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UNITED STATES
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, 1996
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 Identification Number)
incorporation or organization)
20300 Stevens Creek Boulevard, Cupertino, California 95014
(Address of principal executive offices, including zip code)
(408) 777-2700
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(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 (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the 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 as of March 10, 1997 was approximately $421,880,700.
For purposes of this calculation only, (i) shares of Common Stock are
deemed to have a market value of $11.94 per share, the closing sale
price of the Common Stock as reported on the Nasdaq National Market on
March 10, 1997, and (ii) each of the executive officers, directors and
persons holding 5% or more of the outstanding Common Stock is deemed to
be an affiliate.
The number of shares of Common Stock outstanding on March 10, 1997 was
44,872,345 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this Report incorporates information by reference from the
definitive Proxy Statement for the registrant's annual meeting of
stockholders to be held on May 15, 1997.
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DSP COMMUNICATIONS, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . .12
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . .12
Item 4. Submission of Matters to a Vote of Security Holders . . . . . .12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . .13
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . .14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . .15
Item 8. Financial Statements and Supplementary Data . . . . . . . . . .27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . . . .27
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . .27
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . .27
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . .27
Item 13. Certain Relationships and Related Transactions . . . . . . . . 27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . 28
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
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PART I
The matters addressed in this report on Form 10-K, with the exception
of the historical information presented, contain forward-looking statements
involving risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under the heading
"Certain Factors That May Affect Future Results" in the Management's
Discussion and Analysis section and elsewhere in this report.
ITEM 1. BUSINESS
INTRODUCTION
DSP Communications, Inc. ("DSPC" or the "Company"), a Delaware
corporation, applies its expertise in digital signal processing ("DSP")
software, algorithms and VLSI circuit design to develop highly integrated,
low power and cost-effective chip sets for wireless personal communications
applications. The Company believes that it is the largest independent vendor
of baseband chip sets to original equipment manufacturers ("OEMs") in the
Japanese digital cellular telephone market, with customers such as Kenwood
Corporation ("Kenwood"), Kokusai Electric Corporation ("Kokusai"), Kyocera
Corporation ("Kyocera"), Pioneer Corporation ("Pioneer"), Sanyo Electronic
Co. Ltd. ("Sanyo") and Sharp Corporation ("Sharp"). Based on its core DSP
technology, the Company has developed baseband chip sets that support a broad
range of frequency modulation standards, including the Personal Digital
Cellular ("PDC") and IS-136 digital standards and the Advanced Mobile Phone
System ("AMPS") and Total Access Communication System ("TACS") analog
standards. In November 1995, the Company signed an agreement with Qualcomm
Incorporated ("Qualcomm") to license Qualcomm's Code Division Multiple Access
("CDMA") technology which will permit the Company to develop baseband chip
sets for CDMA-based subscriber equipment. The Company is currently
developing baseband chip sets jointly with NEC Electronics ("NEC"), which
support both voice and data capabilities, for use in the IS-136 Time Division
Multiple Access ("TDMA") market and with several customers for use in the
IS-95 (CDMA) market.
The Company is capitalizing on its position in the Japanese digital
cellular market to broaden its technological and geographic customer base
through acquisitions, licenses and joint development agreements. In October
1995, the Company acquired CTP Systems, Ltd. ("CTP Systems"), an Israeli
company, which is engaged in the development of a wireless private branch
exchange ("PBX") system for the office environment and other low-mobility and
wireless local loop applications. CTP Systems has entered into distribution
and service agreements with OEMs such as Harris Corporation, Inc. ("Harris")
and Tadiran Telecommunications Ltd. for its wireless PBX system.
INDUSTRY BACKGROUND
The demand for wireless personal communications services has grown
rapidly over the past several years as cellular, paging and other emerging
wireless personal communications services have become widely available and
increasingly affordable to growing numbers of consumers and businesses.
Changes in telecommunications regulations and allocations of additional radio
spectrum frequencies have further stimulated growth for both wireless voice
and data communications. There has also been a general transition from the
use of analog to digital technologies to improve the reliability and capacity
of wireless networks. In addition, most new cellular networks being built
today utilize digital technology which is capable of transmitting both voice
and data communications. Advancements in cellular and paging technology, as
well as recently introduced services such as personal communications services
("PCS"), are expected to offer subscribers new means of communicating both
voice and data over existing and future wireless networks.
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VOICE COMMUNICATIONS
Wireless voice communications utilize analog or digital transmission
technology which operate with various transmission standards. The Company
has developed products that support a variety of standards, such as PDC,
IS-136 and AMPS, and is developing products for the IS-95 standards as well
as next generation products for existing standards.
In North America, cellular networks primarily rely upon analog
technology and use the AMPS standard. According to the Office of
Telecommunications of the United States Department of Commerce (the "Office
of Telecommunications"), in the United States, the number of cellular
subscribers increased from 16 million in December 1993 to 35 million in
December 1995, and to 38.2 million in June 1996, and as of June 1996,
approximately 14.5% of the total United States population subscribed to
cellular services. Although analog cellular is the most widely deployed
wireless service available today, it has several limitations, including
inconsistent service quality, limited capacity and, currently, an inability
to transfer data without a modem. Digital technologies are expected to offer
improved system flexibility, efficiency and increased capacity by allowing a
given channel of spectrum to carry multiple calls simultaneously. As a
result, most new networks being constructed today utilize digital technology.
Digital subscriber equipment, however, currently is more expensive than
analog subscriber equipment. The Telecommunications Industry Association has
approved two competing digital cellular standards for the United States: (i)
IS-54 and its enhanced version, IS-136, forms of TDMA, and (ii) IS-95, a form
of CDMA. To date, there has been only limited deployment of TDMA-based and
CDMA-based digital cellular networks, with wider deployment not expected in
the United States before the second half of 1997.
New PCS in the United States will also use CDMA and TDMA technology for
cellular type application. Unlike cellular that used the 800 Mhz. frequency,
PCS will use the 1.9 Ghz. band. The Company believes that the increasing
deployment of PCS networks will also accelerate the transition of the
existing cellular service providers from analog technology to digital
technology. The Company's baseband products for the TDMA and CDMA standards
are designed to support telephones that operate in both the 800 Mhz. cellular
frequency and the 1.9 Ghz. PCS frequency.
In Japan, cellular services are being provided over analog networks
based on the Japanese Total Access Communication System ("J-TACS"), and
Nippon Telephone and Telegraph ("NTT") standards and, increasingly, over
digital networks based on the PDC standard. The PDC standard is a form of
TDMA that differs from IS-136 in the following respects: (i) IS-136 uses the
800 Mhz. band, while PDC uses both the 800 Mhz. and the 1.5 Ghz. frequency
bands; (ii) IS-136 requires more bandwidth than PDC (30 kHz compared to 25
kHz); and (iii) IS-136 is capable of supporting analog communications using
AMPS, while PDC is only capable of supporting digital communications. The
new half-rate PDC standard (RCR-27C) has been defined and its implementation
in Japan began in early 1996. The half-rate PDC standard enhances the
capacity of existing PDC networks.
According to the Office of Telecommunications, the number of analog and
digital cellular subscribers in Japan increased from 3.5 million in December
1994, to 8.0 million in December 1995, and to 18.2 million in December 1996,
and as of December 1996, approximately 14.5% of the total Japanese population
subscribed to cellular services. The Company believes that demand for digital
subscriber equipment in Japan may continue to increase as a result of (i) the
continued transition from analog to digital; (ii) anticipated price reductions
in cellular services due to increased competition among wireless communications
providers and potential incentives for users of new half-rate PDC services;
and (iii) the transition from the full-rate to half-rate PDC standard,
thereby stimulating subsequent purchases of replacement and next generation
subscriber equipment.
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REQUIREMENTS OF WIRELESS SUBSCRIBER EQUIPMENT MANUFACTURERS
The Company believes that growing demand for mobile voice and data
applications will require a transition from analog to digital technology to
increase the capacity, quality, convenience and variety of services. The
increase in the number of subscribers and the growth of services provided
over wireless personal communications networks have led to network congestion
and the need to expand the capacity and capabilities of the networks. The
implementation of digital network technology over analog and digital networks
generally requires the use of DSP technology to maximize their capacity and
capabilities. DSP technology involves converting light, sound and other
naturally occurring analog wave forms into a stream of digital values which
may then be processed, manipulated, exchanged or stored by electronic systems
and later converted back into analog signals. DSP technology provides
several advantages over analog technologies, including (i) greater levels of
compression capability, resulting in greater storage and expanded
communications capacity, (ii) greater ability to process and manipulate
digital data, resulting in enhanced product performance and functionality,
and (iii) greater ability to perform routine electronic functions in software
rather than using dedicated hardware. The ability of DSP to manipulate voice
and data communications faster and more efficiently than analog and non-DSP
microprocessor technologies positions DSP as an important technology for
existing and future generations of wireless personal communications products.
Manufacturers of subscriber equipment for wireless personal
communications compete in a high-growth, cost-competitive market, in which it
is necessary to offer a compact, cost-effective solution providing a wide
range of functions. To increase performance, minimize the size and decrease
the cost of subscriber equipment, manufacturers require highly integrated
chip sets. Greater integration of functions minimizes the number and size of
the integrated circuits required, thereby lowering the cost of manufacturing
and decreasing power consumption. Lower power consumption permits extended
battery life, giving the mobile user more usage time without the need to
recharge the battery unit. Due to evolving industry standards and the rapid
introduction of new communications services, the success of OEMs in the
wireless personal communications industry also depends on their ability to
bring new products to market quickly to meet new market demands.
THE DSPC SOLUTION
DSPC is focused on developing DSP-based software and algorithms and
designing highly integrated, low power baseband chip sets for subscriber
equipment operating on both analog and digital wireless personal
communications networks. Through its wholly-owned subsidiary, CTP Systems,
the Company is also focused on developing wireless PBX and other on-premises
and low-mobility wireless communications applications.
The key features of DSPC's solution include the following:
HIGH INTEGRATION. In 1989, the Company introduced its first chip set
for analog cellular telephones which consisted of two integrated circuits
that provided the same functions previously performed by 10 to 15 discrete
components. In 1993, the Company reduced this two-chip analog solution to a
single integrated circuit. Also in 1993, the Company introduced a new chip
set solution for digital cellular telephones in Japan consisting of only two
integrated circuits. The Company is in the process of developing baseband
chip sets that it believes will result in more compact and cost-effective
solutions.
LOW POWER CONSUMPTION. The Company's expertise in DSP technology
enables it to design efficient DSP solutions that minimize power consumption.
The Company has developed a high degree of functionality in its software
which decreases the need for dedicated hardware, and thereby reduces the
millions of instructions per second ("MIPS") required for operation. The
components of the baseband chip set are activated intermittently depending on
the operating mode of the subscriber unit at any given time to minimize power
consumption.
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COST-EFFECTIVE. The Company has reduced the number of integrated
circuits required for a baseband processing subsystem by integrating the DSP
functions, and has also incorporated some traditional hardware functions into
its software, thereby reducing the overall cost of the Company's solution to
OEMs. As a result, the Company's OEM customers are better able to provide
competitively priced products to the wireless personal communications market.
ADAPTABLE TO MULTIPLE STANDARDS. Based on its core DSP technology, the
Company has developed products for use with a variety of modulation
standards. While each product is designed for a specific wireless
communications network and modulation standard, all generally rely on the
same fundamental DSP technology. By maintaining both standards and system
flexibility, the Company seeks to reduce the risks associated with relying on
the success of one or a limited number of existing industry standards. The
Company has developed systems expertise in the PDC, Personal HandyPhone
Services ("PHS"), Digital European Cordless Telephone ("DECT"), IS-136 and
IS-95 digital standards and the AMPS and TACS analog standards. The Company
believes that its expertise with multiple transmission standards will also
help it develop products to address the needs of emerging wireless services,
such as narrowband and broadband PCS.
PRODUCTS
The Company has designed DSP-based software and integrated circuits for
cellular communications. To date, the Company has used its DSP expertise
primarily to develop baseband chip sets for incorporation into cellular
telephones. In addition, the Company is currently developing new products
designed for use in PCS and other emerging wireless personal communications
services.
EXISTING PRODUCTS
The Company has produced baseband chip sets for cellular telephones
that operate using a variety of frequency modulation standards. The
following is a description of the cellular communications products that the
Company has produced to date.
AMPS. The Company introduced its first chip sets in 1989, enabling
manufacturers to replace 10 to 15 discrete components with a single chip set
composed of two integrated circuits. Since then, the Company has developed
and introduced three additional chip sets for analog cellular telephones
which operate on AMPS and various European standards.
PDC. The Company currently sells chip sets to major Japanese
manufacturers of digital cellular telephones. In 1993, the Company
introduced its first digital chip set, a set of two integrated circuits with
a VSELP speech coder, channel coder and modem that operates on five volts and
is based on the PDC standard. In December 1993, the Company began its first
volume shipments of this chip set to Kenwood, Kyocera and Sanyo. In the
second quarter of 1995, the Company commenced volume shipments of its three
volt PDC chip set, and in the fourth quarter of 1995, the Company introduced
and initiated shipments of its half-rate PDC chip set. The half-rate PDC
standard enables cellular carriers to increase the capacity of their existing
cellular networks.
TDMA. In early 1995, the Company began jointly developing a third
generation chip set for digital cellular telephones using the IS-136
standard, and at the end of 1996, the Company commenced commercial sales of
this chip set. IS-136 supports voice and limited data communications, such
as data cypher mode and short message alpha-numeric paging service. As a
result of its development efforts related to products for half-rate PDC and
IS-136, the Company believes that it is well positioned to develop chip sets
for TDMA-based standards for data transmission once data protocols are
established and implemented.
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WIRELESS PBX. The Company's wholly-owned subsidiary, CTP Systems, has
developed a wireless PBX system for intra-building communications. The CTP
Systems solution includes the development of basestations and handsets, and
the joint development of a PBX interface card with several OEMs. CTP
Systems' wireless PBX system, which enables users to make and receive calls
while away from their desks, received in October 1996 approval by the Federal
Communications Commission for operation using the unlicensed 1920 to 1930
Mhz. frequency band. The Company commenced commercial shipments of the
wireless PBX system in the fourth quarter of 1996.
NEW PRODUCT DEVELOPMENT
In addition to improving its existing products, the Company is
currently developing new products that are intended to operate with various
wireless personal communications networks and frequency modulation standards.
CDMA. The Company has developed systems expertise in the IS-95
standard and believes that its technology may be adapted to develop
CDMA-based applications for use in cellular and PCS applications. In 1995,
the Company signed a license agreement with Qualcomm to license Qualcomm's
CDMA technology that permits the Company to develop baseband chip sets for
CDMA products. The Company is presently developing such a chip set for
several customers. The Company does not expect significant revenue from
CDMA-based products in 1997.
There can be no assurance that the Company will be successful in
developing CDMA-based products or any other new products, or in offering such
products to OEMs or other customers in a timely fashion or that, once
developed, the Company's new products will be accepted and incorporated by
OEMs into their products.
SALES, MARKETING AND DISTRIBUTION
The Company markets its products through a direct sales and marketing
organization, headquartered in Cupertino, California, and facilitates product
delivery through a distributor in Japan. In Japan, the Company's Japanese
subsidiary performs customer liaison services. The Company's distributor in
Japan, Tomen Electronics Corp. ("Tomen"), is not subject to minimum purchase
requirements and can cease marketing the Company's products at any time. The
loss of Tomen as the Company's sole distributor in Japan could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company sells its PDC chip sets to OEMs such as Kenwood, Kyocera,
Pioneer, Kokusai, Sanyo and Sharp, through Tomen. In 1994, 1995 and 1996,
product sales to Tomen accounted for 84%, 89% and 91%, respectively, of the
Company's total revenues. Sales to this distributor are made through
specific purchase orders, which are cancelable without significant penalties.
In 1996, substantially all of Tomen's sales of the Company's products were
to five Japanese OEMs, although two new Japanese OEM customers have recently
been added. The Company expects that a significant portion of its future
product sales will continue to be concentrated among a limited number of
major OEMs. The loss of Tomen as a distributor or one or more of the seven
major Japanese customers for the Company's PDC chip sets would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company's sales to its Japanese OEM
customers are dependent on the OEMs' continued success in maintaining or
increasing their market share in the competitive Japanese wireless handset
market. The inability of one or more of these OEM customers to succeed in
this market could have a material adverse effect on the Company's business,
financial condition and results of operations.
