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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended JUNE 30, 1997
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or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-25622
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DSP COMMUNICATIONS , INC.
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(Exact name of registrant as specified in its charter)
Delaware 77-0389180
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
20300 Stevens Creek Boulevard, Cupertino, California 95014
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (408) 777-2700
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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As of August 6, 1997, there were 39,613,727 shares of Common Stock ($.001 per
value) outstanding.
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INDEX
DSP COMMUNICATIONS, INC.
Page No.
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PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-June 30, 1997
and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed consolidated statements of operations-quarter
ended June 30, 1997 and 1996, and six months
ended June 30, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . 4
Condensed consolidated statements of cash flows-six months
ended June 30, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . 5
Notes to condensed consolidated financial statements-
June 30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . 18
Item 3. Defaults upon Senior Securities. . . . . . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 18
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 19
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DSP COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
1 9 9 7 1 9 9 6
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(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 58,091 $ 77,799
Short term investments 34,990 59,034
Trade accounts receivable 6,352 7,054
Other current assets 5,175 3,373
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Total current assets 104,608 147,260
Property and Equipment, net 4,147 3,565
Goodwill 1,641 1,887
Other Assets 2,472 2,642
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$ 112,868 $ 155,354
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,340 $ 3,747
Accrued compensation and benefits 2,472 3,233
Other accrued liabilities 8,039 8,560
Deferred income 173 2,490
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Total current liabilities 15,024 18,030
Other Liabilities 570 480
STOCKHOLDERS' EQUITY
Common stock 40 44
Additional paid-in capital 80,815 127,226
Accumulated earnings 16,419 9,574
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Total stockholders' equity 97,274 136,844
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$ 112,868 $ 155,354
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See Notes to Condensed Consolidated Financial Statements
Note 1: The balance sheet at December 31, 1996 has been derived from
audited financial statements at that date, but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
3
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DSP COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE THREE SIX SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES
Product $ 8,094 $ 19,595 $ 26,779 $ 35,719
Technology development 594 736 2,211 1,934
-------- --------- -------- --------
Total revenues 8,688 20,331 28,990 37,653
COST OF REVENUES
Product 3,974 10,610 14,020 19,822
Technology development 1,204 816 2,210 1,674
-------- --------- -------- --------
Total cost of revenues 5,178 11,426 16,230 21,496
-------- --------- -------- --------
Gross profit 3,510 8,905 12,760 16,157
OPERATING EXPENSES
Research and development 1,580 1,019 3,023 2,026
Sales and marketing 1,138 746 2,067 1,626
General and administrative 1,740 1,429 3,492 3,084
-------- -------- -------- --------
4,458 3,194 8,582 6,736
-------- -------- -------- --------
Operating income (Loss) (948) 5,711 4,178 9,421
Other Income 1,769 1,089 3,644 1,464
-------- -------- -------- ---------
Income before provision
for income taxes 821 6,800 7,822 10,885
Provision for income taxes 102 850 977 1,360
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Net income $ 719 $ 5,950 $ 6,845 $ 9,525
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share $ 0.02 $ 0.13 $ 0.15 $ 0.22
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in computing
net income per share 43,736 45,850 45,263 43,172
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
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DSP COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(US DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
1 9 9 7 1 9 9 6
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OPERATING ACTIVITIES:
Net income for the period $ 6,845 $ 9,525
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,078 794
Loss on disposal of equipment 3 2
Changes in operating assets and liabilities:
Trade accounts receivable 702 1,130
Other current assets (1,802) (801)
Accounts payable 664 1,620
Accrued compensation and benefits (761) 251
Deferred income (2,317) 843
Other accrued liabilities (431) 1,889
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Net cash provided by operating activities 3,981 15,253
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INVESTING ACTIVITIES:
Cash purchases of equipment (1,326) (1,446)
Proceeds from sales of equipment 8 7
Sales and maturities of short term
investments, net 23,999 --
Purchases of short term investments, net -- (37,994)
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Net cash provided by (used in) investing
activities 22,681 (39,433)
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FINANCING ACTIVITIES:
Issuance of common stock for cash 1,849 77,891
Repurchase of common stock (48,219) --
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Net cash provided by financing activities (46,370) 77,891
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Increase in cash and cash equivalents (19,708) 53,711
Cash and Cash equivalents
at beginning of period 77,799 10,292
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Cash and cash equivalents at
end of period $ 58,091 $ 64,003
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See Notes to Condensed Consolidated Financial Statements
5
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DSP COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of DSP
Communications, Inc. ("DSPC" or the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the interim period are not necessarily indicative of the
results that may be expected for the full year. For further information, refer
to the consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1996.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in no change
in primary earnings per share for the quarter ended June 30, 1997 and an
increase in primary earnings per share for the quarter ended June 30, 1996, to
$0.14 per share. The impact of Statement No. 128 on the calculation of fully
diluted earnings per share for these quarters is not expected to be material.
