<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996
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 0-25622
DSP COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0389180
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
20300 Stevens Creek Boulevard, Cupertino, California 95014
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (408) 777-2700
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 periods 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 May 7, 1996, there were 21,745,446 shares of Common Stock ($.001 par
value) outstanding.
<PAGE>
INDEX
DSP COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
_________________________________
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--March 31, 1996
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed consolidated income statements--Quarter
ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed consolidated statements of cash flows--Quarter
ended March 31, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to condensed consolidated financial statements--
March 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 7
PART II. OTHER INFORMATION
_____________________________
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . .15
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . . .15
Item 3. Defaults upon Senior Securities. . . . . . . . . . . . . . . . . . . .15
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . .15
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . .15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . .16
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DSP COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(UNAUDITED) (NOTE 1)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $18,466 $ 10,292
Short term investments 18,441 17,696
Trade accounts receivable 5,220 8,838
Other current assets 1,581 1,448
------- --------
Total current assets 43,708 38,274
Property and Equipment, net 2,265 1,823
Goodwill 2,256 2,379
Other Assets 1,558 1,643
------- --------
$49,787 $44,119
------- --------
------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,684 $ 3,419
Accrued compensation and benefits 1,538 1,711
Other accrued liabilities 3,979 3,478
Deferred income 1,231 473
------- --------
Total current liabilities 10,432 9,081
Other Liabilities 200 170
STOCKHOLDERS' EQUITY
Common Stock 18 18
Additional paid-in-capital 40,506 39,794
Contributed capital 7,232 7,232
Accumulated deficit (8,601) (12,176)
------- --------
Total stockholders' equity 39,155 34,868
------- --------
$49,787 $44,119
------- --------
------- --------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
Note 1: The balance sheet at December 31, 1995 has been derived from audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
3
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DSP COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
1996 1995
----------- ------------
<S> <C> <C>
REVENUES
Product $16,124 $3,477
Technology development 1,198 779
------- ------
Total revenues 17,322 4,256
COST OF REVENUES
Product 9,212 1,778
Technology development 858 411
------- ------
Total cost of revenues 10,070 2,189
------- ------
Gross profit 7,252 2,067
OPERATING EXPENSES
Research and development 1,007 512
Sales and marketing 880 474
General and administrative 1,655 544
------- ------
3,542 1,530
------- ------
Operating income 3,710 537
OTHER INCOME (EXPENSE)
Interest income 143 218
Interest expense (57) (20)
Investment income 301 --
Foreign currency remeasurement (loss)
gain and other expenses (12) (14)
------- ------
Income before provision for income taxes 4,085 721
Provision for income taxes 510 147
------- ------
Net income $ 3,575 $ 574
------- ------
------- ------
Net income per share $ 0.18 $ 0.04
------- ------
------- ------
Shares used in computing net income per share 20,246 13,786
------- ------
------- ------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
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DSP COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
1996 1995
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,575 $ 574
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 380 85
Loss on disposal of equipment -- 3
Gain from sales of short term investments (141) --
Compensation expenses related to shares issued
in a subsidiary 30 --
Changes in operating assets and liabilities:
Trade accounts receivable 3,618 (944)
Other current assets (133) (236)
Accounts payable 362 364
Accrued compensation and benefits (173) (237)
Deferred income 758 (662)
Other accrued liabilities 501 78
------- --------
Net cash provided by (used in) operating
activities 8,777 (975)
------- --------
Investing Activities:
Cash purchases of equipment (717) (254)
Proceeds from sales of equipment 6 10
Purchases of short term investments (6,291) (969)
Sales of short term investments 5,628 241
------- --------
Net cash used in investing activities (1,374) (972)
------- --------
FINANCING ACTIVITIES:
Repayments of lease obligations -- (15)
Issuance of common stock for cash 771 20,245
------- --------
Net cash provided by financing activities 771 20,230
------- --------
Increase in cash and cash equivalents 8,174 18,283
Cash and cash equivalents
at beginning of period 10,292 8,146
------- --------
Cash and cash equivalents at
end of period $18,466 $26,429
------- --------
------- --------
SUPPLEMENTAL NONCASH INVESTING AND FINANCING INFORMATION
Other public offering expenses $ -- $ 1,318
Equipment cost payable $ 33 $ --
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
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DSP COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of DSP
Communications, Inc. ("DSPC" or the "Company") 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 notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the interim period are
not necessarily indicative of the results that may be expected for the full
year. For further information, refer to the consolidated financial statements
and notes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1995.