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The Company sells substantially all of its products and provides
technology development services primarily to OEMs located outside of the
United States. Revenues from Japan accounted for 90%, 94% and 94% of the
Company's total revenues in 1994, 1995 and 1996, respectively. Due to its
international sales, the Company is subject generally to the risks of
conducting business internationally, including unexpected changes in
regulatory requirements, fluctuations in exchange rates for the United States
dollar that could effectively increase the price of the Company's products in
foreign markets, imposition of tariffs and other barriers and restrictions,
and the burden of complying with a variety of foreign laws. During 1996, the
Company hedged its foreign exchange exposure related to anticipatory revenue
transactions by entering into dollar/yen option contracts.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
The Company believes that providing customers with comprehensive
product service and support is critical to maintaining a competitive position
in the wireless personal communications industry. The Company provides
technical support through its application engineering groups located in Japan
and Israel. The application engineering group offers full service technical
support to customers, product upgrades and training, if necessary. The
Company works closely with its customers to monitor the performance of its
product designs, and to provide application design support and assistance.
The Company believes that close contact with its customers improves their
level of satisfaction and provides the Company with insights into future
product development.
The Company provides several levels of technical support to its
customers. The Company's standard support package is generally offered with
all product sales, and includes provision of evaluation and prototyping
systems, full technical documentation and application design assistance.
During an OEM's production phase, the Company also provides failure analysis
and replacement of defective components. In some cases, the Company also
offers more extensive support arrangements for additional quarterly payments,
which includes training, system level design, implementation and integration
support, as well as early releases of new product versions when they become
available. The Company believes that tailoring the technical support level
to its customers' needs is essential for the success of product introductions
and to achieve a high satisfaction level among its customers.
MANUFACTURING
The Company uses independent foundries to manufacture its baseband chip
sets. The Company to date has ordered products from its foundries primarily
upon receipt of orders from its distributor or OEM customers and does not
maintain any significant inventory of its products. This strategy allows the
Company to avoid the significant capital investment required for wafer
fabrication facilities and inventories, and to focus its resources on
algorithm and software development, product design, quality assurance,
marketing and customer support. The Company may in the future maintain
limited inventory in anticipation of orders from its distributor or OEM
customers. Designs of the Company's baseband chip sets are verified by both
the Company and the customer prior to orders being placed. Upon receipt of
such orders, the manufacturers ship the devices through the Company's
distributor to the Company's customers. The Company has also developed
procedures with its contract manufacturers to conduct comprehensive quality
control and quality assurance throughout the manufacturing and assembly
process. The Company's reliance on independent foundries involves a number
of risks, including the possibility of a shortage of certain key components
and reduced control over delivery schedules, manufacturing capacity, quality
and costs.
To date, the Company has purchased most of its DSP chips for cellular
telephones from Texas Instruments Incorporated ("TI"), which embeds the
Company's software algorithms in TI's standard products. The Company also
buys all of the DSP chips used in CTP Systems' products from TI. The Company
is dependent on TI to produce a sufficient quantity of DSP chips to meet the
Company's needs and to deliver
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them in a timely manner. Furthermore, TI's manufacturing schedule is
entirely independent from the Company's supply requirements. The Company's
reliance on TI involves a number of risks, including the possibility of an
insufficient supply of DSP chips, noncompetitive pricing and discontinued
production of the DSP chip currently utilized to produce the Company's
products. Currently, the Company purchases its application specific
integrated circuits ("ASICs") for its PDC chip sets from Atmel ES2, a wholly
owned subsidiary of Atmel Inc., and VLSI Technology, Inc. ("VTI"); all of its
ASICs for analog baseband chip sets from TI; its ASICs for CTP Systems'
products from American Microsystems, Inc. ("AMI"); and the Radio Frequency
("RF") chip sets for CTP Systems' products from Rockwell Semiconductor
Systems, Inc.
CTP Systems currently manufactures its own wireless communications
systems and is therefore subject to various risks associated with the
manufacturing process, including risks resulting from CTP Systems'
inexperience in mass production, risks involved with the ramp-up of
production, 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
materially adversely affect 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.
Although the Company extensively tests its software and hardware
products prior to their introduction, design errors may be discovered after
initial product sampling, resulting in delays in volume production or recalls
of products sold. Although the Company has not experienced any significant
errors to date, the occurrence of such errors could have a material adverse
effect on the Company's business, financial condition and results of
operations.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends on its ability to
adapt to the rapidly changing wireless personal communications environment
and to continue to meet its customers' needs. Therefore, the continued
timely development and introduction of new products is essential in
maintaining its competitive position. The Company develops most of its
products in-house and, as of December 31, 1996, had a research and
development staff of 88 people, including six people holding doctorate
degrees in areas related to DSP. The Company is focusing its current
development efforts primarily on the development of enhanced versions of its
existing digital cellular chip sets and new applications involving IS-95 and
IS-136. During 1994, 1995 and 1996, the Company spent approximately $1.7
million, $3.0 million and $5.3 million, respectively, on research and
development activities, excluding any offsetting grants from the Officer of
the Chief Scientist in Israel's Ministry of Industry and Trade (the "Chief
Scientist").
The Government of Israel encourages research and development projects
oriented towards products for export. Until February 1996, the Company
received grants from the Chief Scientist for the development of certain
products. Under the terms of the Israeli Government grants, a royalty of 3%
of the sales of the developed products is generally required to be paid until
150% of the grant is repaid. In 1996, the Company repaid all amounts owed
pursuant to the grants relating to products being marketed by the Company,
and the Company has no further obligation to pay royalties under these
grants. In 1994, 1995 and 1996, the Company paid and accrued royalties to
the Chief Scientist of approximately $574,000, $1,142,000 and $724,000,
respectively. The terms of Israeli Government participation also contained
restrictions on the location of research and development activities and
subsequent transfer of the developed technology. There are currently no
grants from the Chief Scientist outstanding for any product currently being
developed or marketed by the Company, and the Company intends to fund future
research and development efforts for new products primarily from its own
funds and through research and development arrangements with its major
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OEM customers. The Company does, however, participate with several other
companies in the development of generic CDMA technology for which the Chief
Scientist has issued grants. The total grants received to date in connection
with this technology are not material and there are no royalty obligations
under the terms of these grants.
COMPETITION
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. 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 depends upon a
number of factors within and outside 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. The Company's current OEM customers
continuously evaluate whether to develop and manufacture their own chip sets
and could elect to compete with the Company at any time. Price competition
in the markets in which the Company currently competes and proposes to
compete is intense and is likely to increase, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Moreover, large manufacturers of wireless personal
communications equipment could also elect to enter into the component market
and compete directly with the Company.
In the Japanese digital cellular market, the Company faces competition
from existing cellular telephone manufacturers that develop in-house
solutions, such as Motorola, Inc. ("Motorola"), NEC, Panasonic Company and
Sony Corporation, from other DSP-based baseband chip suppliers, such as Asahi
Kasei, and, in the future, may face competition from other chip suppliers.
In addition, PHS has emerged in Japan as a potential competitor of existing
digital cellular networks and could reduce sales of digital cellular
telephones incorporating the Company's chip sets. The Company believes that
its current advantage stems from its experience in this market, early market
presence and established customer base.
In the United States digital cellular market, the Company intends to
compete with products for second and third generation digital cellular
telephones. The Company is aware that other integrated circuit and
subscriber equipment manufacturers such as AT&T, Motorola, Nokia
Telecommunications and TI have been developing products for the IS-136 market.
INTELLECTUAL PROPERTY
Although the Company has eight patent applications pending or allowed
in the United States, Japan and Israel, the Company relies primarily on its
trade secret program and copyrights to protect its intellectual property.
The Company attempts to protect its trade secrets and other proprietary
information through agreements with its customers, suppliers, employees and
consultants, and through other security measures. Although the Company
intends to protect its rights vigorously, there can be no assurance that
these measures will be successful. In addition, the laws of certain
countries in which the Company's products are or may be developed,
manufactured or sold, including Hong Kong, Japan, Korea and Taiwan, may not
protect the Company's products and intellectual property rights to the same
extent as the laws of the United States.
While the Company's ability to compete may be affected by its ability
to protect its intellectual property, the Company believes that, because of
the rapid pace of technological change in the wireless personal
communications industry, its technical expertise and ability to introduce new
products on a timely
10
<PAGE>
basis will be more important in maintaining its competitive position than
protection of its intellectual property and that patent, trade secret and
copyright protections are important but must be supported by other factors
such as the expanding knowledge, ability and experience of the Company's
personnel, new product introductions and frequent product enhancements.
Although the Company continues to implement protective measures and intends
to defend vigorously its intellectual property rights, there can be no
assurance that these measures will be successful.
While the Company has not been involved in any patent or other
intellectual property rights litigation, there can be no assurance that third
parties will not assert claims against the Company with respect to existing
and future products. In the event of litigation to determine the validity of
any third party's claims, such litigation could result in significant expense
to the Company, and divert the efforts of the Company's technical and
management personnel, whether or not such litigation is determined in favor
of the Company. Both the semiconductor and the wireless personal
communications industries are subject to frequent litigation regarding patent
and other intellectual property rights. Leading companies and organizations
in the wireless personal communications industry have numerous patents that
protect their intellectual property rights in these areas. In the event of
an adverse result of any such litigation, the Company could be required to
expend significant resources to develop non-infringing technology or to
obtain licenses to the technology which is the subject of the litigation.
There can be no assurance that the Company would be successful in such
development or that any such license would be available on commercially
reasonable terms.
BACKLOG
The Company's backlog was approximately $25.9 million at December 31,
1995 and $6.8 million at December 31, 1996. The Company includes in its
backlog all accepted product purchase orders with respect to which a delivery
schedule has been specified for product shipment within one year.
As a result of a reduction during 1996 in the lead time between receipt of
product orders and shipment of products due primarily to an increase in the
supply of integrated circuits and increased competition between OEMs in the
Japanese wireless handset market, the Company experienced declining backlog
levels throughout 1996, and the Company anticipates that the market for its
baseband chip sets will continue to be characterized by short-term order and
shipment schedules. In addition, product orders in the Company's backlog are
subject to changes in delivery schedules or to cancellation at the option of
the purchaser without significant penalty. Accordingly, the Company believes
that backlog as of any particular date is not necessarily a reliable
indicator of sales or revenues for any future period.
EMPLOYEES
As of December 31, 1996, the Company had 153 full and part-time
employees, including 88 in research and development, 17 in marketing and
sales, 22 in production, and 26 in corporate, administration and production
coordination. The Company believes that its future prospects will depend, in
part, on its ability to continue to attract and retain skilled engineering,
marketing and management personnel, who are in great demand. In particular,
there is a limited supply of highly qualified engineers with DSP experience.
None of the Company's employees are covered by a collective bargaining
agreement, and the Company has never experienced any strike or work stoppage.
The Company believes its relations with its employees to be good.
11
<PAGE>
ITEM 2. PROPERTIES
The Company's headquarters are located in an approximately 9,500 square
foot leased facility in Cupertino, California. This facility houses the
Company's management, marketing and sales personnel. The lease for the
Cupertino facility terminates in February 1998, with an option for a three
year extension until February 2001. The Company's subsidiary, DSPC Israel
Ltd. ("DSPCI"), leases approximately 10,000 square feet for research and
development, application engineering and manufacturing coordination
activities, in a facility in Givat Shmuel, Israel. This lease terminates in
April 2001. In addition, DSPCI leases an approximately 5,000 square foot
facility for research and development activities in Givat Shmuel. This lease
terminates in March 1999, and DSPCI has an option to extend the lease until
2002. The Company's subsidiary, CTP Systems, leases approximately 11,000
square feet for research and development, engineering and manufacturing
activities in a facility in Petah-Tikva, Israel. This lease terminates in
October 1997, and CTP Systems has an option to extend the lease until October
1999. The Company's Japanese subsidiary leases approximately 3,200 square
feet in Tokyo for marketing and engineering liaison activities. This lease
expires in October 1997, with an option for a two year extension until
October 1999.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting of stockholders on November 12,
1996, at which the following matters were voted upon. The share numbers
shown below have been retroactively adjusted to reflect the two-for-one stock
split effected in December 1996.
1. The Company's stockholders voted upon and approved a proposal to
approve an amendment to the Company's Certificate of Incorporation to effect
a two-for-one stock split. The results of the voting were as follows:
Number of Shares voted FOR 33,394,404
Number of Shares voted AGAINST 208,302
Number of Shares ABSTAINING 32,806
Number of Broker Non-Votes n/a
2. The Company's stockholders voted upon and approved a proposal to
approve an amendment to the Company's Certificate of Incorporation to
increase the number of shares of Common Stock that the Company is authorized
to issue from 70,000,000 to 110,000,000 shares. The results of the voting
were as follows:
Number of Shares voted FOR 32,680,846
Number of Shares voted AGAINST 727,584
Number of Shares ABSTAINING 227,082
Number of Broker Non-Votes n/a
3. The Company's stockholders voted upon and approved a proposal to
ratify the action of the Board adopting the Company's 1996 Stock Option Plan
(the "1996 Plan"). The number of shares of the Company's common stock
reserved for issuance under the 1996 Plan is 3,000,000. The results of the
voting were as follows:
Number of Shares voted FOR 18,970,772
Number of Shares voted AGAINST 9,990,600
Number of Shares ABSTAINING 231,958
Number of Broker Non-Votes 4,442,182
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company has been traded on the Nasdaq National
Market (Nasdaq Symbol: DSPC) since the Company's initial public offering on
March 7, 1995. Prior to that date, there was no public market for the
Company's Common Stock. The following table presents for the periods
indicated the high and low bid prices for the Common Stock, as reported by
the Nasdaq National Market.
On March 5, 1996, the Company effected a two-for-one stock split of the
Company's Common Stock. The stock split was reflected on the Nasdaq National
Market System commencing on March 26, 1996. On November 13, 1996, the Company
effected another two-for-one stock split of the Company's Common Stock, and
the stock split was reflected on the Nasdaq National Market System commencing
on December 3, 1996. All per share data shown below have been retroactively
adjusted to reflect both of the stock splits.
Price Range of
Common Stock
----------------------
High Low
----------------------
Fiscal Year Ended December 31, 1995
First Quarter (from March 7, 1995) . . . . . . . $ 3.31 $ 2.50
Second Quarter . . . . . . . . . . . . . . . . . $ 5.31 $ 2.81
Third Quarter. . . . . . . . . . . . . . . . . . $ 8.31 $ 5.19
Fourth Quarter . . . . . . . . . . . . . . . . . $11.88 $ 6.81
Fiscal Year Ended December 31, 1996
First Quarter. . . . . . . . . . . . . . . . . . $13.94 $ 7.50
Second Quarter . . . . . . . . . . . . . . . . . $24.50 $11.38
Third Quarter. . . . . . . . . . . . . . . . . . $30.25 $18.75
Fourth Quarter . . . . . . . . . . . . . . . . . $30.50 $16.25
On March 10, 1997, the closing price of the Company's Common
Stock as reported on the Nasdaq National Market was $11.94 per
share. As of March 10, 1997, there were approximately 61 holders
of record of the Common Stock.
DIVIDEND POLICY
To date, the Company has neither declared nor paid any cash dividends
on shares of its Common Stock. The Company presently intends to retain all
future earnings for use in its business and does not anticipate paying cash
dividends on its Common Stock in the foreseeable future.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands,
except per share data) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------
Statement of Operations Data
(Year ended December 31)
Total revenues $ 88,899 $40,867 $15,966 $ 4,098 $ 2,629
Gross profit $ 41,196 $17,021 $ 6,631 $ 2,135 $ 853
Operating income (loss) $ 20,010 $(2,391) $ 2,655 $(1,142) $(2,436)
Net income (loss)(1)(2) $ 21,750 $(2,358) $ 2,233 $(1,026) $(2,580)
Net income (loss) per
share(1)(2) $ 0.48 $ (0.08) $ 0.09 $ (0.08) $ (0.22)
Shares used in computing
net income (loss) per
share(3) 45,564 30,252 25,624 12,604 11,476
Balance Sheet Data
(As of December 31)
Cash, cash equivalents and
short-term investments $136,833 $27,988 $ 8,387 $ 3,636 $ 2,452
Working capital $129,230 $29,193 $ 5,476 $ 3,602 $ 1,566
Total assets $155,354 $44,119 $11,028 $ 6,397 $ 3,782
Long-term obligations $ -- $ -- $ 132 $ 191 $ --
Total stockholders' equity $136,844 $34,868 $ 6,532 $ 4,122 $ 2,142
__________________________
(1) Net loss for 1995 includes a charge of $10,850,000 for acquired
in-process technology primarily in connection with the acquisition of CTP
Systems Ltd. and, to a lesser extent, in connection with a licensing
arrangement. Excluding this charge, pro forma net income for 1995 was
$8,492,000 or $0.24 per share (based on 35,752,000 shares).