3. STOCKHOLDERS' EQUITY
In April and May 1997, the Company's Board of Directors approved share
repurchase programs pursuant to which the Company, from time to time and at
management's discretion, was authorized to purchase up to an aggregate of 8
million shares of the Company's Common Stock (equal to aproximately 18% of the
approximately 45 million shares that were outstanding immediately prior to the
commencement of the repurchase programs) in open-market transactions. As of
June 30, 1997, the Company had completed the repurchase of 5,480,500 shares, at
purchase prices ranging from $6.875 to $11.8625 per share, for an aggregate
purchase price of $48.2 million.
On March 6, 1997, the Board of Directors adopted a share option repricing
program pursuant to which options to purchase an aggregate of 4,322,500 shares
of common stock, held by employees under the Company's stock option plans, were
eligible to be repriced, subject to acceptance by the optionees, as follows:
options held by employees who were not officers of the Company would be repriced
to the fair market value of the common stock on March 6, 1997, which price was
$9.875 per share, and options held by officers of the Company would be repriced
to $10.875 per share. The offer to participate in the option repricing program
was made to the optionees in April 1997, and optionees holding over 92% of the
eligible options accepted the offer.
6
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4. LITIGATION
On May 12, 1997, a class action lawsuit was filed against the Company and
several of its officers and directors in the Superior Court of California, Santa
Clara County, bearing the caption BERT PERL, ET AL. V. DSP COMMUNICATIONS, INC.,
DAVIDI GILO, LEWIS S. BROAD, GERALD DOGON, NATHAN HOD, ARNON KOHAVI AND JOSEPH
PERL. A second, identical lawsuit, captioned GERSHON SONTAG, ET AL. V. DSP
COMMUNICATIONS, INC., ET AL. was filed on May 22, 1997. The complaints, which
have been consolidated, allege that the Company and certain of its officers and
directors violated California securities laws in connection with certain
statements allegedly made during the first quarter of 1997, and seek damages in
an unspecified amount, interest, attorney's fees and other costs, and other
equitable and injunctive relief. The plaintiffs have requested to have the
matter certified as a class action on behalf of certain past and present
shareholders of the Company. The Company has demurred to the complaints, and
such demurrer is presently pending before the court.
The Company believes that the complaints are without merit and intends to defend
these actions vigorously. However, due to the inherent uncertainties of
litigation, the Company cannot accurately predict the ultimate outcome of the
litigation at this time. Any unfavorable outcome of litigation could have an
adverse impact on the Company's business, financial condition and results of
operations.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following information should be read in conjunction with the consolidated
condensed interim financial statements and the notes thereto in Part I, Item 1
of this Quarterly Report and with Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996. 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.