2. INCOME TAXES
The tax provision for the quarter ended March 31, 1996, reflects Israeli
taxes on the portion of the undistributed income which is not subject to
"Approved Enterprise" status and U.S. taxes on U.S. earnings which are not
offset by net operating loss carry forwards.
3. SUBSEQUENT EVENT
On April 24, 1996, the Company closed a follow-on offering of 4,000,000 shares
at $26 per share, of which 901,368 shares were sold by a selling shareholder,
resulting in net proceeds to the Company of approximately $76 million.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following information should be read in conjunction with the consolidated
condensed interim financial statements and the notes thereto in Part I, Item
1 of this Quarterly Report and with Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's
Annual Report for the year ended December 31, 1995.
The results of operations for 1996 include the results of CTP Systems Ltd.
("CTP Systems"). CTP Systems is presently developing its wireless PBX
product for commercial production, and commercial quantities are expected to
be first shipped in the fourth quarter of 1996. CTP Systems incurred losses
in the first quarter of 1996, and is expected to continue to incur losses in
the following quarters of 1996.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain items
from the Company's condensed consolidated statements of income as a percentage
of total revenues.
Quarter ended
March 31,
------------------
1996 1995
------ ------
Revenues:
Product 93.1% 81.7%
Technology development 6.9 18.3
------------------
Cost of revenues:
Product 53.2 41.8
Technology development 5.0 9.7
------------------
58.2 51.5
Gross profit 41.8 48.5
Operating expenses:
Research and development 5.8 12.0
Sales and marketing 5.1 11.1
General and administrative 9.6 12.8
------------------
20.5 35.9
------------------
Operating income 21.3 12.6
Net interest and other income 2.2 4.3
------------------
Income before provision for income taxes 23.5 16.9
Provision for income taxes (2.9) (3.5)
------------------
Net income 20.6% 13.4%
------------------
7
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REVENUES
Total revenues increased 307% to $17.3 million in the first quarter of 1996
from $4.3 million in the first quarter of 1995.
Product revenues increased 364% to $16.1 million in the first quarter of 1996
from $3.5 million in the first quarter of 1995. The demand for the Company's
baseband chip sets for the Japanese PDC digital cellular telephone market has
increased significantly. In addition, during the first quarter of 1996 the
Company commenced volume shipments of its new half rate chipset.
Technology development revenues were $1,198,000 in the first quarter of 1996
as compared to $779,000 in the first quarter of 1995. The Company's technology
development revenues fluctuate depending on the number and size of technology
development agreements and timing of related milestones and deliverables.
GROSS PROFIT
Gross profit in the first quarter of 1996 was $7.3 million (42% of revenues)
compared to $2.1 million (49% of revenues) in the first quarter of 1995. The
gross profit on product revenues decreased from 49% in the first quarter of
1995 to 43% in the first quarter of 1996. The Company anticipates that the
cost of products sold as a percentage of product revenues may continue to
increase in subsequent quarters as the sales price of chip sets decreases as
a result of volume discounts and price pressures. The gross margin on
technology development varies from quarter to quarter depending on the
similarity or diversity of the products and technologies developed, and as
contractual milestones are achieved.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses (net of grants from the Chief Scientist of
the Israeli Ministry of Trade and Industry) increased to $1,007,000 (5.8% of
revenues) in the first quarter of 1996 from $512,000 (12% of revenues) in the
first quarter of 1995. The increase reflects the growth in engineering
personnel and in projects under development, and the inclusion of CTP
Systems' R&D activities.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased to $880,000 (5.1% of revenues) in the
first quarter of 1996 from $474,000 (11.1% of revenues) in the first quarter
of 1995. The increase reflects the growth in the marketing and sales staff at
the Company's Cupertino, California, offices, increased participation at trade
exhibitions, increased promotion and market research expenses, and increased
expenses at the Company's Tokyo offices.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses in the first quarter of 1996 were
$1,655,000 (9.6% of revenues) compared to $544,000 (12.8% of revenues) in the
first quarter of 1995. General and administrative expenses increased
primarily as a result of increased staffing levels at the Company's Cupertino
offices and at the facilities of the Company's Israeli subsidiaries, increased
facility expenses, increased administration expenses and fees, and the
inclusion of CTP Systems' expenses.