(2) Net income for 1996 includes a charge of $5,000,000 in connection with
the termination of a proposed acquisition of Proxim Inc. Excluding this charge,
pro forma net income for 1996 was $26,125,000 or $0.57 per share.
(3) Net income (loss) per share information reflects the common stock
two-for-one split effected in March 1996 and the common stock two-for-one
split effected in December 1996.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the 1996
Consolidated Financial Statements and notes thereto. The matters addressed in
this Management's Discussion and Analysis of Financial Condition and Results
of Operations, with the exception of the historical information presented,
contain forward-looking statements involving risks and uncertainties. The
Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including
those set forth under the heading "Certain Factors That May Affect Future
Results" following this Management's Discussion and Analysis section, and
elsewhere in this report.
OVERVIEW
DSPC, a Delaware corporation incorporated on November 23, 1994,
succeeded to the business of DSP Telecommunications Ltd. ("DSP Telecom"), an
Israeli corporation, pursuant to a reorganization completed upon the closing
of the Company's initial public offering ("IPO") on March 14, 1995, under
which DSP Telecom became a wholly owned subsidiary of DSPC (the
"Reorganization"). The Reorganization was accounted for in a manner similar
to a pooling of interests.
The consolidated financial statements present the financial condition
of the Company as of December 31, 1996, the consolidated results of
operations and cash flows of the Company from the Reorganization date, and
the combined financial position, results of operations and cash flow of the
Company with DSP Telecom prior to the Reorganization.
Until the fourth quarter of 1993, the Company derived most of its
revenues from technology development services and sales of analog baseband
chips sets for cellular telephones. In December 1993, the Company began the
first volume shipments of its digital baseband chip sets to Japanese OEMs
through its distributor in Japan.
The fourth quarter of 1996 included a charge of $5.0 million, included
in general and administrative expenses, in connection with the termination of
a proposed acquisition of Proxim, Inc.
The fourth quarter of 1995 included a charge of $10.9 million for
acquired in-process technology, primarily in connection with the purchase of
CTP Systems.
The Company recorded a net income of $21.8 million on total revenues of
$88.9 million in 1996, compared to a net loss of $2.4 million on total
revenues of $40.9 million in 1995, and a net income of $2.2 million on total
revenues of $16.0 million in 1994. Excluding the charge for the proposed
acquisition in 1996 of $5.0 million, and for acquired in-process technology
in 1995 of $10.9 million, pro forma net income was $26.1 million for 1996 and
$8.5 million for 1995.
The results of operations subsequent to the acquisition of CTP Systems
on October 26, 1995 include the results of CTP Systems. CTP Systems has
developed its wireless PBX product for commercial production, and commercial
shipments commenced in the fourth quarter of 1996. CTP Systems' activities
incurred losses throughout 1996 and are expected to continue to incur losses
during the first half of 1997.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage relationships of certain
items from the Company's consolidated statements of operations as a
percentage of total revenues for the years ended December 31:
1996 1995 1994
------ ------ -----
Revenues:
Product 95.8% 90.9% 88.9%
Technology development 4.2 9.1 11.1
----- ----- -----
Total revenues 100.0 100.0 100.0
Cost of Revenues:
Product 49.7 52.6 49.0
Technology development 4.0 5.8 9.4
----- ----- -----
Total cost of revenues 53.7 58.4 58.4
----- ----- -----
Gross Profit 46.3 41.6 41.6
Operating Expenses:
Research and development 6.0 6.2 7.8
Sales and marketing 4.1 5.9 6.2
General and administrative 13.7 8.9 10.9
Charge for acquired in-process
technology -- 26.5 --
----- ----- -----
Total operating expenses 23.8 47.5 24.9
----- ----- -----
Operating income (loss) 22.5 (5.9) 16.7
Other income (expense) 5.5 2.8 (2.0)
----- ----- -----
Income (loss) before provision
for income taxes 28.0 (3.1) 14.7
Provision for income taxes (3.5) (2.7) (0.7)
----- ----- -----
Net income (loss) 24.5% (5.8)% 14.0%
----- ----- -----
----- ----- -----
REVENUES
PRODUCT: Product revenues consist primarily of baseband chip sets for
digital cellular telephones. Revenues from sales to distributors are
recognized at the time the products are shipped by the distributor to the OEM
customer. Other product revenues are recorded when products are shipped to
customers. Product revenues increased to $85.1 million in 1996 from $37.1
million and $14.2 million in 1995 and 1994, respectively.
16
<PAGE>
The key contributing factor in the Company's product revenue growth in
1996 and 1995 was the large increase in demand leading to volume shipments of
the Company's Japanese PDC digital cellular chip sets. Sales prices for the
Company's chip sets have declined significantly as a result of volume
discounts and price pressures; however, the increased sales volume has more
than offset the effect of decreasing per unit prices. During 1996, the
Company commenced volume shipments of its new half-rate chip sets. The
Company believes that the growth rate in its product revenues will likely
decline in the future from the rate the Company experienced from 1994 to 1996.
TECHNOLOGY DEVELOPMENT AND OTHER: The Company has funded its
technology development in part using revenue from technology development
agreements. Following successful completion of technology development
agreements with OEMs, the Company's strategy is to develop and market
products incorporating the developed technology. Revenues are recognized
only when applicable customer milestones, including deliverables, have been
met, but not in excess of the amount that would be recognized using the
percentage of completion method. Technology development revenues were $3.8
million in 1996, $3.7 million in 1995, and $1.8 million in 1994. The
Company's technology development revenues fluctuate, and may continue to
fluctuate, depending on the number and size of technology development
agreements and the timing of related milestones and deliverables.
In 1995 and 1996, technology development revenues increased relative to
1994 following the initiation and/or completion of contracts for development
and support of products for PDC, TDMA and CDMA applications.
Revenues from Japan, consisting of sales of digital chip sets for
cellular telephones and technology development services, accounted for 94.2%,
94.2% and 89.6% of total revenues in 1996, 1995 and 1994, respectively. The
Company expects that revenues from Japan will continue to account for most of
its revenues through at least 1998. Virtually all sales are denominated in
United States dollars to reduce the effect of fluctuations in foreign
currency exchange rates. In 1996, the Company entered into dollar/yen option
contracts in order to hedge against the increase in the value of the U.S.
dollar against the yen and decrease exposure to currency-driven sales price
pressure.
COST OF REVENUES
COST OF PRODUCTS SOLD: Cost of products sold consists primarily of
materials, and, to a lesser extent, warranty costs and royalties. Cost of
products sold increased to $44.2 million in 1996, from $21.5 million in 1995
and $7.8 million in 1994. The increases in 1996 and 1995 were due to
increased volume sales of chip sets. The cost of products as a percentage of
product revenues was 51.9%, 57.9%, and 55.2% for 1996, 1995 and 1994,
respectively. The effect of the decrease in sales prices in 1996 was more
than offset by cost reductions received from the Company's suppliers due to
increased order volumes and by the fact that in the second quarter of 1996
the Company completed its obligations to pay royalties to the Chief Scientist
of the Israeli Ministry of Trade and Industry on grants relating to products
currently being marketed by the Company. Sales of CTP Systems' wireless PBX
systems to Beta sites were made in small quantities and resulted in negative
margins. The Company expects that it will continue to experience negative
margins on low volume initial sales of these wireless PBX systems until
higher volume sales are achieved. Higher volume sales are anticipated during
the second half of 1997.
The Company anticipates that the average sales prices of chip sets may
decrease as a result of volume discounts and price pressures, which would
increase the cost of products sold as a percentage of product revenues;
however, any such price decreases may be offset to a certain extent by
further cost reductions from suppliers if the Company's order volumes
increase.
17
<PAGE>
COST OF TECHNOLOGY DEVELOPMENT: Cost of technology development is
comprised primarily of engineering salaries, subcontractors' costs and
related costs. The costs of technology development contracts are recorded as
incurred. Cost of technology development increased to $3.6 million in 1996
from $2.4 million in 1995 and $1.5 million in 1994 resulting from increased
technology development activities. The Gross margin on technology
development in 1996 was 5.9%, compared to 36.8% in 1995 and 15.8% in 1994.
The margins on technology development vary depending on the similarity or
diversity of the products and technologies developed, and as contractual
milestones are reached.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses primarily consist of salaries and
related costs of employees engaged in ongoing research, design and
development activities, and materials and subcontracting costs, reduced
through 1995 and 1996 by grants from the Chief Scientist. Net research and
development expenses increased to $5.3 million in 1996 from $2.5 million and
$1.2 million in 1995 and 1994, respectively. The increases were due to the
increased level of activities in connection with the development of CDMA, the
growth in the number of engineering personnel and in projects under
development, the inclusion of CTP Systems' research and development
activities, and, to a lesser extent, due to a decision in 1996 not to apply
for further grants from the Chief Scientist. As a percentage of total
revenues, research and development expenses were 6.0% in 1996 and 6.2% in
1995, a decrease from 7.8% in 1994. The Company expects that its research and
development expenses will continue to increase in the future, in absolute
dollars.
The Company records software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed." To date, the
Company has expensed all of its software costs.
SALES AND MARKETING EXPENSES
Sales and marketing expenses are mainly comprised of employee related
expenses, trade exhibition expenses, and charges for customer liaison
services in Japan. Sales and marketing expenses increased to $3.7 million
(4.1% of revenues) in 1996 from $2.4 million (5.9% of revenues) in 1995, and
from $1.0 million (6.2% of revenues) in 1994. The increase reflects
primarily the growth of sales and marketing staff at the Company's
headquarters in Cupertino, California, and Tokyo offices, increased
participation at trade exhibitions, increased promotion and marketing
research activities, and the inclusion of CTP Systems.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses in 1996 were $12.2 million (13.7%
of revenues) compared to $3.6 million (8.9% of revenues) in 1995, and $1.7
million (10.9% revenues) in 1994.
General and administrative expenses increased, in absolute dollars, as
a result of increased staffing levels at the Company's headquarters in
Cupertino, California, and at the facilities of DSPC Israel Ltd., an Israeli
subsidiary of the Company ("DSPCI"), increased facility expenses, increased
administration expenses and fees, and the inclusion of CTP Systems'
administration expenses and related amortization of the goodwill recorded
with the acquisition of CTP Systems. General and administrative expenses in
1996 also include a charge of approximately $5 million in connection with the
termination of a proposed acquisition of Proxim, Inc.
18
<PAGE>
CHARGE FOR ACQUIRED IN-PROCESS TECHNOLOGY
The Company recorded a charge of $10.9 million in the fourth quarter of
1995, which consisted of $9.6 million for acquired in-process technology
associated with the acquisition of CTP Systems, and $1.3 million for
acquired in-process technology associated with a licensing arrangement. The
Company acquired 100% of the shares of CTP Systems for $13.6 million in cash,
plus $0.5 million of related transaction costs.
A contingent earn-out is payable by the Company in March 1998, the
amount of which will be based on the profits and revenues of CTP Systems in
1996 and 1997. Based on CTP Systems' results of operations for 1996, the
Company does not expect that it will be obligated to make any payments under
the contingent earn out. The transaction was accounted for as a purchase.
The purchase price has been allocated, based on an independent appraisal, as
follows (in millions):
Net tangible assets $ 0.4
Acquired developed technology 1.7
Acquired in-process technology 9.6
Goodwill 2.4
-----
Total purchase price $14.1
-----
-----
The acquired in-process technology represents the appraised value of
technology in the development stage that had not yet reached technological
feasibility and did not have alternative future uses. The acquired developed
technology and goodwill are amortized over five years, and reflected as cost
of product revenues and operating expenses, respectively.
OTHER INCOME (EXPENSE)
Other income (expense) includes interest and investment income, foreign
currency remeasurement gains and losses, and other expenses. Other income in
1996 was $4.8 million compared to $1.1 million in 1995, and an expense of $0.3
million in 1994.
Other income in 1996 and 1995 was generated primarily from interest and
realized gains on the Company's cash and investment balances, including the
proceeds from the IPO completed in March 1995, and from the Company's follow-on
public offerings completed in June 1995 and April 1996. Other expense in 1994
resulted from the decline in value of investments then held in marketable equity
securities. All these investments were liquidated in the second half of 1994,
resulting in realized losses.
PROVISION FOR INCOME TAXES
The tax provisions for 1996, 1995 and 1994 have been influenced by the
Company's Israeli operating subsidiaries' status as "Approved Enterprises"
for Israeli tax purposes.
The Approved Enterprise status was granted according to investment
plans and will allow the Company's Israeli subsidiaries a two to four year
tax holiday on undistributed earnings, and a corporate tax rate of 10% to 25%
for an additional six to eight years on each of the investment plans'
proportionate share of income.
19
<PAGE>
As of December 31, 1996, the Company had United States federal, state,
and Israel net operating loss carryforwards of approximately $15.6 million,
$8.1 million and $3.5 million, respectively. The United States federal and
state net operating loss carryforwards will expire at various dates beginning
in years 2000 through 2011. The Israeli loss carryforwards have no
expiration date.
The Company's effective tax rate was approximately 13% for 1996 and
1995 (excluding the charge for Israeli acquired in-process technology of $9.6
million in 1995) and 5% for 1994. The Company believes its effective income
tax rate will increase in the future due to the utilization of its Israeli
net operating loss carryforwards, the elimination over time of the tax
benefits awarded with Approved Enterprise status, unutilized loss
carryforwards in the United States and potential increases due to rules
regarding controlled foreign corporations ("CFC"). Losses incurred by the
Company or any of its subsidiaries in one country generally will not be
deductible by entities in other countries in the calculation of their
respective local taxes. In addition, losses generated by one Israeli entity
will not offset income generated by another Israeli entity. Therefore, losses
incurred by one Israeli entity or a combined loss of the U.S. entities will
increase the Company's effective tax rate.
A net deferred tax asset of approximately $2.1 million is reflected in
the financial statements. Approximately $4.5 million of future U.S. taxable
income will be necessary to realize this deferred tax asset. While there can
be no assurance that future income will be sufficient to realize this
benefit, management is of the opinion that it is more likely than not that
this benefit will be realized in the near future based upon projected income
from financial instruments and product sales. A valuation allowance of
approximately $5.6 million was provided in the financial statements. Of the
valuation allowance, $4.3 million is for deferred tax assets attributable to
stock option deductions, the benefit of which will be credited to equity when
realized. The remaining valuation allowance relates to operating losses, tax
credit carryforwards, and temporary differences of entities in the
consolidated group for which the generation of taxable income in the near
future is not projected.
DSP Telecom, DSPCI and CTP Systems (collectively, the "Israeli
Companies") are CFCs for United States income tax purposes. Accordingly, all
or a portion of the earnings of DSP Telecom are subject to United States
taxation if, among other things: (i) the Israeli Companies accumulate cash
and other passive assets in excess of 25% of total assets; (ii) the Israeli
Companies lend funds to the Company or otherwise invest in certain proscribed
assets; or (iii) the Israeli Companies engage in various types of
transactions defined in the Subpart F provisions of the United States
Internal Revenue Code. However, if the Israeli Companies' earnings become
subject to United States taxation, DSPC may be eligible to utilize its
Israeli and other foreign income taxes as a credit against its United States
income taxes. The Company believes that its existing plans will minimize the
impact of the CFC rules for the immediate future, subject to any changes in
United States tax laws that may occur. However, over time, the CFC rules may
cause the Company's tax rate to increase, except to the extent that the
taxable amount is offset by otherwise unutilized United States losses.
FOREIGN CURRENCY TRANSACTIONS
Substantially all of the Company's sales and a substantial portion of
its costs are denominated in United States dollars. Since the dollar is the
primary currency in the economic environment in which the Company operates,
the dollar is its functional currency, and, accordingly, monetary accounts
maintained in currencies other than the dollar (principally cash and
liabilities) are remeasured using the foreign exchange rate at the balance
sheet date. Operational accounts and nonmonetary balance sheet accounts are
remeasured and recorded at the rate in effect at the date of the transaction.