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 :
<TABLE>
<CAPTION>
Quarter ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
--------------------- ---------------------
<S> <C> <C> <C> <C>
Revenues:
Product 93.2% 96.4% 92.4% 94.9%
Technology development 6.8 3.6 7.6 5.1
--------------------- ---------------------
Total revenues 100.0 100.0 100.0 100.0
Cost of Revenues:
Product 45.7 52.2 48.4 52.6
Technology development 13.9 4.0 7.6 4.4
-------------------- ---------------------
Total cost of revenues 59.6 56.2 56.0 57.0
-------------------- ---------------------
Gross profit 40.4 43.8 44.0 43.0
Operating Expenses:
Research and development 18.2 5.0 10.4 5.4
Sales and marketing 13.1 3.7 7.1 4.3
General and administrative 20.0 7.0 12.0 8.2
-------------------- --------------------
Total operating expenses 51.3 15.7 29.5 17.9
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Operating income (loss) (10.9) 28.1 14.5 25.1
Other income 20.4 5.4 12.5 3.8
-------------------- --------------------
Income before provision
for income taxes 9.5 33.5 27.0 28.9
Provision for income taxes (1.2) (4.2) (3.4) (3.6)
-------------------- --------------------
Net income 8.3% 29.3% 23.6% 25.3%
-------------------- --------------------
-------------------- --------------------
</TABLE>
8
<PAGE>
REVENUES
PRODUCT: Product revenues decreased to $8.1 million in the second quarter of
1997 from $19.6 million in the second quarter of 1996 and to $26.8 million in
the six months ended June 30, 1997 from $35.7 million in the first six months of
1996. Product revenues consist primarily of baseband chip sets for digital
cellular telephones. The decline in revenues in the second quarter was primarily
due to a product transition in the Japanese PDC market. At the end of the
second quarter, the Company began shipments of its new PDC chipsets. Revenues
from sales to distributors are recognized at the time the products are shipped
by the distributor to the original equipment manufacturer ("OEM") customer.
Other product revenues are recorded when products are shipped to customers.
TECHNOLOGY DEVELOPMENT AND OTHER: Technology development revenues decreased to
$594,000 in the second quarter of 1997 from $736,000 in the second quarter of
1996 and increased to $2.2 million in the six months ended June 30, 1997 from
$1.9 million in the first six months of 1996. Technology development revenues
were affected in the second quarter by delays in achieving technology milestones
in the Code Division Multiple Access ("CDMA") project. It is expected that these
milestones will be achieved in the third quarter. 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.
GROSS PROFIT
Gross profit in the second quarter of 1997 was $3.5 million (40.4% of revenues)
compared to $8.9 million (43.8% of revenues) in the first quarter of 1996. Gross
profit in the second quarter was negatively affected by the loss on technology
development activities and the effect of these revenues being a greater relative
portion of the total revenues than previously experienced. Gross profit in the
first half of 1997 was $12.8 million (44.0% of revenues), compared to $16.2
million (43.0% of revenues) in the first half of 1996.
The gross margins on product revenues (primarily from sales of chipsets for the
Japanese PDC market) are affected by the changes in the customer mix from
quarter to quarter as well as the overall general price reduction. Sales of
wireless private branch exchange ("PBX") systems of the Company's subsidiary,
CTP Systems, Ltd. ("CTP Systems"), resulted in positive but relatively low
margins in the second quarter of 1997. The Company expects that it will
continue to experience relatively low margins on low volume sales of these
wireless PBX systems until higher volume sales are achieved. Higher volume
sales are anticipated towards the end of 1997.
The Company anticipates that the average sales prices of chip sets may continue
to 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.
The costs incurred on technology development varies from quarter to quarter
depending on the similarity or diversity of the products and technologies
developed, and as contractual milestones are achieved.
From time to time, the Company enters into dollar/yen option transactions in
order to hedge against the increase in value of the US dollar against the yen
and to decrease exposure to currency-driven sales price pressure.