8
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OTHER INCOME
Net interest and other income was $375,000 in the first quarter of 1996
compared to $184,000 in the first quarter of 1995. The 1996 amount was
generated primarily from interest on the Company's cash and investment
balances, including the proceeds from the Company's initial public offering
("IPO") completed in March 1995, and from the follow-on public offering
completed in June 1995.
PROVISIONS FOR INCOME TAX
The tax provision for the quarter ended March 31, 1996, reflects Israeli
taxes on the portion of the undistributed income which is not subject to
"Approved Enterprise" status and U.S. taxes on U.S. earnings which are not
offset by net operating loss carryforwards. The effective tax rate for the
first quarter of 1996 is approximately 12.5% and may increase in the future
depending on, among other factors, the elimination over time of the tax
benefits awarded with Approved Enterprise status and the possible application
of U.S. tax rules regarding the taxation of controlled foreign corporations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided $8.8 million in the three months
ended March 31, 1996 and used $1 million in the comparable period in 1995.
Net cash provided from operations in the first quarter of 1996 was composed
primarily of net income for the period, and an increase in accounts payable,
a decrease in trade accounts receivable and an increase in deferred income.
The Company's investing activities, other than purchases of and proceeds from
short-term investments, have consisted primarily of expenditures for fixed
assets, which totaled $717,000 in the first three months of 1996 and $254,000
in the first three months of 1995.
In obtaining approval of the Company's reorganization from Israeli tax
authorities, which was completed immediately before the closing of the IPO,
the Company agreed to invest in activities in Israel not less than $9.0
million out of the proceeds of the IPO within three years after the IPO.
In October 1995, the Company completed the acquisition of CTP Systems, for
$14.1 million. Prior shareholders of CTP Systems who are continuing as
employees of CTP Systems and, under certain circumstances, prior shareholders
who have no continuing role in CTP Systems, may be entitled to receive a
contingent earn-out payment on March 31, 1998. The amount of the contingent
earn-out payment will be determined by a formula based upon the profits and
revenues, as defined, of CTP Systems for fiscal years 1996 and 1997 on a
combined basis, and the relationship between such profits and revenues. The
Company has the ability to extinguish the contingent earn-out obligation by
paying an additional $6.0 million by December 1996.
As of March 31, 1996, the Company had $36.9 million of cash, cash equivalents
and short-term investments. The Company believes that existing cash, cash
equivalents and short-term investments balances, will be sufficient to meet
its cash requirements for at least the next twelve months. While operating
activities may provide cash in certain periods, to the extent the Company may
experience growth in the future, the Company anticipates that its operating
and investing activities may use cash and consequently, such growth may
require the Company to obtain additional sources of financing. The Company
may also from time to time consider the acquisition of additional
complimentary businesses,
9
<PAGE>
projects or technologies which may require additional financing or require
the use of a significant portion of its existing cash.
On April 24, 1996, the Company closed a follow-on public offering of
4,000,000 shares of Common Stock at $26 per share, of which 901,368 shares
were sold by a selling shareholder. Aggregate net proceeds to the Company
from the offering, exclusive of the Company's expenses associated with the
offering, were approximately $76 million.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-Q contains forward looking statements concerning the Company's
future products, expenses, revenue, liquidity and cash needs as well as the
Company's plans and strategies. These forward looking statements are based
on current expectations and the Company assumes no obligation to update this
information. Numerous factors could cause actual results to differ
significantly from the results described in these forward looking statements,
including the following risk factors.
RELIANCE ON A SINGLE JAPANESE DISTRIBUTOR AND A SMALL NUMBER OF OEMS.