The effects of foreign currency remeasurement are reported in current
operations and have been immaterial to date.
20
<PAGE>
IMPACT OF INFLATION
The rate of inflation in Israel in 1996, 1995 and 1994 was 10.6%, 8.1%
and 14.7%, 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 Israeli-based 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses independent foundries to fabricate its baseband chip
set products, minimizing its need to invest in manufacturing equipment and to
develop integrated circuit fabrication processes. However, the Company
relies on its independent foundries to achieve acceptable manufacturing
yields and to allocate to the Company a sufficient portion of foundry
capacity to meet the Company's needs. The Company to date has ordered
products from its foundries primarily upon receipt of orders for chipsets
from its distributor or OEM customers and has not maintained any significant
inventory of its chipsets. This strategy allows the Company to avoid
utilizing its capital resources for manufacturing facilities and inventory,
and allows the Company to focus substantially all of its resources on the
design, development and marketing of its products. The Company may in the
future maintain limited inventory in anticipation of orders from its
distributors or OEM customers. CTP Systems has commenced manufacturing its
PBX systems product and therefore utilizes capital resources for its
manufacturing facility. To date, production of PBX systems has been limited
and has not had a material effect on the Company's liquidity or capital
resources.
Since its inception, the Company has financed its operations and
investments in capital equipment primarily through cash provided by
operations, sales of equity securities and, to a lesser extent, debt and
lease arrangements. The Company received gross proceeds of approximately $9.4
million through private sales of equity securities prior to the IPO in March
1995, approximately $18.9 million from the IPO, $10.5 million from the
follow-on offering in June 1995, and $75.6 million from the second follow-on
offering in April 1996.
The Company's operating activities provided cash of $32.9 million in
1996, $4.0 million in 1995 and $5.8 million in 1994. Net cash provided from
operations in 1996 was comprised primarily of net income, an increase in
current liabilities, and a decrease in trade accounts receivable. Trade
accounts receivable decreased to $7.1 million at December 31, 1996 due to the
timing of shipments and payments. Accounts receivable have to date been
primarily from Tomen, the Company's distributor in Japan, which accounted for
71.5% of the Company's accounts receivable at December 31, 1996. The
Company's write-offs of accounts receivable have not been material to date.
The Company's investing activities, other than purchases of and
proceeds from sales and maturities of short-term investments, have consisted
of expenditures for fixed assets, which totaled $2.7 million in 1996.
In obtaining approval of the Reorganization from Israeli tax
authorities, which was completed immediately before the closing of the IPO,
the Company agreed to invest in activities in Israel in an amount of 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 $13.6 million in cash. In 1995, the Company transferred $4.5 million out
of the IPO proceeds to Israel in order to finance a part of the CTP Systems
acquisition, and in 1996, an additional $0.5 million was transferred by the
Company to increase the capital of DSPCI.
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As of December 31, 1996, the Company had $136.8 million of cash, cash
equivalents and short-term investments. The Company believes that its
existing cash, cash equivalents and short-term investment balances, will be
sufficient to meet its cash requirements for at least the next twelve months.
As of December 31, 1996, the Company also had issued bank guarantees and
letters of credit totalling $2.2 million.
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 complementary businesses, projects or technologies which may
require additional financing or require the use of a significant portion of
its existing cash, although the Company has no present understandings,
commitments or agreements, nor is it engaged in any discussions or
negotiations with respect to any such transaction.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Future trends for the Company's revenue and profitability remain
difficult to predict, despite the strong financial results described in this
report. The Company operates in a rapidly changing and developing market
that involves a number of risks, some of which are beyond the Company's
control. The following discussion highlights certain of these risks.
RELIANCE ON A SINGLE JAPANESE DISTRIBUTOR AND A SMALL NUMBER OF OEMS;
COMPETITION IN JAPANESE OEM MARKET. Substantially all of the Company's sales
of baseband chip sets for digital cellular telephones are to Tomen, the
Company's distributor in Japan. Tomen's sales of the Company's products are
concentrated in a small number of Japanese OEM customers. Prior to 1997,
five OEM customers accounted for substantially 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 world-wide 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. 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. 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
in part on gaining additional OEM customers, both within existing markets and
in new markets. The competition between OEMs in the Japanese wireless
handset market is intense and is increasing. The Company's performance
depends significantly on the ability of its OEM customers to maintain and
increase their market share in this market. The loss of any existing 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.
REDUCED VISIBILITY; DECREASED BACKLOG. Over the past year, the
period of time between the receipt of orders for the Company's products and
the date requested by OEM customers for shipment of products has been
reduced, due primarily to an increase in the supply of integrated circuits
and increased competition among OEMs in the Japanese wireless handset market.
This reduced lead time has resulted in decreased backlog levels and has
decreased the time period for which the Company is able to estimate future
product demand. The Company anticipates that the market for its baseband
chip sets will continue to be characterized by short-term order and shipment
schedules. Accordingly, since the Company's revenue expectations and planned
operating expenses are in large part based on these estimates rather than on
firm customer orders, the Company's quarterly operating results could be
materially adversely affected if orders and revenues do not meet expectations.
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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.
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 most 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 Atmel ES2 and VTI; all of its ASICs for analog baseband chip
sets from TI and its ASICs for CTP Systems' products from AMI. Accordingly,
the Company is and will remain dependent on independent foundries, including
TI, AMI, Atmel ES2 and VTI, 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.
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 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.
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 in the process of 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.
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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 handset manufacturers and 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.
UNCERTAINTIES RELATED TO DEVELOPMENT, PRODUCTION AND MARKETING OF
CDMA-BASED PRODUCT. The Company is currently developing a baseband chip set
for CDMA products pursuant to a license agreement with Qualcomm for CDMA
technology. Although the Company expects to complete successfully the
development of this chip set and to deliver the product, there can be no
assurance that the development work will be successfully completed, or that
completion of development will not be delayed. To date, there has
been only limited deployment of CDMA-based digital cellular networks, and the
success of the Company in marketing its CDMA-based chip set will be dependent
on, among other things, the success of the CDMA standard and growth of the
CDMA subscriber population. There can be no assurance that the CDMA standard
will be widely adopted or that the CDMA-based chip set will be successful in
the marketplace. Sales of the Company's CDMA-based products will also be
dependent on the success of the Company's OEM customers in completing their
development of CDMA-based handsets in a timely manner and in successfully
competing in the CDMA-based handset market. In addition, the Company intends
to use independent foundries to manufacture the product, and there can be no
assurance that this chip set will be able to be manufactured in commercial
quantities at reasonable cost. If the Company is unable, for technological
or other reasons, to develop, introduce and manufacture in a timely manner
the CDMA-based chip set and to market the product successfully, or if the
Company's OEMs are unable successfully to develop and market their products,
the Company's business and results of operations could be materially and
adversely affected.
RISK OF INCREASED INCOME TAXES. 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 this date, 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."
24
<PAGE>
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 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, as of December 31, 1996, 135
of the Company's 153 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 1995 and 1996 was 8.1% and 10.6%, 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 Israeli-based 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.
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 private branch exchanges ("PBXs") and other
low-mobility wireless communications applications. CTP Systems began
commercial shipments of wireless PBX equipment to two OEM customers in the
fourth quarter of 1996, and the PBX system is currently in Beta testing with
other OEMs, which may identify quality or operational problems in the product
25
<PAGE>
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.
Although CTP Systems has commenced manufacturing its PBX product, it
has not yet manufactured commercial quantities on a continuous basis. The
Company believes that CTP Systems' existing manufacturing facilities will
enable it to produce commercial quantities of its PBX equipment. No
assurance can be given, however, that manufacturing or control problems will
not arise as CTP Systems increases production of its product, or as
additional facilities are required in the future. CTP Systems is 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, CTP Systems may be required to
develop, adapt or acquire additional production technology, facilities and
technical personnel in the event the PBX system equipment is modified or
redesigned. Since CTP Systems has limited manufacturing experience, there
can be no assurance that prices for CTP Systems' products will cover the
manufacturing costs for its product. 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.
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 and other intangibles 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.
VOLATILITY OF STOCK PRICE. The price of the Company's Common Stock has
recently experienced substantial fluctuation, and the Company believes that
factors such as announcements of developments related
26
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to the Company's business, announcements by competitors, quarterly
fluctuations in the Company's financial results and general conditions in the
wireless personal communications industry in which the Company competes or
the national economies in which the Company does business, fluctuation in
levels of consumer spending for cellular telephones in Japan, and other
factors could cause the price of the Company's Common Stock to continue to
fluctuate in the future, perhaps substantially. In addition, in recent years
the stock market in general, and the market for shares of small
capitalization technology stocks in particular, have experienced extreme
price fluctuations, which have often been unrelated to the operating
performance of affected companies. Such fluctuations could have a material
adverse effect on the market price of the Company's Common Stock.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted as a separate section of this Form
10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors and executive officers required by
Item 10 is incorporated by reference from the information under the captions
"Election of Directors," "Directors and Executive Officers" and "Section
16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive
proxy statement for its annual meeting of stockholders to be held on May 15,
1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from
the information under the caption "Executive Compensation and Other
Information" in the Company's definitive proxy statement for its annual
meeting of stockholders to be held on May 15, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from
the information under the caption "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement for its
annual meeting of stockholders to be held on May 15, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from
the information under the caption "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for its annual
meeting of stockholders to be held on May 15, 1997.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS
The financial statements filed as a part of this report are
identified in the Index to Consolidated Financial Statements on page F-1.
(a)2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as part of this
Report:
Page
----
Schedule II - Valuation and Qualifying Accounts. . . . . . . . .S-1
Schedules not listed above have been omitted because the
information required to be set forth therein is not applicable or is shown in
the financial statements or notes thereto.
(a)3. EXHIBITS
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Commission. The Company
shall furnish copies of exhibits for a reasonable fee (covering the expense
of furnishing copies) upon request.
Exhibit
Number Exhibit Title
- ------- -------------
2.1 Termination Agreement and General Release, dated November 21, 1996,
among DSP Communications, Inc., Proxim, Inc. and Data Merger
Corporation (Filed as Exhibit 2.1 to the Registrant's Current Report
on Form 8-K, dated November 21, 1996, as filed on November 26, 1996,
and incorporated herein by reference).
3.1 Amended and Restated Certificate of Incorporation of the Company
(Filed as Exhibit 3.1 to the Registrant's Registration Statement on
Form S-1, File No. 33-87506, as declared effective on March 7, 1995,
and incorporated herein by reference).
3.1A Certificate of Amendment of Amended and Restated Certificate of
Incorporation, dated March 5, 1996 (Filed as Exhibit 3.1A to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1995, as filed on March 30, 1996, and incorporated herein by
reference).
3.1B Certificate of Amendment of Amended and Restated Certificate of
Incorporation, dated November 13, 1996.
3.2 Bylaws of the Company (Filed as Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1, File No. 33-87506, as declared
effective on March 7, 1995, and incorporated herein by reference).
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Exhibit
Number Exhibit Title
- ------- -------------
3.3 Written Consent dated January 26, 1995, amending the Bylaws of the
Company (Filed as Exhibit 3.7 to the Registrant's Registration
Statement on Form S-1, File No. 33-87506, as declared effective on
March 7, 1995, and incorporated herein by reference).
10.1 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. 33-87506, as declared effective on
March 7, 1995, and incorporated herein by reference).
10.2 1995 Director Stock Option Plan (Filed as Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1, File No. 33-87506,
as declared effective on March 7, 1995, and incorporated herein by
reference).
10.3 1995 Employee and Consultant Stock Plan (Filed as Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1, File No. 33-87506,
as declared effective on March 7, 1995, and incorporated herein by
reference).
10.4 1992 Israeli Key Employee Share Incentive Plan (Filed as Exhibit 10.4
to the Registrant's Registration Statement on Form S-1, File No. 33-
87506, as declared effective on March 7, 1995, and incorporated
herein by reference).
10.5 1995 Employee Stock Purchase Plan (Filed as Exhibit 10.5 to the
Registrant's Registration Statement on Form S-1, File No. 33-87506,
as declared effective on March 7, 1995, and incorporated herein by
reference).
10.6 Non-Exclusive Distribution Agreement dated as of January 1, 1994,
between DSP Telecom and Tomen Electronics Corp. (Filed as Exhibit
10.8 to the Registrant's Registration Statement on Form S-1, File No.
33-87506, as declared effective on March 7, 1995, and incorporated
herein by reference).
10.7 Technology Agreement and License Agreement dated as of January 7,
1994 between DSP Group and DSP Telecom (Filed as Exhibit 10.14 to the
Registrant's Registration Statement on Form S-1, File No. 33-87506,
as declared effective on March 7, 1995, and incorporated herein by
reference).
10.8 License Agreement dated as of March 25, 1994 between DSP Telecom and
DSP Semiconductors USA, Inc. (Filed as Exhibit 10.15 to the
Registrant's Registration Statement on Form S-1, File No. 33-87506,
as declared effective on March 7, 1995, and incorporated herein by
reference).
10.9 Technical Support Agreement dated October 21, 1992 between DSP
Telecom and DSP Semiconductors Ltd. (Filed as Exhibit 10.16 to the
Registrant's Registration Statement on Form S-1, File No. 33-87506,
as declared effective on March 7, 1995, and incorporated herein by
reference).
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Exhibit
Number Exhibit Title
- ------- -------------
10.10 Lease Agreement dated February 21, 1991 for the Company's facility
located in Givat Shmuel, Israel, together with documentation
transferring the Lease from DSP Semiconductors Ltd. to DSP Telecom
(in Hebrew) (Filed as Exhibit 10.27 to the Registrant's Registration
Statement on Form S-1, File No. 33-87506, as declared effective on
March 7, 1995, and incorporated herein by reference).
10.11 Lease Agreement dated February 21, 1991 for the Company's facility
located in Givat Shmuel, Israel, together with documentation
transferring the Lease from DSP Semiconductors Ltd. to DSP Telecom
(in English) (Filed as Exhibit 10.28 to the Registrant's Registration
Statement on Form S-1, File No. 33-87506, as declared effective on
March 7, 1995, and incorporated herein by reference).
10.12 Development and License Agreement dated May 1, 1993 between Texas
Instruments Incorporated and DSP Telecom (Filed as Exhibit 10.29 to
the Registrant's Registration Statement on Form S-1, File No. 33-
87506, as declared effective on March 7, 1995, and incorporated
herein by reference).
10.13 Lease Agreement dated December 15, 1994 for the Company's
headquarters located in Cupertino, California (Filed as Exhibit 10.30
to the Registrant's Registration Statement on Form S-1, File No. 33-
87506, as declared effective on March 7, 1995, and incorporated
herein by reference).
10.14 Development and License Agreement dated as of March 31, 1993 between
NEC Electronics Inc. and DSP Telecom, Inc. (Filed as Exhibit 10.33 to
the Registrant's Registration Statement on Form S-1, File No. 33-
87506, as declared effective on March 7, 1995, and incorporated
herein by reference).
10.15 1994 Employee and Consultant Stock Plan (Filed as Exhibit 10.34 to
the Registrant's Registration Statement on Form S-1, File No. 33-
87506, as declared effective on March 7, 1995, and incorporated
herein by reference).
10.16 Stock Purchase Agreement, dated October 13, 1995, by and between DSP
Telecommunications Ltd., the holders of the Ordinary Shares of CTP
Systems Ltd., and CTP Systems Ltd. (Filed as Exhibit 10.35 to the
Registrant's Current Report on Form 8-K, dated October 26, 1995, as
filed on November 13, 1995, and incorporated herein by reference).
10.17 Addendum No. 1 to Lease Agreement between Multiline Service
International Limited and DSP Semiconductors Ltd. and DSPC Israel
Ltd. dated December 3, 1995, together with Guarantee by DSP
Communications Inc. (in English & Hebrew) (Filed as Exhibit 10.36 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995, as filed on March 30, 1996, and incorporated
herein by reference).
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<PAGE>
Exhibit
Number Exhibit Title
- ------- -------------
10.18 Addendum No. 2 to Lease Agreement between Multiline Service
International Limited and DSPC Israel Ltd., dated December 3, 1995
(in English and Hebrew) (Filed as Exhibit 10.37 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995, as
filed on March 30, 1996, and incorporated herein by reference).