9
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RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased to $1.6 million in the second
quarter of 1997 from $1.0 million in the second quarter of 1996 and to $3.0
million in the first half of 1997 from $2.0 million in the first half of
1996. The increases were a result of increases in research and development
activities during those periods and growth in the number of engineering
personnel. As percentage of total revenues, research and development expenses
increased to 18.2% in the second quarter of 1997, from 5.0% in the second
quarter of 1996, mainly because of the reduced revenues, and to 10.4% from
5.4% in the first half of 1997 and 1996, respectively. The Company expects
that its research and development expenses will 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 increased to $1.1 million (13.1% of revenues) in
the second quarter of 1997 from $746,000 (3.7% of revenues) in the second
quarter of 1996 and to $2.1 million (7.1% of revenues) in the first half of 1997
from $1.6 million (4.3% of revenues) in the first half of 1996. The increase
reflects primarily increased promotion and marketing research activities, and
increased expenses at the company's Tokyo offices.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $1.7 million (20.0% of revenues) in the
first quarter of 1997 compared to $1.4 million (7.0% of revenues) in the first
quarter of 1996 and $3.5 million (12.0% of revenues) in the first half of 1997
compared to $3.1 million (8.2% of revenues) in the first half of 1996.
General and administrative expenses increased, in absolute dollars, as a result
of increases in facility expenses, legal and audit fees, insurance and
communications expenses.
OTHER INCOME
Other income includes net interest income, investment income, and foreign
currency remeasurement gains and losses and other expenses. Other income in the
second quarter of 1997 was $1.8 million compared to $1.1 million in the second
quarter of 1996 and $3.6 million in the first half of 1997 compared to $1.5
million in the first half of 1996.
Other income in the first six months of 1997 was generated primarily from
interest and realized gains on the Company's cash and investment balances.
During the second quarter the Company repurchased 5,480,500 shares of its common
stock for $48.2 million, and the resulting reduction in cash balances will
affect the interest income generated in the third quarter.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 12.5% for the first half of 1996 and 1997.
The effective tax rate is substantially below the federal statutory rate
primarily due to the tax benefits achieved by the status of certain of the
Company's Israeli subsidiaries as "Approved Enterprises" granted by the State of
Israel, which provides for a tax holiday or a reduced corporate tax rate of 10%
on the Company's undistributed Israeli earnings.
10
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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, and potential increases in U.S. tax due to the 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.
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.
IMPACT OF INFLATION
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's operating activities provided cash of $4.0 million in the first
six months of 1997 and $15.3 million in the first half of 1996. Net cash
provided from operations in the first six months of 1997 was comprised primarily
of net income, a decrease in current liabilities, and a decrease in trade
accounts receivable. Trade accounts receivable decreased to $6.4 million at
June 30, 1997 due to the timing of shipments and payments.
The Company's investing and financing activities, other than purchases of and
proceeds from, short-term investments, have consisted of expenditures for fixed
assets which totaled $1.3 million, and the repurchase of common stock which
totaled $48.2 million, in the first six months of 1997.
In obtaining approval of the Company's Reorganization from Israeli tax
authorities, which was completed immediately before the closing of the Company's
initial public offering ("IPO") in March 1995, 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 a further
$500,000 to increase the capital of DSPC Israel, Ltd. ("DSPCI"), an Israeli
subsidiary of the Company.
As of June 30, 1997, the Company had $93.1 million of cash, cash equivalents and
short-term investments. As of June 30, 1997, the Company had repurchased
5,480,500 shares of its Common Stock in its share repurchase program, using an
aggregate of approximately $48.2 million. The
11
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Company may from time to time repurchase additional shares of its Common
Stock under its share repurchase program. 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.
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 complimentary
businesses, projects or technologies which may require additional financing or
require the use of a significant portion of its existing cash.
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This Form 10-Q contains forward looking statements concerning the Company's
future products, expenses, revenue, liquidity and cash needs as well as the
Company's plans and strategies. These forward looking statements are based
on current expectations, and the Company assumes no obligation to update this
information. Numerous factors could cause actual results to differ
significantly from the results described in these forward looking statements,
including but not limited to the following risk factors.
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 Electronics
Corp. ("Tomen"), the Company's distributor in Japan. Tomen's sales of the
Company's products are concentrated in a small number of Japanese 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 increased competition among OEMs in the Japanese wireless handset
market and to an increase in the supply of integrated circuits. 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
12
<PAGE>
operating results could be materially adversely affected if orders and
revenues do not meet expectations.