Substantially all of the Company's sales of baseband chip sets for digital
cellular telephones are to Tomen Electronics Corp. ("Tomen"), the Company's
distributor in Japan. Tomen's sales of the Company's products are
concentrated in a small number of Japanese original equipment manufacturer
("OEM") customers. Although Tomen has recently commenced shipments of the
Company's products to additional Japanese OEMs, prior to 1996, Kenwood
Corporation, Kyocera Corporation and Sanyo Electronic Co., Ltd. accounted for
all of Tomen's sales of the Company's baseband chip sets. The loss of Tomen
as a distributor or the loss of or significant reduction in Tomen's sales to
any of these Japanese OEMs would have a material adverse effect on the
Company's business, financial condition and results of operations. Because
the worldwide cellular subscriber equipment industry is dominated by a small
number of large corporations, the Company expects that a significant portion
of its future product sales will continue to be concentrated in a limited
number of OEMs. As a result, the Company's performance is likely to depend
on relatively large orders from a limited number of distributors and OEMs.
The Company's performance will also depend significantly on gaining
additional OEM customers, both within existing markets and in new markets.
In addition the Company believes that the manufacture of subscriber equipment
for emerging telecommunications services, such as personal communications
services ("PCS") will also be concentrated in a limited number of OEMs. The
loss of any exiting OEM customer, a significant reduction in the level of
sales to any existing customers, or the failure of the Company to gain
additional OEM customers could have a material adverse effect on the
Company's business, financial condition and results of operations.
RELIANCE ON TEXAS INSTRUMENTS AND OTHER THIRD PARTY MANUFACTURERS. All of
the Company's integrated circuits are currently fabricated by independent
third parties, and the Company intends to continue using independent
foundries in the future. To date, the Company has purchased all of the DSP
chips for its baseband chip sets for cellular telephones from Texas
Instruments Incorporated ("TI"). The Company also buys all of the DSP chips
used in the products of CTP Systems from TI. The Company purchases standard
DSP chips from TI, and TI embeds the Company's proprietary software
algorithms in TI's chips. In addition, the Company currently purchases its
application specific integrated circuits ("ASICs") for its PDC chip sets from
VLSI Technology, Inc. ("VTI") and Atmel ES2, a wholly-owned subsidiary of
Atmel, Inc. ("Atmel ES2"); all of its ASICs for analog baseband chip sets
from TI and its ASICs for CTP Systems' products from American Microsystems,
Inc. ("AMI") and Pacific Communication Services, Inc. ("PCSI"), a subsidiary
of Cirrus Logic, Inc. Accordingly, the Company is and will remain dependent
on
10
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independent foundries, including TI, PCSI, AMI, VTI and Atmel ES2, to achieve
acceptable manufacturing yields, to allocate to the Company a sufficient
portion of foundry capacity to meet the Company's needs and to offer
competitive pricing to the Company. Although the Company has not experienced
material quality, allocation or pricing problems to date, if such problems
were to arise in the future, they would have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON JAPANESE MARKET. The future performance of the Company will be
dependent, in large part, upon its ability to continue to compete
successfully in the Japanese market. The Company's ability to continue to
compete in this market will be dependent upon several factors, including no
deterioration of existing trade relations between Japan, Israel and the
United States or imposition of tariffs in the wireless personal
communications industry, no adverse changes in the Japanese
telecommunications regulatory environment, the Company's ability to develop
products that meet the technical requirements of its Japanese customers and
the Company's ability to maintain satisfactory relationships with its
Japanese customers and its distributor. All of the Company's sales to its
Japanese customers are denominated in United States dollars and, therefore,
fluctuations in the exchange rate for the United States dollar could
materially increase the price of the Company's products to these customers
and require the Company to reduce prices of its products to remain
competitive. Moreover, the expected emergence of Personal HandyPhone
Services, a microcellular technology potentially competitive with today's
existing Japanese analog and digital cellular networks, could reduce sales in
Japan of digital cellular telephones incorporating the Company's baseband
chip sets. There can be no assurance that changes in the political or
economic conditions, trade policy or regulation of telecommunications in
Japan will not have a material adverse effect on the Company's business,
financial condition and results of operations.