10.19 Lease Agreement for CTP Systems' facility located in Petah-Tikva,
Israel (in Hebrew) (Filed as Exhibit 10.38 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995, as filed on
March 30, 1996, and incorporated herein by reference).
10.20 Amended and Restated Employment Agreement, dated December 15, 1995
between DSP Telecom, Inc. and Davidi Gilo (Filed as Exhibit 10.39 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, as filed on August 12, 1996, and incorporated herein
by reference).
10.21 Amended and Restated Employment Agreement dated November 1, 1995
between DSP Telecom, Inc. and Nathan Hod (Filed as Exhibit 10.40 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, as filed on August 12, 1996, and incorporated herein
by reference).
10.22 1996 Nonstatutory Employee and Consultant Stock Option Plan (Filed as
Exhibit 10.41 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996, as filed on August 12, 1996, and
incorporated herein by reference).
10.23 1996 Stock Option Plan (Filed as Exhibit 10.42 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, as filed on November 14, 1996, and incorporated herein by
reference).
10.24 Employment Agreement, dated as of June 15, 1996, between DSP Telecom,
Inc. and Michael Lubin (Filed as Exhibit 10.43 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, as filed on November 14, 1996, and incorporated herein by
reference).
10.25 Amended and Restated Employment Agreement, dated as of November 1,
1996, between DSP Telecom, Inc. and Davidi Gilo.
11.1 Statement regarding computation of net income (loss) per share.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27. Financial Data Schedule
- ------------------
31
<PAGE>
(b) REPORTS ON FORM 8-K
On October 31, 1996, the Company filed with the Securities and
Exchange Commission a report on Form 8-K, reporting under Item 5, Other
Events, that the Company, Proxim, Inc., a Delaware corporation ("Proxim"),
and Data Merger Corporation, a Delaware corporation and wholly-owned
subsidiary of the Company ("Data Merger"), entered into an Agreement and Plan
of Merger (the "Merger Agreement") providing for the merger of Proxim with
and into Data Merger, with Proxim as the surviving corporation. Under the
terms of the Merger Agreement, Proxim stockholders were to receive 0.70
shares of the Company's common stock for each share of Proxim common stock,
subject to adjustments under certain conditions. The merger was intended to
qualify as a tax-free reorganization and a pooling-of-interests for
accounting and financial reporting purposes, and was subject to certain
conditions, including, among other things, the approval of the respective
stockholders of the Company and of Proxim.
On November 26, 1996, the Company filed with the Securities and
Exchange Commission a report on Form 8-K, reporting under Item 5, Other
Events, that the Company, Proxim, and Data Merger had entered into a
Termination Agreement and General Release, which provided for the mutual
termination of the Merger Agreement by the Company, Proxim and Data Merger,
effective as of November 21, 1996. Following the unexpected reduction in the
Company's share price and that of Proxim, the Boards of Directors of the
Company and Proxim determined that both companies should pursue a working
partnership outside the context of a merger.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.)
32
<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 COMMUNICATIONS, INC.
By: /s/ Nathan Hod
-------------------------------------------------
Nathan Hod, Chief Executive Officer and President
Date: March 17, 1997
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/ Davidi Gilo Chairman of the Board March 17, 1997
- ------------------------- of Directors
Davidi Gilo
/s/ Nathan Hod President, Chief Executive Officer March 17, 1997
- ------------------------- and Director (Principal
Nathan Hod Executive Officer)
/s/ Gerald Dogon Executive Vice President and Chief March 17, 1997
- ------------------------- Financial Officer (Principal
Gerald Dogon Financial and Accounting Officer)
/s/ Neill Brownstein
- ------------------------- Director March 17, 1997
Neill Brownstein
/s/ Lewis Broad
- ------------------------- Director March 17, 1997
Lewis Broad
/s/ Andrew Schonzeit
- ------------------------- Director March 17, 1997
Andrew Schonzeit
/s/ Shigeru Iwamoto
- ------------------------- Director March 17, 1997
Shigeru Iwamoto
/s/ Avraham Fischer
- ------------------------- Director March 17, 1997
Avraham Fischer
33
<PAGE>
DSP COMMUNICATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Ernst & Young LLP, Independent Auditors. . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 . . . . . F-3
Consolidated Statements of Operations --
Years ended December 31, 1996, 1995, and 1994. . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity --
Years ended December 31, 1996, 1995, and 1994. . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows --
Years ended December 31, 1996, 1995, and 1994. . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . F-7
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
DSP Communications, Inc.
We have audited the accompanying consolidated balance sheets of DSP
Communications, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of DSP
Communications, Inc. at December 31, 1996 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
San Jose, California
January 15, 1997
F-2
<PAGE>
DSP Communications, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
DECEMBER 31,
1996 1995
---------------------------
ASSETS
Current assets:
Cash and cash equivalents $77,799 $10,292
Short-term investments 59,034 17,696
Trade accounts receivable (net of allowance for
doubtful accounts of $132 and $139 in 1996
and 1995, respectively) 7,054 8,838
Other current assets 3,373 1,448
---------------------------
Total current assets 147,260 38,274
Property and equipment, net 3,565 1,823
Goodwill (net of accumulated amortization of
$574 and $82 in 1996 and 1995, respectively) 1,887 2,379
Other assets 2,642 1,643
---------------------------
$155,354 $44,119
---------------------------
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,747 $ 3,419
Accrued liabilities 11,793 5,189
Deferred income 2,490 473
---------------------------
Total current liabilities 18,030 9,081
Other liabilities 480 170
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.001 per share,
5,000,000 shares authorized; no shares issued
and outstanding - -
Common stock, par value $0.001, 110,000,000
shares authorized; 44,497,177 shares issued
and outstanding at December 31, 1996
(36,211,844 shares in 1995) 44 36
Additional paid-in capital 127,226 47,008
Retained earnings (deficit) 9,574 (12,176)
---------------------------
Total stockholders' equity 136,844 34,868
---------------------------
$155,354 $44,119
---------------------------
---------------------------
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
DSP Communications, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
1996 1995 1994
----------------------------------------
Revenues:
Product (includes related party
revenues of $6,260, $8,379 and
$3,690 in 1996, 1995 and 1994,
respectively) $85,128 $37,127 $14,189
Technology development (includes
related party revenues of $113,
$710 and $225 in 1996, 1995 and
1994, respectively) 3,771 3,740 1,777
----------------------------------------
Total revenues 88,899 40,867 15,966
----------------------------------------
Cost of revenues:
Product 44,153 21,483 7,839
Technology development 3,550 2,363 1,496
----------------------------------------
Total cost of revenues 47,703 23,846 9,335
----------------------------------------
Gross profit 41,196 17,021 6,631
Operating expenses:
Research and development 5,311 2,524 1,243
Sales and marketing 3,685 2,407 993
General and administrative 12,190 3,631 1,740
Charge for acquired in-process
technology - 10,850 -
----------------------------------------
Total operating expenses 21,186 19,412 3,976
----------------------------------------
Operating income (loss) 20,010 (2,391) 2,655
Interest and other income
(expense), net 4,848 1,148 (312)
----------------------------------------
Income (loss) before provision
for income taxes 24,858 (1,243) 2,343
Provision for income taxes (3,108) (1,115) (110)
----------------------------------------
Net income (loss) $21,750 $(2,358) $2,233
----------------------------------------
----------------------------------------
Net income (loss) per share $0.48 $(0.08) $0.09
----------------------------------------
----------------------------------------
Shares used in computing net
income (loss) per share 45,564 30,252 25,624
----------------------------------------
----------------------------------------
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
DSP Communications, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
<TABLE>
<CAPTION>
COMMON STOCK ORDINARY SHARES ADDITIONAL RETAINED NOTES TOTAL
---------------------------------------------- PAID-IN EARNINGS FROM STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) STOCKHOLDERS EQUITY
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 - $ - 5,240,010 $ 1,275 $ 14,931 $(12,051) $(33) $4,122
Issuance of ordinary shares for
cash - - 35,626 25 1 - - 26
Issuance of ordinary shares for
options exercised - - 57,693 11 21 - - 32
Issuance of ordinary shares for
warrants exercised - - 388,031 75 11 - - 86
Issuance of common stock 400 - - - - - - -
Payment on notes receivable from
stockholders - - - - - - 33 33
Net income - - - - - 2,233 - 2,233
-----------------------------------------------------------------------------------------------
Balance at December 31, 1994 400 - 5,721,360 1,386 14,964 (9,818) - 6,532
Conversion of ordinary shares
into common stock 22,885,440 23 (5,721,360) (1,386) 1,363 - - -
Issuance of common stock for
warrants exercised 505,432 - - - 187 - - 187
Issuance of common stock pursuant
to options exercised 1,073,940 1 - - 922 - - 923
Issuance of common stock in
public offerings, net 11,746,632 12 - - 29,241 - - 29,253
Change in net unrealized gain on
securities available for sale - - - - 331 - - 331
Net loss - - - - - (2,358) - (2,358)
-----------------------------------------------------------------------------------------------
Balance at December 31, 1995 36,211,844 36 - - 47,008 (12,176) - 34,868
Issuance of common stock under
stock option and stock purchase
plans (2,076,882 shares and
11,187 shares, respectively) 2,088,069 2 - - 3,273 - - 3,275
Issuance of common stock in
public offering, net 6,197,264 6 - - 75,616 - - 75,622
Tax benefit related to stock
option plans - - - - 1,617 - - 1,617
Change in net unrealized gain on
securities available for sale - - - - (288) - - (288)
Net income - - - - - 21,750 - 21,750
-----------------------------------------------------------------------------------------------
Balance at December 31, 1996 44,497,177 $44 - $ - $127,226 $ 9,574 $ - $136,844
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
DSP Communications, Inc.
Consolidated Statements of Cash Flows
(In thousands)
YEAR ENDED DECEMBER 31,
1996 1995 1994
------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $21,750 $(2,358) $2,233
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Charge for acquired in-process
technology, in connection with CTP
acquisition - 9,600 -
Depreciation and amortization 1,778 557 332
Compensation expenses related to
shares issued in a subsidiary 310 170 -
Other (1) (360) 355
Changes in operating assets and
liabilities, net of effects of
acquisition:
Trade accounts receivable 1,784 (7,257) 602
Other current assets (1,647) (169) (5)
Accounts payable 333 2,007 410
Accrued liabilities 6,604 2,431 1,353
Deferred income 2,017 (621) 472
------------------------------------------
Net cash provided by operating
activities 32,928 4,000 5,752
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of CTP, net of cash
acquired - (13,886) -
Cash purchases of equipment (2,702) (1,203) (267)
Proceeds from sales of equipment 10 34 31
Purchases of short-term investments (97,340) (68,685) (2,454)
Sales and maturities of short-term
investments 55,714 51,934 3,920
Other assets - (750) -
------------------------------------------
Net cash provided by (used in)
investing activities (44,318) (32,556) 1,230
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of lease obligations - (190) (59)
Issuance of common and ordinary
shares for cash 78,897 30,892 144
Repayment of stockholders' notes
receivable - - 33
Deferred public offering costs - - (529)
------------------------------------------
Net cash provided by (used in)
financing activities 78,897 30,702 (411)
------------------------------------------
Increase in cash and
cash equivalents 67,507 2,146 6,571
Cash and cash equivalents at
beginning of year 10,292 8,146 1,575
------------------------------------------
Cash and cash equivalents at end of
year $77,799 $10,292 $8,146
------------------------------------------
------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Interest paid $ - $ 127 $ 77
------------------------------------------
------------------------------------------
Income taxes paid $ 730 $ 445 $ 28
------------------------------------------
------------------------------------------
SUPPLEMENTAL NONCASH INVESTING AND
FINANCING INFORMATION
Equipment cost payable $ 125 $ 130 $ 45
------------------------------------------
------------------------------------------
Loan provided to CTP before $ - $ 750 $ -
acquisition
------------------------------------------
------------------------------------------
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
December 31, 1996
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
DSP Communications, Inc. ("DSPC" or the "Company"), a Delaware corporation
incorporated on November 23, 1994, succeeded to the business of DSP
Telecommunications Ltd., an Israeli corporation ("DSP Telecom"), pursuant to a
reorganization completed upon the closing of the Company's initial public
offering ("IPO") on March 14, 1995, under which DSP Telecom became a wholly
owned subsidiary of DSPC (the "Reorganization"). The Reorganization was
accounted for in a manner similar to a pooling of interests.
The consolidated financial statements present the financial condition of the
Company as of December 31, 1996 and 1995, the consolidated results of operations
and cash flows of the Company from the Reorganization date and the combined
financial position, results of operations and cash flows of the Company with DSP
Telecom prior to the Reorganization.
The consolidated financial statements include the accounts of DSPC, its
subsidiaries DSP Telecom Inc., a California corporation; DSP Communications
(Japan) Inc., a Japanese corporation; DSPC Israel Ltd. ("DSPCI"), an Israeli
company; DSP Telecom; and effective October 31, 1995, CTP Systems Ltd., an
Israeli company ("CTP") (see Note 2). DSPC wholly owns all of its subsidiaries
except for less than a 1% minority interest in DSPCI represented by nonvoting
preferred stock of DSPCI held by certain employees and advisors. Intercompany
accounts and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS AND RELATED CONCENTRATIONS
The Company applies its expertise in the development, design and marketing of
DSP (digital signal processing) software, algorithms and VLSI circuit design to
develop highly integrated, low power and cost-effective chip sets for wireless
personal communications applications. Following the CTP Acquisition, DSPC also
provides wireless PBX solutions for the office environment and other low-
mobility and wireless local loop applications.
Substantially all of DSPC's product revenues to date have been generated from
the sale of a single product, its baseband chip set for digital cellular
telephones for use in Japan.
F-7
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NATURE OF OPERATIONS AND RELATED CONCENTRATIONS (CONTINUED)
Substantially all of the Company's product revenues are from sales to one
distributor in Japan who in turn sells to OEM manufacturers in Japan. The
Company's distributor is not subject to minimum purchase requirements and can
cease marketing the Company's products at any time. The loss of the Company's
sole distributor in Japan could have a material adverse effect on the Company's
business, financial condition and results of operations. Substantially all of
these distributor sales were made to a small number of customers in 1996, 1995
and 1994. Because the worldwide cellular subscriber equipment industry is
dominated by a small number of large corporations, DSPC expects that a
significant portion of its future product revenues will continue to be
concentrated in a limited number of customers. The loss of one of these
customers would have a material adverse effect on the Company's results of
operations.
The Company uses independent foundries to manufacture its baseband chip sets.
The Company's reliance on independent foundries involves a number of risks,
including the possibility of a shortage of certain key components and reduced
control over delivery schedules, manufacturing capacity, quality and costs.
DSPC's integrated circuits are fabricated by independent third party suppliers.
The Company's reliance on these suppliers involves a number of risks, including
the possibility of an insufficient supply of DSP chips, noncompetitive pricing
and discontinued production of the DSP chip currently utilized to produce the
Company's products. During and at the end of 1996 the Company had three major
suppliers for the integrated circuits. The reliance on a small number of
suppliers may subject the Company from time to time to quality, allocation and
pricing constraints.
REVENUE RECOGNITION
PRODUCT - Product revenue relates to baseband chip sets for cellular
telephones and to wireless PBX systems. Revenue from product sales to
customers, other than sales to distributors, are recorded when products are
shipped. Sales to distributors, under agreements allowing price protection
and right of return on products unsold by the distributor, are not recognized
until the products are sold by the distributor to OEM manufacturers. Through
December 31, 1996, the Company deferred recognition of sales to distributors
until the products were sold in complete chip sets by the distributors to OEM
manufacturers. Revenue deferred for unmatched chip sets is no longer
significant to the Company's operations. DSPC accrues estimated sales
returns/exchanges for end-user sales and warranty costs upon recognition of
sales. DSPC has not experienced significant warranty claims to date.
F-8
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
TECHNOLOGY DEVELOPMENT - DSPC performs best-efforts research and product
development work under technology development agreements. Due to technology risk
factors, the costs of these agreements are expensed as incurred and revenues are
recognized when applicable customer milestones are met, including deliverables,
and in any case, not in excess of the amount that would be recognized using the
percentage-of-completion method. Costs incurred under technology development
agreements are included in the cost of technology development. Revenues under
support agreements are recorded pro rata over the terms of the agreements.