RELIANCE ON A SINGLE PRODUCT; NEED FOR NEW PRODUCT INTRODUCTIONS. 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 believes that
its success will depend in part on its ability to develop successfully
additional products for digital cellular telephones, PCS and wireless PBX
applications, and the Company is in the process of developing and introducing
new products; however, there can be no assurance that it will be successful
in doing so, or that completion of development of products will not be
delayed. The success of new products will also depend on, among other
things, the ability of the Company to market the products successfully, the
growth of the relevant markets for the products, and the success of the
Company's OEM customers in completing in a timely manner their development of
handsets or other OEM products utilizing the Company's products and in
successfully competing in the applicable markets. In addition, the Company
will likely use independent foundries to manufacture any such products (with
the exception of CTP Systems' PBX products, which are currently manufactured
by CTP Systems), and there can be no assurance that the products will be able
to be manufactured in a timely manner, in commercial quantities, at
reasonable cost, and with acceptable yields and quality standards,
particularly with new products, such as the new PDC chip set, that
incorporate new manufacturing technology. If the Company is unable, for
technological or other reasons, to develop, introduce and manufacture in a
timely manner new products and to market them 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. In addition, the Company anticipates that for the
foreseeable future new product introductions may cause significant
fluctuations in quarterly operating results.
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'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.
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.
13
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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 PDC
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 DSP chips and its application
specific integrated circuits ("ASICs") for its IS-136 D-AMPS chip sets from NEC
Corporation ("NEC"); its ASICs for its PDC chip sets from Atmel ES2 and VLSI
Technology, Inc. ("VTI"); its ASICs for analog baseband chip sets from TI; and
its ASICs for CTP Systems' products from American Microsystems, Inc. ("AMI").
Accordingly, the Company is and will remain dependent on independent foundries,
including TI, NEC, 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.
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 a timely
manner, in commercial quantities and 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
14
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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."
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 June 30, 1997, 148 of
the Company's 168 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.
15
<PAGE>
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 PBX systems 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 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.
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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 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.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 12, 1997, a class action lawsuit was filed against the Company and
several of its officers and directors in the Superior Court of California, Santa
Clara County, bearing the caption BERT PERL, ET AL. V. DSP COMMUNICATIONS, INC.,
DAVIDI GILO, LEWIS S. BROAD, GERALD DOGON, NATHAN HOD, ARNON KOHAVI AND JOSEPH
PERL. A second, identical lawsuit, captioned GERSHON SONTAG, ET AL. V. DSP
COMMUNICATIONS, INC., ET AL. was filed on May 22, 1997. The complaints, which
have been consolidated, allege that the Company and certain of its officers and
directors violated California securities laws in connection with certain
statements allegedly made during the first quarter of 1997, and seek damages in
an unspecified amount, interest, attorney's fees and other costs, and other
equitable and injunctive relief. The plaintiffs have requested to have the
matter certified as a class action on behalf of certain past and present
shareholders of the Company. The Company has demurred to the complaints, and
such demurrer is presently pending before the court.
The Company believes that the complaints are without merit and intends to defend
these actions vigorously. However, due to the inherent uncertainties of
litigation, the Company cannot accurately predict the ultimate outcome of the
litigation at this time. Any unfavorable outcome of litigation could have an
adverse impact on the Company's business, financial condition and results of
operations.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on May 15, 1997. At the
annual meeting, the following matters were voted upon:
1. The election of two (2) Class II directors to serve for a three year term
until the 2000 Annual Meeting of Stockholders. The results of the voting were
as follows:
a. LEWIS BROAD:
Number of shares voted FOR 39,980,113
Number of shares voted AGAINST 127,593
b. AVRAHAM FISCHER:
Number of shares voted FOR 39,832,033
Number of shares voted AGAINST 275,673
2. Ratification of the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending December 31, 1997. The
results of the voting were as follows:
Number of Shares Voted FOR 40,032,643
Number of Shares Voted AGAINST 37,202
Number of Shares ABSTAINING 37,861
Number of Broker Non-Votes --
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ITEM 5. OTHER INFORMATION
In April and May 1997, the Company's Board of Directors approved share
repurchase programs pursuant to which the Company, from time to time and at
management's discretion, was authorized to purchase up to an aggregate of 8
million shares of the Company's Common Stock (equal to approximately 18% of the
approximately 45 million shares that were outstanding immediately prior to the
commencement of the repurchase programs) in open-market transactions. As of
June 30, 1997, the Company had completed the repurchase of 5,480,500 shares, at
purchase prices ranging from $6.875 to $11.8625 per share, for an aggregate
purchase price of $48.2 million.