DECLINING SALES PRICES. Manufacturers of wireless personal communications
equipment are experiencing, and are likely to continue to experience, intense
price pressure, which has resulted and is expected to continue to result in
downward pricing pressure on the Company's products. As a result, the
Company has experienced, and expects to continue to experience, declining
sales prices for its products. In addition, pricing competition among
component suppliers has increased. There can be no assurance that either
increases in unit volume or reductions in per unit costs will offset declines
in per unit sales prices, in which case the Company's gross profit would be
adversely affected. Since cellular telephone manufacturers frequently
negotiate supply arrangements far in advance of delivery dates, the Company
often must commit to price reductions for its products before it is aware of
how or if, such cost reductions can be obtained. As a result, such current
or future price reduction commitments could have, and any inability of the
Company to respond to increased price competition would have, a material
adverse effect on the Company's business, financial condition and results of
operations.
RELIANCE ON A SINGLE PRODUCT. Since December 1993, the Company has relied
upon sales from a single product, its baseband chip set for digital cellular
telephones for use in Japan, to generate substantially all of its product
sales. The Company is developing additional products for digital cellular
telephones, PCS and wireless PBX applications; however, there can be no
assurance that it will be successful in doing so.
EXPECTED FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND POTENTIAL QUARTERLY
LOSSES. The Company's quarterly operating results depend on the volume and
timing of product orders received and delivered during the quarter and the
timing of new product introductions by the Company and its customers. The
Company anticipates that for the foreseeable future new product introductions
may cause significant fluctuations in quarterly operating results. The
Company's quarterly operating results may also vary significantly depending
on other factors, including the introduction of new products by the Company's
competitors; market acceptance of new products; the greater number of
manufacturing days in the second
11
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and third quarters; adoption of new technologies and standards; relative
prices of the Company's products; competition; the cost and availability of
components; the mix of products sold; the quality and availability of chip
sets manufactured for the Company by third parties; changes in the Company's
distribution arrangements; sales of wireless subscriber equipment by OEMs and
changes in general economic conditions. In addition, the Company has an
obligation to make certain contingent earn-out payments in March 1988 in
connection with its acquisition of CTP Systems; however, the Company has the
right to extinguish this contingent earn-out obligation by paying $6 million
by December 1996. If the Company elects to make this payment, it will result
in the recognition of a substantial one-time charge against earnings and a
material adverse effect on the Company's operating results in the quarter in
which it is paid. In the event the Company does not elect to make this
payment, the Company could be required to pay a substantially greater amount
in March 1998 if CTP Systems exceeds its original projections of revenues and
profits.
RISK OF INCREASED INCOME TAXES. DSPC Israel Ltd. ("DSPCI") and CTP Systems,
two Israeli subsidiaries of the Company, operate as "Approved Enterprises"
under Israel's Law for the Encouragement of Capital Investments, 1959, as
amended. An Approved Enterprise is eligible for significant income tax rate
reductions for several years following the first year in which it has income
subject to taxation in Israel (after consideration of tax losses carried
forward). There can be no assurance that this favorable tax treatment will
continue, and any change in such tax treatment could have a material adverse
effect on the Company's net income and results of operations. As of the date
hereof, the Company is not aware of any circumstances that might cause it to
lose its favorable tax treatment. If Israel's tax incentives or rates
applicable to DSPCI or CTP Systems are rescinded or changed their income
taxes could increase and their results of operations and cash flow would be
adversely affected. In addition, the Company's income tax rate would
increase if all or a portion of the earnings of DSP Telecom, DSPCI or CTP
Systems were to become subject to United States federal and state income tax
as a result of actual or deemed dividends or through operation of United
States tax rules applicable to "controlled foreign corporations."
MARKETS FOR THE COMPANY'S PRODUCTS ARE HIGHLY COMPETITIVE. The markets for
the Company's products are extremely competitive and the Company expects that
competition will increase. Many of the Company's competitors have entrenched
market positions, established patents, copyrights, tradenames, trademarks and
intellectual property rights and substantial technological capabilities. The
Company's current competitors in the digital cellular market include other
suppliers of DSP-based chip sets and existing cellular telephone
manufacturers that develop chip set solutions internally. Both in the
cellular market and in other wireless personal communications markets, the
Company's existing and potential competitors include large and emerging
domestic and international companies, many of which have significantly
greater financial, technical, manufacturing, marketing, sales and
distribution resources and management expertise than the Company. The
Company believes that its ability to compete successfully in the wireless
personal communications market will depend upon a number of factors both
within and outside of its control, including price, quality, availability,
product performance and features; timing of new product introductions by the
Company, its customers and competitors; and customer service and technical
support. There can be no assurance that the Company will have the financial
resources, technical expertise, or marketing, sales, distribution and
customer service and technical support capabilities to compete successfully.