Deferred income consists of the following at December 31 (in thousands):
1996 1995
-------------------------
Product revenues $2,390 $425
Technology development revenues 100 48
-------------------------
$2,490 $473
-------------------------
-------------------------
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and reduced by related
participation from programs sponsored by the Israeli government.
CHARGE FOR ACQUIRED-IN-PROCESS TECHNOLOGY
The charge for acquired-in-process technology of $10,850,000 in 1995 was
recorded in the fourth quarter of 1995 and consists of $9,600,000 of acquired
in-process technology in connection with the CTP Acquisition (see note 2) and
$1,250,000 of acquired in-process technology in connection with a license
arrangement.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
F-9
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market and
are included in other assets.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation and amortization is
provided using the straight-line method over the estimated useful lives of the
assets (generally from 3 to 5 years), or the life of the lease, whichever is
shorter.
FOREIGN CURRENCY TRANSACTIONS
Substantially all of DSPC's sales are made in United States dollars. In
addition, a substantial portion of DSPC's costs are incurred in dollars. Since
the dollar is the primary currency in the economic environment in which DSPC
operates, the dollar is its functional currency, and accordingly, monetary
accounts maintained in currencies other than the dollar (principally cash and
liabilities) are remeasured using the foreign exchange rate at the balance sheet
date. Operational accounts and nonmonetary balance sheet accounts are measured
and recorded at the rate in effect at the date of the transaction. The effects
of foreign currency remeasurement, which have been immaterial to date, are
reported in current operations.
The Company utilizes financial instruments to reduce financial market risks.
These instruments are used to hedge anticipatory transactions. The foreign
exchange forward contract position as of December 31, 1996 is to hedge
$20,000,000 in foreign currency exposure. This contract matures in January 1997.
The Company does not use derivative financial instruments for trading purposes.
Gains and losses on currency options that are designated and effective as hedges
of anticipated transactions are deferred and recognized in income in the same
period that the underlying transactions are settled.
F-10
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME (LOSS) PER SHARE
Net income (loss) per share reflects the common stock splits through December
31, 1996 and is computed using the weighted average number of shares of common
stock, Class B ordinary shares and dilutive ordinary equivalent shares from
Class A convertible ordinary shares (using the as if-converted method) and from
dilutive share options and warrants (using the treasury stock method). Pursuant
to the Securities and Exchange Commission ("SEC") Staff Accounting Bulletins,
common and common equivalent shares issued at prices below the IPO price per
share during the 12-month period prior to the IPO have been included in the
calculation through December 31, 1994 (using the treasury stock method).
CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject DSPC to credit risk consist principally of
cash equivalents and short term investments and trade receivables. The majority
of DSPC's product sales are to a single distributor who in turn sells to
manufacturers of consumer electronics products. No collateral is required from
the distributor or end customers. At December 31, 1996, approximately $5,000,000
or approximately 70% of trade accounts receivable is due from the distributor.
Write-offs of accounts receivable through December 31, 1996 have been
insignificant.
CASH EQUIVALENTS AND SHORT - TERM INVESTMENTS
DSPC considers all highly liquid investments with a maturity of three months or
less, when purchased, to be cash equivalents.
At December 31, 1996, pursuant to SFAS 115, all debt securities are designated
as available-for-sale. Available-for-sale securities are carried at fair value,
which is determined based upon the quoted market prices of the securities, with
unrealized gains and losses reported in stockholders' equity. Realized gains and
losses and declines in value judged to be other-than-temporary on available for-
sale securities are included in interest income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in interest income.
F-11
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets consist of acquired developed technology and goodwill
resulting from the CTP acquisition (see note 2) which are being amortized over
the estimated useful lives of five years.
Acquired developed technology at December 31, 1996, with a cost of $1,700,000
and accumulated amortization of $397,000, are included in other assets.
Management assesses the realizability of the goodwill and the acquired
technology at each balance sheet date.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of the grant, no compensation expense is recognized.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
F-12
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
2. MERGER AND ACQUISITION ACTIVITY
On October 26, 1995, the Company acquired all of the outstanding shares of CTP,
which develops wireless PBX and other low mobility wireless applications, for
$13,600,000 in cash. The transaction was accounted for as a purchase. The
purchase price of $14,100,000, which consisted of the $13,600,000 cash payment
and $500,000 of transaction costs, was allocated based on an independent
appraisal as follows (in thousands):
Net tangible assets $ 369
Acquired developed technology 1,700
Acquired in-process technology 9,600
Goodwill 2,461
--------------
Total purchase price $14,130
--------------
--------------
The purchase price allocation resulted in a $9,600,000 charge to acquired in-
process technology in the fourth quarter of 1995. The acquired in-process
technology represents the appraised value of technology in the development stage
that had not yet reached technological feasibility and does not have alternative
future uses. The results of CTP are consolidated from October 31, 1995. The
results of operations of CTP from October 26, 1995 to October 31, 1995 were not
material to DSPC.
In connection with the acquisition, prior shareholders of CTP were entitled to
receive a contingent earn-out payment on March 31, 1998. Due to CTP's operating
results for the year ended December 31, 1996, the Company will not be required
to make this contingent earn-out payment.
The following unaudited pro forma financial summary is presented as if the
operations of the Company and CTP were combined as of January 1, 1995. The
unaudited pro forma combined results are not necessarily indicative of actual
results that would have occurred had the purchase been consummated at this date,
or of the future operations of the combined entities.
F-13
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
2. MERGER AND ACQUISITION ACTIVITY (CONTINUED)
In accordance with SEC Regulation S-X, Rule 11-02(b)(5), nonrecurring charges,
such as the charge for acquired in-process technology resulting from the
acquisition, are not reflected in the following pro forma financial summary for
the fiscal year ended December 31 (in thousands):
1995 1994
-------------------------------
Revenues $42,810 $16,608
-------------------------------
-------------------------------
Net income $ 4,883 $ 1,049
-------------------------------
-------------------------------
Net income per share $ 0.14 $ 0.04
-------------------------------
-------------------------------
Shares used in
computing net
income per share 35,752 25,624
-------------------------------
-------------------------------
In the fourth quarter of 1996, the Company incurred a charge of approximately
$5,000,000 in connection with the termination of a proposed acquisition of
Proxim, Inc.
3. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities at December 31,
1996: (in thousands)
Unamortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
-----------------------------------------------------
Bank time deposit $13,904 $ - $ - $13,904
Commercial paper 6,039 - - 6,039
Closed-end mutual fund
shares 20,577 - - 20,577
U.S. corporate obligations 30,658 29 (2) 30,685
U.S. municipal obligations 19,430 11 (3) 19,438
U.S. government obligations 7,233 8 - 7,241
-----------------------------------------------------
$97,841 $48 $(5) $97,884
-----------------------------------------------------
-----------------------------------------------------
Reported as:
Cash equivalents $38,850 $ - $ - $38,850
Short-term investments 58,991 48 (5) 59,034
-----------------------------------------------------
$97,841 $48 $(5) $97,884
-----------------------------------------------------
-----------------------------------------------------
F-14
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
3. AVAILABLE-FOR-SALE SECURITIES (CONTINUED)
The following is a summary of available-for-sale securities at December 31, 1995
(in thousands):
Unamortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
-----------------------------------------------------
Bank time deposit $ 4,686 $ - $ - $ 4,686
Commercial paper 14,137 284 (2) 14,419
Closed-end mutual fund
shares 1,300 2 - 1,302
U.S. government obligations 5,228 47 - 5,275
-----------------------------------------------------
$25,351 $333 $ (2) $25,682
-----------------------------------------------------
-----------------------------------------------------
Reported as:
Cash equivalents $ 7,986 $ - $ - $ 7,986
Short-term investments 17,365 333 (2) 17,696
-----------------------------------------------------
$25,351 $333 $ (2) $25,682
-----------------------------------------------------
-----------------------------------------------------
During the years ended December 31, 1996 and 1995, the change in net unrealized
gains was a decrease of $288,000 and an increase of $331,000, respectively.
Proceeds from the sale of available-for-sale securities for the year ended
December 31, 1996 were $106,822,000. Realized gains and losses on the sale of
available-for-sale securities for the year ended December 31, 1996 were
immaterial.
Proceeds from the sale of available-for-sale securities for the year ended
December 31, 1995 were $13,019,000. Realized gains on the sale of available-for-
sale securities during 1995 were $369,000. There were no realized losses on the
sale of available-for-sale securities during 1995.
Proceeds from the sales of available-for-sale securities and the related gross
realized gains and losses for the year ended December 31, 1994 were $3,793,000,
$96,000 and $450,000, respectively.
The contractual maturity of available-for-sale securities as of December 31,
1996 is as follows: 1997 - $88,707,000; 1998 - $8,081,000; 1999 - $1,096,000.
F-15
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31 (in thousands):
1996 1995
---------------------------------------
Computer and laboratory equipment $ 4,047 $ 2,437
Furniture and fixtures and other 752 558
Leasehold improvements 1,100 231
---------------------------------------
5,899 3,226
Accumulated depreciation (2,334) (1,403)
---------------------------------------
$ 3,565 $ 1,823
---------------------------------------
---------------------------------------
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31 (in thousands):
1996 1995
---------------------------------------
Accrued royalties $ 235 $ 1,036
Warranty reserve 3,069 807
Compensation and benefits 3,533 1,711
Income tax authorities 3,570 761
Other 1,386 874
---------------------------------------
$11,793 $5,189
---------------------------------------
---------------------------------------
6. LEASES
DSPC leases facilities under noncancelable operating lease arrangements. The
Company leases facilities in Cupertino, California, in Israel and in Japan under
noncancelable operating leases. The California facility lease expires in
February 1998, the Israeli facilities leases expire in October 1997, March 1999,
and April 2001, and the Japanese lease expires in October 1997.
F-16
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
6. LEASES
Future minimum payments under noncancelable operating leases with initial terms
of one year or more consist of the following at December 31, 1996 (in
thousands):
1997 $ 896
1998 736
1999 694
2000 508
2001 526
Thereafter 457
----------------
$3,817
----------------
----------------
The gross rental payments under all operating leases were $865,000, $497,000 and
$176,000 in 1996, 1995 and 1994, respectively. Rental expense, net of
reimbursements from sublessees, was $784,000, $412,000 and $84,000 in 1996,
1995, and 1994, respectively.
7. COMMITMENTS AND CONTINGENCIES
ISRAELI GOVERNMENT RESEARCH GRANTS
The Company has participated in programs sponsored by the Israeli Government for
the support of research and development activities. Through December 31, 1996
the Company has obtained grants from the Office of the Chief Scientist in the
Israeli Ministry of Industry and Trade (the "Chief Scientist") aggregating
approximately $2,800,000 for participation in a number of research and
development projects. 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 Chief Scientist. The
Company is obligated to pay royalties to the Chief Scientist, amounting to 3% of
the sales of the products developed out of such projects up to an amount equal
to 150% of the grant received. For the years ended December 31, 1996, 1995 and
1994, the Company charged cost of revenues for approximately $724,000,
$1,142,000 and $574,000, respectively, for royalties on products that were
commercially developed out of projects funded by research grants from the Chief
Scientist. As of December 31, 1996 the Company has repaid all amounts owed
pursuant to the grants relating to products being currently marketed by the
Company. As of December 31, 1996, the Company has decided not to apply for
further grants from the Chief Scientist.
F-17
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
OTHER ROYALTY COMMITMENTS
In connection with certain license and technology development agreements, DSPC
agreed to pay royalties on certain sales based on specified rates, which are
generally 6% to 8% subject to certain limitations.
CTP participated with one of its customers in a program sponsored by the BIRD
Foundation, which was terminated prior to the acquisition by DSPC. In
connection with the program, CTP agreed to pay to the BIRD Foundation
royalties on its wireless PBX product sales at specified rates of 2.5% to 5%,
up to an aggregate total of approximately $800,000 as adjusted for changes in
the consumer price index.
SEVERANCE LIABILITY
The Company's liability for severance pay and pension, pursuant to Israeli law
is fully provided for through insurance contracts and by accrual. At December
31, 1996, virtually all of the liability is funded. The amounts maintained with
insurance companies and part of pension and severance pay funds, are not under
the control of the Company and, therefore, are not included in the financial
statements. Pension and severance expenses for the years ended December 31,
1996, 1995 and 1994 amounted to approximately $802,000, $493,000 and $161,000,
respectively.
INVESTMENT COMMITMENT
In obtaining approval of the Reorganization from Israeli tax authorities, the
Company has agreed to invest in activities in Israel no less than $9,000,000 out
of the proceeds of the initial public offering within three years after
consummation of the offering. Through December 31, 1996, $5,000,000 has been
transferred to Israel primarily in order to finance a portion of the CTP
acquisition, and to increase the capital of DSPCI.
8. CREDIT ARRANGEMENTS
As of December 31, 1996, the Company had issued bank guarantees and a letter of
credit totaling $2,150,000. The term of the letter of credit is through
November 27, 1997.
F-18
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
9. 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 from time to time in one or more series with such designations,
rights, preferences and limitations as the board of directors may determine,
including the consideration received therefore, the number of shares comprising
each series, dividend rates, redemption provisions, liquidation preferences,
redemption fund provisions, conversion rights and voting rights, all without the
approval of the holders of common stock.
SHARE OPTION PLANS
1995 EMPLOYEE AND CONSULTANT STOCK PLAN
DSPC's 1995 Employee and Consultant Stock Plan (the "1995 Plan") provides for
(i) the grant to employees of incentive stock options, (ii) the grant to
employees and consultants of DSPC of nonstatutory stock options and (iii) the
grant of stock options which comply with the applicable requirements of Israeli
law to the extent granted to persons who may be subject to income tax in Israel.
A total of 4,800,000 shares of common stock have been reserved for issuance
under the 1995 Plan.
Options granted under the 1995 Plan have an exercise price no less than the fair
market value of the common stock on the date of grant. The period within which
the option may be exercised is determined at the time of grant. In no event may
the term of an incentive stock option be longer than ten years.
1996 STOCK OPTION PLAN
DSPC's 1996 Stock Option Plan (the "1996 Plan") provides for (i) the grant to
employees of incentive stock options, (ii) the grant to employees, consultants
and nonemployee directors of DSPC of nonstatutory stock options, and (iii) the
grant of stock options which comply with the applicable requirements of Israeli
law to the extent granted to persons who may be subject to income tax in Israel.
A total of 3,000,000 shares of common stock have been reserved for issuance
under the 1996 Plan.
Options granted under the 1996 Plan have an exercise price no less than the fair
market value of the common stock on the date of grant. The period within which
the option may be exercised is determined at the time of grant. In no event may
the term of an incentive stock option be longer than ten years.
F-19
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
9. STOCKHOLDERS' EQUITY (CONTINUED)
SHARE OPTION PLANS (CONTINUED)
1995 DIRECTOR STOCK OPTION PLAN
Each nonemployee director of the Company is entitled to participate in the
Company's 1995 Director Stock Option Plan (the "Director Option Plan"). The
board of directors and the stockholders have authorized a total of 600,000
shares of common stock for issuance under the Director Option Plan. The Director
Option Plan provides for the grant of nonstatutory options to nonemployee
directors of the Company.
The Director Option Plan provides that each eligible director shall be granted
an option to purchase 32,000 shares of common stock on the later of March 14,
1995 or the date on which the optionee first becomes a director of the Company.
Thereafter, beginning on January 1, 1996, each nonemployee director shall be
granted an option to purchase 8,000 additional shares of common stock on January
1 of each year if, on such date, he or she shall have served on the Company's
board of directors for at least six months.
Options granted under the Director Option Plan have an exercise price equal to
the fair market value of the common stock on the date of grant and have a term
of ten years, unless terminated sooner upon termination of the optionee's status
as a director or otherwise pursuant to the Director Option Plan.