On March 6, 1997, the Board of Directors adopted a share option repricing
program pursuant to which options to purchase an aggregate of 4,322,500 shares
of common stock, held by employees under the Company's stock option plans, were
eligible to be repriced, subject to acceptance by the optionees, as follows:
options held by employees who were not officers of the Company would be repriced
to the fair market value of the common stock on March 6, 1997, which price was
$9.875 per share, and options held by officers of the Company would be repriced
to $10.875 per share. The offer to participate in the repricing program was
made by the Company to optionees in April 1997, and optionees holding over 92%
of the eligible options accepted the offer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.26 Employment Agreement, dated as of September 16, 1996, between DSP
Telecom, Inc. and Stephen Pezzola
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 8, 1997
DSP COMMUNICATIONS, INC.
BY: /s/ Gerald Dogon
- ------------------------------------------------------------------
Gerald Dogon, Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
20
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EMPLOYMENT AGREEMENT EXHIBIT 10.26
OF STEPHEN P. PEZZOLA
WITH
DSP COMMUNICATIONS, INC. AND DSP TELECOM, INC.
THIS EMPLOYMENT AGREEMENT (this "Agreement"), made and entered into
effective as of the 16th day of September, 1996, by and between DSP
COMMUNICATIONS, INC., a Delaware corporation (hereinafter "DSPC"), DSP TELECOM,
INC., a California corporation (hereinafter the "Corporation"), and STEPHEN P.
PEZZOLA (hereinafter "Pezzola").
RECITALS
A. Effective September 16, 1996, Pezzola was employed by DSPC as its
General Counsel, and to serve as an employee of the Corporation. DSPC is the
parent corporation of the Corporation.
B. DSPC, the Corporation, and Pezzola desire to document the terms of
their employment agreement entered into on September 16, 1996 as 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 Pezzola, and
Pezzola hereby agrees to accept employment with the Corporation, on the terms
and conditions hereinafter set forth.
b. CORPORATION'S DUTIES. The Corporation shall allow Pezzola to,
and Pezzola shall, perform responsibilities normally incident to his position as
General Counsel of DSPC, commensurate with his background, education, experience
and professional standing. The Corporation shall provide Pezzola with a private
office, stenographic help, office equipment, supplies, customary services and
cooperation suitable for the performance of his duties.
c. PEZZOLA'S DUTIES. Unless otherwise agreed to by the parties,
Pezzola shall serve as General Counsel of DSPC, and to the extent requested
by the Board of Directors, as General Counsel for any and all subsidiaries of
DSPC. For purposes of acting as an attorney for DSPC (or any of its
subsidiaries), Pezzola shall owe his duties of loyalty and confidentiality
directly to DSPC (or any of its subsidiaries). Pezzola shall devote such
time in executing his duties as General Counsel as is deemed needed by DSPC's
Chairman of the Board of Directors. Pezzola shall not be required to devote
his full time efforts to the Corporation or DSPC. It is intended that
Pezzola will work part time, approximately thirteen (13) hours per week, and
that he will serve as General Counsel of other entities and as an owner in an
investment entity.
<PAGE>
Pezzola shall report directly to the Chairman of the Compensation Committee
and to the Board of Directors of DSPC. Mr. Pezzola shall inform the Chairman
of the DSPC Compensation Committee of any other positions that he takes with
any other entity, beyond the positions that he currently holds. Pezzola's
duties shall be performed primarily in the San Francisco Bay Area, and more
particularly, in either Cupertino or Oakland, California, at the option of
Pezzola.