RELIANCE ON INTERNATIONAL OPERATIONS; RISKS OF OPERATIONS IN ISRAEL. The
Company is subject to the risks of doing business internationally, including
unexpected changes in regulatory requirements; fluctuations in the exchange
rate for the United States dollar; imposition of tariffs and other barriers
and restrictions; and the burdens of complying with a variety of foreign
laws. The Company is also subject to general geopolitical risks, such as
political and economic instability and changes in diplomatic and trade
12
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relationships, in connection with its international operations. In
particular, the Company's principal research and development facilities are
located in the State of Israel and, as a result, at March 31, 1996, 106 of
the Company's 119 employees were located in Israel, including all of the
Company's research and development personnel. Therefore, the Company is
directly affected by the political, economic and military conditions to which
that country is subject. In addition many of the Company's expenses in
Israel are paid in Israeli currency, thereby also subjecting the Company to
foreign currency fluctuations and to economic pressures resulting from
Israel's generally high rate of inflation. The rate of inflation in Israel
for 1994 and 1995 was 14.7% and 8.1%, respectively. While substantially all
of the Company's sales and expenses are denominated in United States dollars,
a portion of the Company's expenses are denominated in Israeli shekels. The
Company's primary expense paid in Israeli currency is employee salaries. As
a result, an increase in the value of Israeli currency in comparison to the
United States dollar could increase the cost of technology development,
research and development expenses and general and administrative expenses.
There can be no assurance that currency fluctuations, changes in the rate of
inflation in Israel or any of the other aforementioned factors will not have
a material adverse effect on the Company's business, financial condition and
results of operations.
In the past, the Company has obtained royalty-bearing grants from the Office
of the Chief Scientist in Israel's Ministry of Industry and Trade (the "Chief
Scientist") and the Israel-United States Binational Industrial Research and
Development Foundation to fund research and development. The terms of the
grants from the Chief Scientist prohibit the transfer of technology developed
pursuant to the terms of these grants to any person, without the prior
written consent of the State of Israel. The Company does not expect to apply
for such grants for the development of new products in the future but will
continue to apply for grants for existing products.
OPERATIONAL RISKS ASSOCIATED WITH CTP SYSTEMS. On October 26, 1995, the
Company acquired for $14.1 million CTP Systems, a developer and manufacturer
of wireless PBXs and other low-mobility wireless communications applications.
CTP Systems' wireless PBX equipment is currently in Beta testing, which may
identify quality or operational problems in the product that require the
Company to incur additional engineering expenses to correct any problems or
redesign the product, and also may result in a delay in making the product
commercially available. CTP Systems intends to manufacture its own products
and will, therefore, be subject to various risks associated with the
manufacturing process, including errors in the manufacturing process,
shortages of required components, manufacturing equipment failures and
disruptions of operations at the manufacturing facility. Prolonged inability
of CTP Systems to deliver products in a timely manner could result in the
loss of customers and a material adverse effect on its results of operations.
In addition certain of the components included in CTP Systems' products are
obtained from a single source or a limited group of suppliers. The partial
or complete loss or delay of the supply of components from certain of these
sources could result in a significant reduction in CTP Systems' revenues and
could also damage certain customer relationships.
MANAGEMENT OF GROWTH. The growth in the Company's business has placed, and
is expected to continue to place, a significant strain on the Company's
management and operations. To manage its growth, the Company must continue
to implement and improve its operational, financial and management
information systems and expand, train and manage its employees. The
anticipated increase in product development and marketing and sales expenses
coupled with the Company's reliance on OEMs to successfully market and
develop products that incorporate the Company's proprietary technologies
could have an adverse effect on the Company's performance in the next several
quarters. The Company's failure to manage growth effectively could have a
material adverse effect on the Company's business, financial condition and
results of operations.
