000, we received
$10.8 million upon the exercise of employee stock options and through
purchases pursuant to the employee stock purchase plan.
At June 30, 2000, our principal source of liquidity consisted of cash and
cash equivalents deposits totaling $72.8 million and marketable securities
and short-term cash deposits of $158.6 million. Our working capital at June
30, 2000 was $226.6 million.
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 twelve months.
In addition, as part of our business strategy, we occasionally evaluate
potential acquisitions of businesses, products and technologies. Accordingly, a
portion of our available cash may be used at any time for the acquisition of
complementary products or businesses. Such potential transactions may require
substantial capital resources, which may require us to seek additional debt or
equity financing. There can be no assurance that we will consummate any such
transactions. See "Factors Affecting Future Operating Results--There are Risks
Associated with our Acquisition Strategy" for more detailed information.
YEAR 2000 READINESS
We were 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, we utilized both internal and external
resources to identify, correct or reprogram and test our systems for Year 2000
readiness. All reprogramming efforts, including testing, were 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
us 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 our 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 our primary processing
vendors that
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plans had been developed to address the processing of transactions in the Year
2000. We also communicated with suppliers and other third parties that do
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 our 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. It is our policy not to enter into derivative financial
instruments. We do not currently have any significant foreign currency exposure
since we do not transact business in foreign currencies. Due to this, we did not
have significant overall currency exposure at August 1, 2000.
FOREIGN CURRENCY RATE RISK. As nearly all of our sales and expenses are
denominated in U.S. Dollars, we have experienced only insignificant foreign
exchange gains and losses to date, and do not expect to incur significant gains
and losses in 2000. We did not engage in foreign currency hedging activities
during the three months ended June 30, 2000.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the "EMU") introduced a
new currency, the euro, on January 1, 1999. During 2002, all EMU countries are
expected to be operating with the euro as their single currency. Uncertainty
exists as to the effect the euro currency will have on the marketplace.
Additionally, all of the final rules and regulations have not yet been defined
and finalized by the European Commission with regard to the euro currency. We
are assessing the effect the euro formation will have on DSP Group's internal
systems and the sale of DSP Group products. We expect to take appropriate
actions based on the results of such assessment. We believe that the cost
related to this issue will not be material to us and will not have a substantial
effect on our financial condition and results of operations.
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FACTORS AFFECTING FUTURE OPERATING RESULTS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING OUR FUTURE
PRODUCTS, EXPENSES, REVENUE, LIQUIDITY AND CASH NEEDS AS WELL AS OUR PLANS AND
STRATEGIES. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS
AND WE ASSUME NO OBLIGATION TO UPDATE THIS INFORMATION. NUMEROUS FACTORS COULD
CAUSE OUR ACTUAL RESULTS TO DIFFER SIGNIFICANTLY FROM THE RESULTS DESCRIBED IN
THESE FORWARD-LOOKING STATEMENTS, INCLUDING THE FOLLOWING RISK FACTORS.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. Our quarterly
results of operations may vary significantly in the future for a variety of
reasons, including the following:
- fluctuations in volume and timing of product orders;
- timing of recognition of license fees;
- level of per unit royalties;
- changes in demand for our products due to seasonal customer buying patterns
and other factors;
- timing of new product introductions by us or our customers, licensees or
competitors;
- changes in the mix of products sold by us;
- fluctuations in the level of sales by original equipment manufacturers
(OEMs) and other vendors of products incorporating our products; and
- general economic conditions, including the changing economic conditions in
Asia.
Each of the above factors is difficult to forecast and thus could harm our
business, financial condition and results of operations. Through 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
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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 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 affect 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 MAY NEED TO INCREASE OUR RESEARCH AND DEVELOPMENT EFFORTS TO REMAIN
COMPETITIVE. The DSP Cores market is experiencing extensive efforts by some of
ourcompetitors to use new technologies to manipulate the chip design programming
toincrease the parallel processing of the chip. One such technology used is
VeryLong 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
toimprove the programming processing of these chips, then we may need to
furtherour research and development to obtain such technology to remain
competitive inthe market.
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;
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- political and economic instability; and
- changes in diplomatic and trade relationships.
In particular, our principal research and development facilities are located in
the State of Israel and, as a result, at June 30, 2000, 124 of our 169 employees
were located in Israel, including 85 out of 100 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 general rate of inflation. While
substantially all of our sales and expenses are denominated in United States
dollars, a portion of our expenses are denominated in Israeli shekels. Our
primary expenses paid in Israeli currency are employee salaries and lease
payments on our Israeli facilities. As a result, an increase in the value of
Israeli currency in comparison to the United States dollar could increase the
cost of technology development, research and development expenses and general
and administrative expenses. We cannot provide assurance that currency
fluctuations, changes in the rate of inflation in Israel or any of the other
factors mentioned above will not have a material adverse effect on our business,
financial condition and results of operations.
WE DEPEND ON OEMS AND THEIR SUPPLIERS TO OBTAIN REQUIRED COMPLEMENTARY
COMPONENTS. Some of the raw materials, components and subassemblies included in
the products manufactured by our OEM customers, which also incorporate our
products, are obtained from a limited group of suppliers. Supply disruptions,
shortages or termination of any of these sources could have an adverse effect on
our business and results of operations due to the delay or discontinuance of
orders for our products by customers until those necessary components are
available.
WE DEPEND UPON THE ADOPTION OF INDUSTRY STANDARDS BASED ON TRUESPEECH. Our
prospects are partially dependent upon the establishment of industry standards
for digital speech compression based on TrueSpeech algorithms in the computer
telephony and Voice over IP markets. The development of industry standards
utilizing TrueSpeech algorithms would create an opportunity for us to develop
and market speech co-processors that provide TrueSpeech solutions and enhance
the performance and functionality of products incorporating these co-processors.
In February 1995, the ITU established G.723.1, which is predominately composed
of a TrueSpeech algorithm, as the standard speech compression technology for use
in video conferencing over public telephone lines. In March 1997, the
International Multimedia Teleconferencing Consortium, a nonprofit industry
group, recommended the use of G.723.1 as the default audio coder for all voice
transmissions over the Internet or for IP applications for H.323 conferencing
products.
THERE ARE RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY. DSP Group has pursued,
and will continue to pursue, growth opportunities through internal development
and acquisition of complementary businesses, products and technologies. We are
unable to predict whether or when any prospective acquisition will be completed.
The process of integrating an acquired business may be prolonged due to
unforeseen difficulties and may require a disproportionate amount of our
resources and management's attention. We cannot provide assurance that we will
be able to successfully identify suitable acquisition candidates, complete
acquisitions, integrate acquired businesses into our operations, or expand into
new markets. Once
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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. These factors and fluctuations could have a
material adverse effect on the market price of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quantitative and Qualitative Disclosures About Market Risk."
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended June 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DSP GROUP, INC.
(Registrant)
By /s/ MOSHE ZELNIK
--------------------------------------------------------------------
Moshe Zelnik, Vice President of Finance, Chief Financial Officer and
Secretary (Principal Financial Officer and Principal Accounting Officer)
Date: August 14, 2000
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