2. TERM. This Agreement shall terminate December 31, 1998, unless (a)
extended as set forth herein, or (b) terminated sooner under the terms of
this Agreement. Thereafter, this Agreement may be renewed by Pezzola and the
Board of Directors of DSPC 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 Pezzola hereunder, including any
extensions.
3. COMPENSATION. Pezzola shall be compensated as follows:
a. FIXED SALARY. Effective September 16, 1996, Pezzola shall
receive a fixed annual salary of Ninety Thousand Dollars ($90,000). Beginning
on January 1, 1997, and continuing thereafter, Pezzola shall receive a fixed
salary of Ninety-five Thousand Dollars ($95,000). The Corporation agrees to
review the fixed salary following the end of each calendar year during the
employment term based upon Pezzola's services and the financial results of DSPC
during the calendar year, and to make such increases as may be determined
appropriate in the discretion of DSPC's Compensation Committee of the Board of
Directors ("Compensation Committee").
b. PAYMENT. Pezzola's fixed salary shall be payable on a
semi-monthly basis.
c. BONUS COMPENSATION. During the employment term, Pezzola shall
participate in each bonus plan adopted by DSPC, and shall receive such other
bonus pay as may be determined reasonable in the discretion of the Compensation
Committee.
d. VACATION. Pezzola shall accrue paid vacation at the rate of
twenty-five (25) days for each twelve (12) months of employment. Pezzola shall
be compensated at his usual rate of compensation during any such vacation.
Pezzola shall be entitled to ten (10) paid holidays during each twelve (12)
months of employment. Pezzola shall receive sick leave or disability leave in
accordance with the terms of the Corporation's standard sick leave or disability
leave policy.
e. BENEFITS. Pezzola waives any entitlement he may have as a
Corporation employee to any benefits relating to group health, disability, life
insurance, retirement and
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other related benefits as in effect from time to time. Such waiver shall be
ineffective, however, for a Corporation employee benefit plan in the event
that such waiver would adversely impact the beneficial federal income tax
status of such plan. The Corporation shall provide Pezzola with Director and
Officer Insurance.
4. EXPENSES. The Corporation shall reimburse Pezzola for his normal and
reasonable expenses incurred for travel, entertainment and similar items in
promoting and carrying out the business of the Corporation in accordance with
the Corporation's general policy as adopted by the Corporation's management from
time to time. The Corporation shall pay Pezzola's cellular telephone expenses
up to an amount equal to Three Hundred Dollars ($300) per month, unless Pezzola
provides documentation to DSPC that Pezzola's cellular telephone use during a
particular month was directly related to the business of DSPC, in which case
DSPC shall pay all of the cellular telephone expenses attributable to the
business of DSPC during such month. As a condition of payment or reimbursement,
Pezzola 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 reimburse Pezzola for fifty percent
(50%) of all professional membership dues incurred, if any; fifty percent (50%)
of all technical books purchased by Pezzola; and one hundred (100%) of all legal
education and seminar expenses. The Corporation shall also reimburse Pezzola
for fifty percent (50%) of any California Bar Association dues or fees necessary
to maintain his certification as an attorney in California. It is noted that
Zen Research, Inc. is currently providing an office adjacent to the
Corporation's principal place of business to Pezzola at no expense to DSPC or
the Corporation.
5. INDEMNIFICATION. The parties agree to enter into an Indemnification
Agreement, effective September 16, 1996, under which DSPC will indemnify Pezzola
for actions he may take on behalf of the Corporation or DSPC.
6. CONFIDENTIALITY AND COMPETITIVE ACTIVITIES. Pezzola 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. Pezzola 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
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<PAGE>
contrary, Pezzola shall be allowed to invest as a shareholder in publicly
traded companies, or through a venture capital firm or an investment pool.