13
<PAGE>
FUTURE ACQUISITIONS. The Company's strategy includes obtaining additional
technologies and will involve, in part, acquisitions of products,
technologies or businesses from third parties. Identifying and negotiating
these acquisitions may divert substantial management resources. An
acquisition could absorb substantial cash resources, could require the
Company to incur or assume debt obligations, or could involve the issuance of
additional Common or Preferred Stock. The issuance of additional equity
securities would dilute and could represent an interest senior to the rights
of then outstanding Common Stock of the Company. An acquisition which is
accounted for as a purchase, like the acquisition of CTP Systems, could
involve significant one-time non-cash write-offs, or could involve the
amortization of goodwill over a number of years, which would adversely affect
earnings in those years. Acquisitions outside the digital communications
area may be viewed by outside market analysts as a diversion of the Company's
focus on digital communications. For these and other reasons, the market for
the Company's stock may react negatively to the announcement of any
acquisition. An acquisition will continue to require attention from the
Company's management to integrate the acquired entity into the Company's
operations, may require the Company to develop expertise in fields outside
its current area of focus and may result in departures of management of the
acquired entity. An acquired entity may have unknown liabilities, and its
business may not achieve the results anticipated at the time of the
acquisition.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting of stockholders on February 29,
1996. At the special meeting, the following matters were voted upon:
1. Proposal to authorize the Board of Directors to amend, at any time prior
to the 1996 Annual Meeting of Stockholders, the Company's Certificate of
Incorporation to increase the number of shares of Common Stock that the
Company is authorized to issue from 20,000,000 to 70,000,000 shares. The
results of the voting were as follows:
Number of Shares voted FOR 5,260,957
Number of Shares voted AGAINST 1,869,180
Number of Shares ABSTAINING 3,250
Number of Broker Non-Votes 500
2. Proposal to authorize the Board of Directors to amend, at any time prior
to the 1996 Annual Meeting of Stockholders, the Company's Certificate of
Incorporation to effect a two-for-one stock split. The results of voting
were as follows:
Number of Shares voted FOR 7,077,836
Number of Shares voted AGAINST 52,801
Number of Shares ABSTAINING 3,250
Number of Broker Non-Votes --
ITEM 5. OTHER INFORMATION
On April 24, 1996, the Company effected a follow-on public offering of shares
of its Common Stock. Aggregate net proceeds to the Company, exclusive of the
Company's expenses associated with the offering, were $75,536,210. A
complete description of the terms of the public offering is set forth in the
Company's Registration Statement on Form S-3 (File No. 333-3134), which was
declared effective on April 18, 1996.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement re: computation of per share earnings.
27 Financial Data Schedule.
(b) Reports on Form 8-K
On January 10, 1996 the Company filed a Form 8-K/A. This Form 8-K/A
constituted Amendment No. 1 to a report on Form 8-K filed by the Company on
November 13, 1995, and was filed solely for the purpose of filing the
financial statements of CTP Systems Ltd. and the pro forma financial
information required by Item 7 of Form 8-K.
16
<PAGE>
SIGNATURE
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.
Dated: May 14, 1996
DSP COMMUNICATIONS, INC.
By: /s/ Gerald Dogon
--------------------------------
Gerald Dogon, Senior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
<PAGE>
EXHIBIT 11.1
DSP COMMUNICATIONS, INC.
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA)
Quarter ended March 31,
------------------------
1996 1995
-------- --------
Shares used in calculation of net income per share:
Average Class B Ordinary shares and Common
shares outstanding 18,304 8,764
Net effect of dilutive stock options and
warrants 1,942 1,404
Class A Convertible Ordinary shares, if
converted -- 3,618
------------------------
20,246 13,786
------------------------
------------------------
Net income $ 3,575 $ 574
------------------------
------------------------
Net income per ordinary share $ 0.18 $ 0.04
------------------------
------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q OF DSP COMMUNICATIONS,
INC. FOR THE QUARTER ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 18,466
<SECURITIES> 18,441
<RECEIVABLES> 5,220
<ALLOWANCES> 0
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<CURRENT-ASSETS> 43,708
<PP&E> 2,265
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0
0
<COMMON> 18
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<TOTAL-LIABILITY-AND-EQUITY> 49,787
<SALES> 16,124
<TOTAL-REVENUES> 17,322
<CGS> 9,212
<TOTAL-COSTS> 10,070
<OTHER-EXPENSES> 3,542
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<INCOME-PRETAX> 4,085
<INCOME-TAX> 510
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<EPS-PRIMARY> 0.18
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