F-20
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
9. STOCKHOLDERS' EQUITY (CONTINUED)
SHARE OPTION PLANS (CONTINUED)
A summary of the Company's stock option activity under all option plans, and
related information for the years ended December 31 is as follows (in thousands
except per share information):
<TABLE>
<CAPTION>
1994 1995 1996
--------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of
year 1,663 $0.06 3,531 $0.99 5,534 $ 2.71
Granted 2,673 $0.86 3,238 $3.98 4,307 $19.92
Exercised (231) $0.70 (1,068) $0.87 (2,077) $ 1.57
Forfeited (574) $0.45 (167) $2.40 (374) $ 3.94
--------------------------------------------------------------
Outstanding-end of year 3,531 $0.99 5,534 $2.71 7,390 $13.00
--------------------------------------------------------------
--------------------------------------------------------------
Exercisable at end of year 1,360 995
Weighted-average fair
value of options granted
during the year $1.75 $11.39
</TABLE>
F-21
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
9. STOCKHOLDERS' EQUITY (CONTINUED)
SHARE OPTION PLANS (CONTINUED)
The options outstanding at December 31,1996 have been segregated into ranges for
additional disclosure as follows (in thousands except per share information):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------
WEIGHTED- OPTIONS
OPTIONS AVERAGE WEIGHTED- CURRENTLY WEIGHTED-
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE AT DECEMBER 31, EXERCISE
PRICES 1996 LIFE PRICE 1996 PRICE
- --------------------------------------------------------------------------------
$0.06-$0.08 177 1.6 $ 0.06 119 $ 0.07
$1.00-$1.27 355 2.2 $ 1.13 110 $ 1.17
$1.70-$2.50 519 4.3 $ 1.95 146 $ 2.03
$3.25-$3.88 1,375 3.6 $ 3.60 266 $ 3.85
$5.00-$6.00 508 3.6 $ 5.29 111 $ 5.11
$9.44-$10.91 702 4.2 $ 10.06 25 $ 9.44
$15.88-$22.75 2,940 5.0 $ 19.28 8 $ 18.25
$24.00-$31.25 814 5.3 $ 28.54 210 $ 24.00
----- --- ------- --- -------
$0.06-$31.25 7,390 4.9 $ 13.00 995 $ 7.49
----- --- ------- --- -------
----- --- ------- --- -------
Substantially all options were granted at fair market value in 1996 and 1995.
Options to purchase 420,000 shares were granted with an exercise price in excess
of the fair market value on the date of grant. The weighted-average exercise
price and the weighted-average fair value of these options are $26.00 and $9.08,
respectively.
In 1992, options to purchase ordinary shares equivalent to 21,180 common shares,
not designated under any option plan, were granted to an employee; 15,000 of
these options were canceled in 1994, leaving a balance of 6,180 options
outstanding at December 31, 1994. These options were exercised in 1995.
F-22
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
9. STOCKHOLDERS' EQUITY (CONTINUED)
SHARE OPTION PLANS (CONTINUED)
1995 EMPLOYEE STOCK PURCHASE PLAN
DSPC has reserved 2,000,000 shares of common stock for issuance under the 1995
Employee Stock Purchase Plan (the "1995 Purchase Plan"). Under the 1995 Purchase
Plan, eligible employees are permitted to purchase shares of common stock at the
end of each six month purchase period during a two year offering period (the
"Offering Period"), through payroll deductions not exceeding 10% of an
employee's compensation. The price per share is equal to 85% of the fair market
value of the common stock on the first day of the Offering Period or on the last
day of the applicable purchase period, whichever is lower.
PRO FORMA DISCLOSURES
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of the grant, no
compensation expense is recognized.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by SFAS 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes pricing model with a graded vesting approach with the
following assumptions for 1995 and 1996 respectively: risk-free interest rates
from 5.0% to 7.0%; no dividend yield; volatility factor of the expected market
price of the Company's common stock of 0.65 for both years; and a weighted-
average expected life of the option of 2.5 years for both years.
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 valuation 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
input 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.
F-23
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
9. STOCKHOLDERS' EQUITY (CONTINUED)
PRO FORMA DISCLOSURES (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings (loss) per share
information):
1996 1995
--------------------------------
Pro forma net income (loss) $15,194 $(3,452)
Pro forma net income (loss) per share $ 0.34 $ (0.11)
Because SFAS 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect will not be fully realized until 1998.
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
As of December 31, 1996, approximately 12,000,000 shares of common stock are
reserved for future issuance upon exercise of share options under the Company's
stock option and stock purchase plans.
10. INCOME TAXES
The tax provision consists of the following for the years ended December 31 (in
thousands):
1996 1995 1994
--------------------------------------------------
Current:
Federal $ 630 $ - $ -
State 170 - -
Israel 2,770 1,115 110
--------------------------------------------------
3,570 1,115 110
Deferred:
Federal (183) - -
Israel (279) - -
--------------------------------------------------
(462) - -
--------------------------------------------------
Provision for income taxes $3,108 $1,115 $110
--------------------------------------------------
--------------------------------------------------
F-24
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
10. INCOME TAXES (CONTINUED)
Pretax income (loss) from foreign operations was $24,655,000 in 1996,
$(164,000) in 1995, and $3,237,000 in 1994.
The tax benefits resulting from the exercise of nonqualified stock options and
the disqualifying dispositions of shares acquired under the Company's incentive
stock option plans reduced taxes payable by $1,617,000 in 1996. Such benefit was
credited to additional paid-in capital.
A reconciliation between DSPC's effective tax rate and the United States
("U.S.") statutory rate (35%) is as follows (in thousands):
DECEMBER 31,
------------------------------------------------
1996 1995 1994
------------------------------------------------
Tax (benefit) at U.S.
statutory rate $ 8,700 $ (435) $ 820
Operating losses utilized - - (289)
Valuation of temporary
differences (163) 399 -
Lower effective tax
rate of Israel (7,656) (2,209) (421)
Charge for acquired Israeli
in-process technology - 3,360 -
Unbenefited foreign losses 1,518 - -
State taxes, net of federal
benefit 110 - -
Other 599 - -
--------------------------------------------------
Provision for income taxes $ 3,108 $ 1,115 $ 110
--------------------------------------------------
--------------------------------------------------
F-25
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
10. INCOME TAXES (CONTINUED)
Significant components of DSPC's deferred tax assets for U.S. federal, state and
Israel income taxes are as follows at December 31 (in thousands):
1996 1995
----------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 6,178 $ 694
Accruals and reserves not currently
deductible 535 20
Foreign tax credits 484 -
Capitalized research and development 409 89
Capitalized license fee - 497
Other 97 2
----------------------------------------
Total deferred tax assets 7,703 1,302
Valuation allowance (5,624) (1,302)
----------------------------------------
Total deferred tax assets $ 2,079 $ -
----------------------------------------
----------------------------------------
Of the valuation allowance as of December 31, 1996, $4,331,000 is related to the
benefits of stock options, which will be credited to paid-in capital when
realized.
As of December 31, 1996, DSPC has U.S. federal and state and Israel net
operating loss carryforwards of approximately $15,600,000, $8,100,000 and
$3,500,000 respectively. The federal and state net operating loss carryforwards
will expire beginning in years 2000 through 2011 if not utilized. The Israeli
loss carryforwards have no expiration date.
Net undistributed earnings of the Israeli subsidiaries amounted to approximately
$21,300,000 at December 31, 1996. Those earnings are considered to be
indefinitely reinvested, and accordingly, no provision for U.S. federal and
state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
additional Israeli corporate income and withholding taxes. Withholding taxes of
approximately $3,750,000 would be payable upon remittance of all previously
unremitted net earnings at December 31, 1996.
F-26
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
10. INCOME TAXES (CONTINUED)
The Approved Enterprise status was granted according to several investment plans
and will allow the Israeli subsidiaries a two to four year tax holiday on
undistributed earnings and a corporate tax rate of 10% to 25% for an additional
six to eight years on each of the investment plan's proportionate share of
income.
The per share benefit of the Israeli tax holiday was $0.17 for 1996, $0.70 for
1995 and $0.01 for 1994.
11. RELATED PARTY TRANSACTION
In prior years, DSP Telecom entered into technology licensing, engineering, and
marketing arrangements and had transactions with DSP Group, Inc. a Delaware
corporation, and its subsidiaries ("DSP Group"). DSP Group was DSP Telecom's
parent, prior to the Reorganization in 1995, and is primarily engaged in the
development of DSP-based software for digital speech products. One of DSPC's
former directors is DSP Group's chairman of the board.
Pursuant to these arrangements and transactions, the Company performed certain
contract engineering, research and development, sales and marketing, and general
and administrative services for, and received certain research and development,
sales and marketing, and general and administrative services from DSP Group,
amounting to approximately none and $64,000, respectively, in 1996, $183,000 and
$1,135,000, respectively, in 1995 and $370,000 and $713,000, respectively, in
1994.
Currently, the Company has a license agreement with DSP Group, which gives DSPC
rights to develop five integrated circuits using DSP Group's current generation
digital signal processor technology.
DSPC performed certain technology development services for a former, significant
stockholder in the amounts of $112,500 in 1996, $710,000 in 1995 and $225,000 in
1994. DSPC also sold chipsets to the same former, significant stockholder.
Product revenues from such transactions amounted to $6,260,000, $8,379,000 and
$3,690,000 in 1996, 1995, and 1994, respectively. Management believes that the
transactions with the former stockholder were at arms-length.
F-27
<PAGE>
DSP Communications, Inc.
Notes to Consolidated Financial Statements
11. RELATED PARTY TRANSACTION (CONTINUED)
In the normal course of business, DSPC provided officers and employees loans,
which amounted to an aggregate of $319,000 at December 31, 1996.
12. INDUSTRY SEGMENT REPORTING
DSPC and its subsidiaries operate in one industry segment, principally the
development and marketing of integrated circuits for the wireless communications
market. Operations in Israel include research, development and sales.
Operations in the U.S. include marketing and sales. The following is a summary
of operations within geographic areas for the years ended December 31 (in
thousands):
1996 1995 1994
------------------------------------------
Revenues from
unaffiliated
customers:
United States $ 2,711 $ 1,066 $ 869
Europe - 167 538
Israel 1,917 525 247
Japan 83,771 38,517 14,307
Others 500 592 5
------------------------------------------
$ 88,899 $40,867 $15,966
------------------------------------------
Income (loss) before
provision for income
taxes (including
intercompany amounts):
United States $ 203 $(1,079) $ (894)
Israel 24,655 (164) 3,237
------------------------------------------
$ 24,858 $(1,243) $ 2,343
------------------------------------------
Identifiable assets:
United States $105,587 $31,637 $ 570
Israel 51,107 20,365 11,722
Eliminations (1,340) (7,883) (1,264)
------------------------------------------
$155,354 $44,119 $11,028
------------------------------------------
------------------------------------------
In 1996, 1995 and 1994 sales of chip sets through one distributor accounted for
91%, 89% and 84% of total revenues, respectively.
F-28
<PAGE>
DSP COMMUNICATIONS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
- ----------------------- ------------ ----------------------- ---------- ------------
Additions
-----------------------
Charged to
Balance at Charged to Other
Beginning of Costs and Accounts Deductions Balance at
Descriptions Period Expenses Describe Describe End of Period
- ------------ ------------ ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts
Years Ended:
December 31, 1994 ...... $ 65,000 $ -- $ -- $(15,000)(1) $ 50,000
December 31, 1995 ...... $ 50,000 $ 89,000 $ -- $ -- $ 139,000
December 31, 1996 ...... $139,000 $ -- $ -- $( 7,000)(1) $ 132,000
Warranty Reserve:
Years Ended:
December 31, 1994 ...... $ 53,000 $ 372,000 $ -- $ -- $ 425,000
December 31, 1995 ...... $425,000 $ 382,000 $ -- $ -- $ 807,000
December 31, 1996 ...... $807,000 $2,262,000 $ -- $ -- $3,069,000
</TABLE>
(1) Estimated Allowance reduced as a result of a lower outstanding accounts
receivable balance.
S-1
<PAGE>
EXHIBIT 3.1B
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
DSP COMMUNICATIONS, INC.
DSP Communications, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of DSP Communications, Inc. duly
adopted resolutions setting forth a proposed amendment of the Amended and
Restated Certificate of Incorporation of said corporation, declaring said
amendment to be advisable and directing that said amendment be considered at
a special meeting of the stockholders of said corporation. The resolution
setting forth the proposed amendment is as follows:
RESOLVED: That the first paragraph of Article IV of this
corporation's Amended and restated Certificate of Incorporation be
amended to read in its entirety as follows:
"This Corporation is authorized to issue two (2) classes of stock
to be designated, respectively, Preferred Stock, par value $.001 per
share ("Preferred"); and Common Stock, par value $.001 per share
("Common"). The total number of shares of Common that this Corporation
shall have authority to issue is one hundred ten million (110,000,000).
The total number of shares of Preferred that this Corporation shall have
authority to issue is five million (5,000,000). The Preferred Stock may
be issued from time to time in one or more series.
Upon the filing of this amendment to the Certificate of
Incorporation with the Secretary of State of the State of Delaware (the
"Effective Time"), each share of Common of this Corporation issued and
outstanding immediately prior to the Effective Time shall be changed and
converted into two (2) shares of Common of this Corporation."
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, a special meeting of the stockholders of said corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation law of the State of Delaware, at which meeting the necessary
number of shares as required by statute were voted in favor of the amendment.
<PAGE>
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, said DSP Communications, Inc. has caused this
certificate to be signed by Nathan Hod, its President and Chief Executive
Officer, this 12th day of November, 1996.
DSP COMMUNICATIONS, INC.
BY: /s/ Nathan Hod
----------------------------------------
Nathan Hod,
President and Chief Executive Officer
<PAGE>
EXHIBIT 10.25
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
OF DAVIDI GILO
WITH
DSP TELECOM, INC.
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement"), made
and entered into effective as of this 1st day of November, 1996, by and
between DSP TELECOM, INC., a California corporation (hereinafter the
"Corporation"), and DAVIDI GILO (hereinafter "Gilo").
RECITALS
A. On August 1, 1994, Gilo and the Corporation entered into an
Employment Agreement (the "Employment Agreement"), as amended and restated as
of December 15, 1995, for the provision by Gilo of certain services to the
Corporation.
B. The Corporation and Gilo desire to amend and restate the Employment
Agreement according to the terms and conditions set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. EMPLOYMENT DUTIES.
a. GENERAL. The Corporation hereby agrees to employ Gilo, and
Gilo hereby agrees to accept employment with the Corporation, on the terms
and conditions hereinafter set forth.
b. CORPORATION'S DUTIES. The Corporation shall allow Gilo to,
and Gilo shall, perform responsibilities normally incident to his position as
Chairman, subject to his election by the shareholders as a Director, but
otherwise as the immediate superior to the Chief Executive Officer of the
Corporation, commensurate with his background, education, experience and
professional standing. The Corporation shall provide Gilo with a private
office, stenographic help, office equipment, supplies, customary services and
cooperation suitable for the performance of his duties. These duties shall
be performed primarily in Santa Clara, California.
c. GILO'S DUTIES. Unless otherwise agreed to by the parties,
Gilo shall serve as the Chairman of the Board of the Corporation's parent,
DSP Communications, Inc. ("DSPC"), a Delaware corporation. Gilo shall devote
at least twenty (20) hours per week on
<PAGE>
average to the work of the Corporation. Gilo shall report directly to DSPC's
Board of Directors. Gilo's service for DSPC's subsidiaries, including,
without limitation, the Corporation, DSP Telecommunications, Ltd , CTP
Systems, Ltd, DSPC Israel, Ltd, DSPC Japan, Inc., and CTP Systems, Inc. shall
be credited to the twenty (20) hour requirement. Mr. Gilo shall inform the
Board of any other positions that he takes with any other corporation.
2. TERM. This Agreement shall terminate December 31, 2001, unless (a)
extended as set forth herein, or (b) terminated sooner under the terms of
this Agreement. Thereafter, this Agreement may be renewed by Gilo and the
Board of Directors of this Corporation on such terms as the parties may agree
to in writing. Absent written notice to the contrary, thirty (30) days prior
to the end of the employment term, this Agreement will be renewed for
consecutive one (1) year extensions. As used herein, the term "employment
term" refers to the entire period of employment of Gilo hereunder, including
any extensions.