7. TERMINATION.
a. TERMINATION BY PEZZOLA. Pezzola may voluntarily terminate his
employment hereunder upon sixty (60) days' advance written notice to the
Corporation.
b. TERMINATION FOR CAUSE. The Corporation may immediately terminate
Pezzola's employment at any time for cause. Termination for cause shall be
effective from the receipt of written notice thereof to Pezzola 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 competitors 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 Pezzola's death. In addition, if any disability or
incapacity of Pezzola 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
Pezzola's employment upon written notice. Payment of salary to Pezzola during
any sick leave shall only be to the extent that Pezzola has accrued sick leave
or vacation days. Pezzola 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 Pezzola 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 Pezzola shall remain as a consultant to the
Corporation. If this Agreement is terminated with cause pursuant to Section
7.b. (above), the Corporation shall not be obligated to pay Pezzola any
severance/consulting fee. If this Agreement is not renewed on or after December
31, 1998, then the Corporation shall pay Pezzola a severance/consulting fee
equal to his then-current monthly rate of fixed salary compensation, multiplied
by the number three (3).
-4-
<PAGE>
8. CORPORATE OPPORTUNITIES.
a. DUTY TO NOTIFY. In the event that Pezzola, during the employment
term, shall become aware of any material and significant business opportunity
directly related to any of the Corporation's significant businesses, Pezzola
shall promptly notify the Corporation's Directors of such opportunity. Pezzola
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. Pezzola'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 Pezzola fails to notify the
Corporation of, or so appropriates, any such opportunity without the express
written consent of the Board of Directors, Pezzola shall be deemed to have
violated the provisions of this Section notwithstanding the following:
i. The capacity in which Pezzola shall have acquired such
opportunity; or
ii. The probable success in the Corporation's hands of such
opportunity.
c. CORPORATION DEFINED. For purposes of Sections 6 and 8 hereof,
the term "Corporation" shall also include DSPC and all of DSPC's 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.
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.
-5-
<PAGE>
c. PERSONAL SERVICES. It is understood that the services to be
performed by Pezzola hereunder are personal in nature and the obligations to
perform such services and the conditions and covenants of this Agreement cannot
be assigned by Pezzola. 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, instructions 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 POTENTIAL AND DUTY TO NOTIFY. Pezzola agrees to
notify the Chairman of the Compensation Committee of: (1) any investments in
any company or other entity of his own personal funds which is in excess of
$200,000; (2) any investment which results in Pezzola owning over five
percent (5%) of an entity; or (3) any other employment or consulting
arrangement to which Pezzola is a party. If the Chairman of the Compensation
Committee deems such investment or arrangement to be a conflict, he and
Pezzola shall attempt to resolve the conflict. If such conflict cannot be so
resolved, then the Chairman of
-6-
<PAGE>
the Compensation Committee shall discuss the matter with the entire Board,
and bring the matter to the Corporation's outside counsel.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
DSP TELECOM, INC. DSP COMMUNICATIONS, INC.
a California corporation a California corporation
20300 Stevens Creek Blvd., Ste. 465 20300 Stevens Creek Blvd., Ste. 465
Cupertino, CA 95014 Cupertino, CA 95014
By: /s/ Nathan Hod By: /s/ Lewis Broad
--------------------------------- --------------------------------
Nathan Hod, Chairman of the Board Lewis Broad, Chairman of the
Compensation Committee
/s/ Stephen P. Pezzola
- ----------------------------
STEPHEN P. PEZZOLA
40 Yorkshire Drive
Oakland, CA 94618
-7-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTE FROM THE FINANCIAL
STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q OF DSP COMMUNICATIONS, INC. FOR
THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 58,091
<SECURITIES> 34,990
<RECEIVABLES> 6,484
<ALLOWANCES> 132
<INVENTORY> 0
<CURRENT-ASSETS> 104,608
<PP&E> 7,132
<DEPRECIATION> 2,985
<TOTAL-ASSETS> 112,868
<CURRENT-LIABILITIES> 15,024
<BONDS> 0
0
0
<COMMON> 40
<OTHER-SE> 97,234
<TOTAL-LIABILITY-AND-EQUITY> 97,274
<SALES> 26,779
<TOTAL-REVENUES> 28,990
<CGS> 14,020
<TOTAL-COSTS> 16,230
<OTHER-EXPENSES> 3,023
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,822
<INCOME-TAX> 977
<INCOME-CONTINUING> 6,845
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,845
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