3. COMPENSATION. Gilo shall be compensated as follows:
a. FIXED SALARY. Gilo shall receive a fixed annual salary of
Three Hundred Thousand Dollars ($300,000). The Corporation agrees to review
the fixed salary following the end of each twelve (12) month period during
the employment term based upon Gilo's services and the Corporation's
financial results during the calendar year, and to make such increases as may
be determined appropriate in the discretion of the Corporation's Board of
Directors.
b. PAYMENT. Gilo's fixed salary shall be payable on a
semi-monthly basis.
c. BONUS COMPENSATION. During the employment term, Gilo shall
participate in each bonus plan adopted by the Corpor-ation's Board of
Directors. Commencing in 1996, Gilo shall be entitled to receive an annual
bonus equal to (i) twenty-five percent (25%) of his base salary should this
Corporation meet eighty percent (80%) of its plan as presented to the Board
in January of each year, during the term of Gilo's employment ("Yearly
Plan"); (ii) fifty percent (50%) of his base salary should this Corporation
meet its Yearly Plan; and (iii) one hundred percent (100%) of his base salary
should this Corporation meet one hundred twenty percent (120%) of its Yearly
Plan, with the bonus prorated if the Yearly Plan is met between eighty
percent (80%) and one hundred percent (100%); or between one hundred percent
(100%) and one hundred twenty percent (120%). The meeting of the Yearly Plan
for purposes of this Section shall be based upon the actual revenues and
earnings per share for each applicable year (each weighted fifty percent
(50%)) compared to the revenues and
-2-
<PAGE>
earnings per share projected in the Yearly Plan (with each item weighted
fifty percent (50%)) and no item shall be counted if it is not at least
eighty percent (80%) met.
d. VACATION. Gilo shall accrue paid vacation at the rate of
twenty-five (25) days for each twelve (12) months of employment. Gilo shall
be compensated at his usual rate of compensation during any such vacation.
Gilo shall be entitled to ten (10) paid holidays during each twelve (12)
months of employment.
e. BENEFITS. During the employment term, Gilo and his dependents
shall be entitled to participate in any group plans or programs maintained by
the Corporation for any employees relating to group health, disability, life
insurance and other related benefits as in effect from time to time. The
level of benefits shall be based on the salary payable to Gilo. The
Corporation shall provide Gilo with Director and Officer Insurance, if
reasonably available to the Corporation, and all of its officers and
directors. Gilo shall in no event receive less insurance coverage than that
available to any other employee. The Corporation shall, at a minimum, keep in
full force and effect its indemnification agreement previously entered into
with Gilo.
4. EXPENSES. The Corporation shall reimburse Gilo for his normal and
reasonable expenses incurred for travel, entertainment and similar items in
promoting and carrying out the business of DSPC in accordance with the
Corporation's general policy as adopted by the Corporation's management from
time to time. As a condition of reimbursement, Gilo agrees to provide the
Corporation with copies of all available invoices and receipts, and otherwise
account to the Corporation in sufficient detail to allow the Corporation to
claim an income tax deduction for such paid item, if such item is deductible.
Reimbursements shall be made on a monthly, or more frequent, basis. The
Corporation shall also reimburse Gilo for all professional membership dues
incurred, if any; all technical books purchased by Gilo; and all moving and
relocation expenses, incurred by Gilo at the Corporation's request.
5. CONFIDENTIALITY AND COMPETITIVE ACTIVITIES. Gilo agrees that
during the employment term he is in a position of special trust and
confidence and has access to confidential and proprietary information about
the Corporation's business and plans. Gilo agrees that he will not directly
or indirectly, either as an employee, employer, consultant, agent, principal,
partner, stockholder, corporate officer, director, or in any similar
individual or representative capacity, engage or participate in any business
that is in competition, in any manner whatsoever, with the Corporation.
Notwithstanding anything in the foregoing to the contrary, Gilo shall be
allowed to invest as a shareholder in publicly traded companies, or through a
venture capital firm or an investment pool.
-3-
<PAGE>
For purposes of this Section 5, the term "Corporation" shall also mean
DSPC or any of its subsidiaries.
6. TRADE SECRETS.
a. SPECIAL TECHNIQUES. It is hereby agreed that the Corporation
has developed or acquired certain products, technology, unique or special
methods, manufacturing and assembly processes and techniques, trade secrets,
special written marketing plans and special customer arrangements, and other
proprietary rights and confidential information and shall during the
employment term continue to develop, compile and acquire said items (all
hereinafter collectively referred to as the "Corporation's Property"). It is
expected that Gilo will gain knowledge of and utilize the Corporation's
Property during the course and scope of his employment with the Corporation,
and will be in a position of trust with respect to the Corporation's Property.
b. CORPORATION'S PROPERTY. It is hereby stipulated and agreed
that the Corporation's Property shall remain the Corporation's sole property.
In the event that Gilo's employment is terminated, for whatever reason, Gilo
agrees not to copy, make known, disclose or use, any of the Corporation's
Property without the Corporation's prior written consent which shall not be
unrea-sonably withheld. In such event, Gilo further agrees not to endeavor
or attempt in any way to interfere with or induce a breach of any prior
proprietary contractual relationship that the Corporation may have with any
employee, customer, contractor, supplier, representative, or distributor for
nine (9) months. Gilo agrees upon termination of employment to deliver to the
Corporation all confidential papers, documents, records, lists and notes
(whether prepared by Gilo or others) comprising or containing the
Corporation's Property. Gilo recognizes that violation of covenants and
agreements contained in this Section 6 may result in irreparable injury to
the Corporation which would not be fully compensable by way of money damages.
c. COVENANT NOT TO COMPETE. For a period of one (1) year from
the date of any termination of Gilo's employment with the Corporation,
provided that he has sold substantially all of his stock in the Corporation,
Gilo shall not, directly or indirectly, either as an employee, employer,
consultant, agent, principal, partner, stockholder, corporate officer,
Director, or in any other individual or representative capacity, engage or
participate in any activities within the State of California, which are the
same as, or competitive with, the activities in which the Corporation is
presently engaged.
d. CORPORATION DEFINED. For purposes of this Section 6, the term
"Corporation" shall also mean DSPC and any of its subsidiaries.
-4-
<PAGE>
7. TERMINATION.
a. GENERAL. The Corporation may terminate this Agreement without
cause, by written notice. Gilo may voluntarily terminate his employment
hereunder upon ninety (90) days' advance written notice to the Corporation.
b. TERMINATION FOR CAUSE. The Corporation may immediately
terminate Gilo's employment at any time for cause. Termination for cause
shall be effective from the receipt of written notice thereof to Gilo
specifying the grounds for termination and all relevant facts. Cause shall
be deemed to include: (i) material neglect of his duties or a significant
violation of any of the provisions of this Agreement, which continues after
written notice and a reasonable opportunity (not to exceed thirty (30) days)
in which to cure; (ii) fraud, embezzlement, defalcation or conviction of any
felonious offense; or (iii) intentionally imparting confidential information
relating to the Corporation or DSPC or their business to com-petitors or to
other third parties other than in the course of carrying out his duties
hereunder. The Corporation's exercise of its rights to terminate with cause
shall be without prejudice to any other remedy it may be entitled at law, in
equity, or under this Agreement.
c. TERMINATION UPON DEATH OR DISABILITY. This Agreement shall
automatically terminate upon Gilo's death. In addition, if any disability or
incapacity of Gilo to perform his duties as the result of any injury,
sickness, or physical, mental or emotional condition continues for a period
of thirty (30) business days (excluding any accrued vacation) out of any one
hundred twenty (120) calendar day period, the Corporation may terminate
Gilo's employment upon written notice. Payment of salary to Gilo during any
sick leave shall only be to the extent that Gilo has accrued sick leave or
vacation days. Gilo shall accrue sick leave at the same rate generally
available to the Corporation's employees.
d. SEVERANCE PAY. If this Agreement is terminated without cause
pursuant to Section 7.a. (above), the Corporation shall pay Gilo a
severance/consulting fee equal to the full amount of the compensation that
he could have expected under this Agreement, as and when payable under this
Agreement, without deduction except for tax withholding amounts, through the
end of the term, during which Gilo shall remain as a consultant to the
Corporation. The Corporation shall pay Gilo a severance fee equal to his
monthly salary at his then-current rate of fixed salary compensation,
multiplied by the number six (6) if this Agreement is terminated pursuant to
Section 7.b (i) (above) or if Gilo or the Corporation elects not to renew
this Agreement. The Corporation shall pay Gilo a severance fee equal to his
monthly salary at his then-current rate of fixed salary compensation,
multiplied by the lesser of the number eighteen (18) or the number of months
left in the original term of this Agreement as set forth
-5-
<PAGE>
herein plus eight (8), if Gilo voluntarily elects to terminate his
employment, unless the Corporation successfully claims that a termination in
accordance with Section 7. b(ii) and (iii) is in order, or if Gilo or the
Corporation elects not to renew this Agreement. There shall be no severance
in the event that this Agreement is terminated in accordance with Section 7.b
(ii) and (iii).
8. CORPORATE OPPORTUNITIES.
a. DUTY TO NOTIFY. In the event that Gilo, during the employment
term, shall become aware of any material and significant business opportunity
directly related to the Corporation's digital signal processing business or
the Corporation's wireless PBX business, or such other businesses that become
significant for the Corporation, Gilo shall promptly notify the Corporation's
Directors of such opportunity. Gilo shall not appropriate for himself or for
any other person other than the Corporation, or any affiliate of the
Corporation, any such opportunity unless, as to any particular opportunity,
the Board of Directors of the Corporation fails to take appropriate action
within thirty (30) days. Gilo's duty to notify the Corporation and to
refrain from appropriating all such opportunities for thirty (30) days shall
neither be limited by, nor shall such duty limit, the application of the
general law of California relating to the fiduciary duties of an agent or
employee.
b. FAILURE TO NOTIFY. In the event that Gilo fails to notify the
Corporation of, or so appropriates, any such opportunity without the express
written consent of the Board of Directors, Gilo shall be deemed to have
violated the provisions of this Section notwithstanding the following:
i. The capacity in which Gilo shall have acquired such
opportunity; or
ii. The probable success in the Corporation's hands of such
opportunity.
c. CORPORATION DEFINED. For purposes of this Section 8, the term
"Corporation" shall also mean DSPC or any of its subsidiaries.
9. MISCELLANEOUS.
a. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement and understanding between the parties with respect to the subject
matters herein, and supersedes and replaces any prior agreements and
understandings, whether oral or written between them with respect to such
matters. The provisions of this Agreement may be waived, altered, amended or
repealed in whole or in part only upon the written consent of both parties to
this Agreement.
-6-
<PAGE>
b. NO IMPLIED WAIVERS. The failure of either party at any time
to require performance by the other party of any provision hereof shall not
affect in any way the right to require such performance at any time
thereafter, nor shall the waiver by either party of a breach of any provision
hereof be taken or held to be a waiver of any subsequent breach of the same
provision or any other provision.
c. PERSONAL SERVICES. It is understood that the services to be
performed by Gilo hereunder are personal in nature and the obligations to
perform such services and the conditions and covenants of this Agreement
cannot be assigned by Gilo. Subject to the foregoing, and except as otherwise
provided herein, this Agreement shall inure to the benefit of and bind the
successors and assigns of the Corporation.
d. SEVERABILITY. If for any reason any provision of this
Agreement shall be determined to be invalid or inoperative, the validity and
effect of the other provisions hereof shall not be affected thereby, provided
that no such severability shall be effective if it causes a material
detriment to any party.
e. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, applicable
to contracts between California residents entered into and to be performed
entirely within the State of California.
f. NOTICES. All notices, requests, demands, instruc-tions or
other communications required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly given upon
delivery, if delivered personally, or if given by prepaid telegram, or mailed
first-class, postage prepaid, registered or certified mail, return receipt
requested, shall be deemed to have been given seventy-two (72) hours after
such delivery, if addressed to the other party at the addresses as set forth
on the signature page below. Either party hereto may change the address to
which such communications are to be directed by giving written notice to the
other party hereto of such change in the manner above provided.
g. MERGER, TRANSFER OF ASSETS, OR DISSOLUTION OF THE CORPORATION.
This Agreement shall not be terminated by any dissolution of the Corporation
resulting from either merger or consolidation in which the Corporation is not
the consolidated or surviving corporation or a transfer of all or
substantially all of the assets of the Corporation. In such event, the
rights, benefits and obligations herein shall automatically be assigned to
the surviving or resulting corporation or to the transferee of the assets.
h. CONFLICT. The parties acknowledge that Pezzola & Reinke, A
Professional Corporation ("P&R") is counsel to each of them. The parties
have been made aware of the
-7-
<PAGE>
conflict and advised to seek independent counsel. Gilo acknowledges that P&R
advised the Corporation and not Gilo. Gilo hereby acknowledges the conflict
and waives it as to P&R's participation in this Agreement. The Corporation
acknowledges the conflict and waives it as to P&R's participation in this
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
DSP TELECOM, INC.
a California corporation
20300 Stevens Creek Blvd., Ste. 465
Cupertino, CA 95014
By: /s/ Nathan Hod /s/ Davidi Gilo
---------------------------- ------------------------------
NATHAN HOD, Chief Executive DAVIDI GILO
Officer 100 Why Worry Lane
Woodside, CA 94062
<PAGE>
EXHIBIT 11.1
DSP COMMUNICATIONS, INC.
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
(in thousands except per share data)
YEARS ENDED DECEMBER 31,
1996 1995 1994
----------- --------- ---------
Primary:
Shares used in calculation of net income
(loss) per share:
Average common and Class B Ordinary shares
outstanding 41,865 30,252 11,912
Net effect of dilutive stock options and
warrants 3,699 -- 3,080
Shares related to SAB Nos. 55, 64 and 83 -- -- 1,584
Class A Convertible Ordinary shares, if
converted -- -- 9,048
-----------------------------
45,564 30,252 25,624
-----------------------------
-----------------------------
Net income (loss) $21,750 $(2,358) $ 2,233
-----------------------------
-----------------------------
Net income (loss) per share $ 0.48 $ (0.08) $ 0.09
-----------------------------
-----------------------------
YEARS ENDED DECEMBER 31,
1996 1995 1994
----------- --------- ---------
Fully Diluted:
Shares used in calculation of net income
(loss) per share:
Average common and Class B Ordinary shares
outstanding 41,865 30,252 11,912
Net effect of dilutive stock options and
warrants 3,895 -- 3,080
Shares related to SAB Nos. 55, 64 and 83 -- -- 1,584
Class A Convertible Ordinary shares, if
converted -- -- 9,048
-----------------------------
45,760 30,252 25,624
-----------------------------
-----------------------------
Net income (loss) $21,750 $(2,358) $ 2,233
-----------------------------
-----------------------------
Net income (loss) per share $ 0.48 $ (0.08) $ 0.09
-----------------------------
-----------------------------
Note: Net income (loss) per share information reflects the common stock
two-for-one split effected in March 1996 and the common stock two-for-one
split effected in December 1996.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
NAME JURISDICTION OF INCORPORATION
- ---- -----------------------------
DSP Telecom, Inc. California
CTP Systems, Inc. California
DSP Telecommunications, Ltd. Israel
DSPC Israel Ltd. Israel
CTP Systems Ltd. Israel
DSP Communications (Japan), Inc. Japan
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-19883) pertaining to the 1996 Stock Option Plan, the
Registration Statement (Form S-8 No. 333-11841) pertaining to the 1996
Nonstatutory Employee and Consultant Option Plan and the Registration
Statement (Form S-8 No. 033-95886) pertaining to the 1995 Employee Stock
Purchase Plan, the 1995 Employee and Consultant Stock Plan and the 1995
Director Stock Option Plan of our report dated January 15, 1997, with respect
to the consolidated financial statements of DSP Communications, Inc. (the
"Company") included in the Annual Report (Form 10-K) for the year ended
December 31, 1996.
Our audits also included the financial statement schedule of DSP
Communications, Inc. listed in item 14(a)2 of this Annual Report. 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 financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
March 21, 1997
<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 COMMUNICATIONS,
INC. FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 77,799
<SECURITIES> 59,034
<RECEIVABLES> 7,186
<ALLOWANCES> 132
<INVENTORY> 0
<CURRENT-ASSETS> 147,260
<PP&E> 5,899
<DEPRECIATION> 2,334
<TOTAL-ASSETS> 155,354
<CURRENT-LIABILITIES> 18,030
<BONDS> 0
0
0
<COMMON> 44
<OTHER-SE> 136,800
<TOTAL-LIABILITY-AND-EQUITY> 136,844
<SALES> 85,128
<TOTAL-REVENUES> 88,899
<CGS> 44,153
<TOTAL-COSTS> 47,703
<OTHER-EXPENSES> 5,311
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 24,858
<INCOME-TAX> 3,108
<INCOME-CONTINUING> 21,750
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,750
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
</TABLE>
